The source of the water and diamond paradox results from a confusion about
A) luxuries and necessities
B) who uses what goods
C) the extraordinary role played by consumer surplus in the case of diamonds
D) which good lies on the indifference curve
E) the role that total and marginal utilities play in determining value

Question

Quizplus · Accepted Answer

The water and diamond paradox, which questions why diamonds are more expensive than water despite water being essential for life, is resolved by understanding the concepts of total and marginal utility. Total utility reflects the overall satisfaction or value derived from consuming a good, while marginal utility is the additional satisfaction from consuming one more unit of the good. Water, being abundant, has high total utility but low marginal utility because each additional unit adds little additional satisfaction. Diamonds, being rare, have high marginal utility, making them more expensive despite their lower total utility compared to water.

The Source of the Water and Diamond Paradox Results from a Confusion