Identify the correct statement in the context of Circular Flow of Income in a two sector economy:

Firms produce goods and services.

The correct answer is Option (3) → Firms produce goods and services.

In a two-sector economy, firms are responsible for producing goods and services, while households provide factors of production (such as labor and capital) to firms. This process forms the basis of the circular flow of income, where households receive income from firms in exchange for providing factor services, and firms generate income from selling goods and services to households.