1.

1. Draw, label and explain the Circular Flow Model (CFM). Include the following: firms, households, product market, and factor (or resource) market.
2. Who owns the productive resources? What are those resources? What payment does each type of resource earn?
3. Explain the two markets in the CFM and explain the roles that firms and household each play in the CFM.

2.

Ron's Woodworking supplies high quality wooden bowls made from exotic hardwoods from around the world for its customers. Ron has hired several employees.

1. Explain two factors that impact Ron's demand for workers in his shop.
2. Ron is considering hiring a new worker. Assuming that Ron wishes to maximize profits, how should he make the decision to hire or not hire the next worker? Explain your reasoning. How can Ron figure out how many workers would earn profit?
3. Ron has recently purchased a new lathe that will allow the production of several bowls from a single block of wood, greatly increasing the productivity of the workers in his shop. How will the increased productivity of Ron's workers impact the number of workers he employs? Why? What is the key determinant of whether or not he should hire more workers?

3.

Murphy's Machinery is a profit-maximizing firm with the following production information. The price of machine parts is $8.

Number of workers	Number of Machine Parts Produced Per Day
0	0
1	10
2	25
3	50
4	80
5	95
6	90

1. At which number of workers is marginal product maximized?
2. Identify and define the economic principle that explains why marginal product eventually decreases.
3. Why would Murphy's Machinery never hire the 6th worker?
4. What is the maximum daily wage Murphy's Machinery would be willing to pay the 3rd worker?