Final answer:
The correct answer to the relationship between households and firms is that households provide labor and other resources to firms, which in turn pay them. This interaction forms part of the circular flow of economic activity in the markets for inputs and goods and services.
Step-by-step explanation:
The relationship between households and firms is a fundamental concept in economics, specifically in the context of the circular flow of economic activity. Households provide labor and other resources such as land, capital, and raw materials to firms. In return, firms pay for these inputs in the form of wages and other factor payments. This interaction occurs in the market for inputs, or factors of production. Simultaneously, firms produce and sell goods and services in the market for goods and services, from which households buy products, spending the income they earned from providing labor and resources.
Therefore, the correct answer to the student's question is: c. households provide labor and firms pay them. This choice accurately describes the exchange between households and firms where households sell their labor and other resources to firms, and firms compensate them for these resources, allowing households to then buy products from firms with the income they receive.