Based on the model of factors of production, households earn income when:

• A. they supply land, labor, capital, or entrepreneurship to firms
• B. they pay taxes to the government
• C. they purchase goods and services from firms
• D. they consume public goods provided by the government

Answer: (A)

Verified step by step guidance

1. Understand the model of factors of production, which identifies the inputs used by firms to produce goods and services. These inputs are land, labor, capital, and entrepreneurship.
2. Recognize that households own these factors of production and supply them to firms in exchange for income.
3. Recall that income earned by households comes from payments made by firms for these factors: rent for land, wages for labor, interest for capital, and profits for entrepreneurship.
4. Note that paying taxes to the government, purchasing goods and services, or consuming public goods are not ways households earn income; rather, these are ways households spend income or receive benefits.
5. Conclude that the correct understanding is that households earn income by supplying land, labor, capital, or entrepreneurship to firms.