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Question: Based on this model, households earn income when firms purchase factors in factor markets.

Answer: In the circular-flow model of an economy, households own all the factors of production. Households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. Firms, in turn, earn revenue when households buy goods and services.

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Question: Suppose South Africa produces two types of goods: agricultural and capital. The following diagram shows its current production possibilities frontier for barley, an agricultural good, and cars, a capital good.

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