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Question: Examine the diamond-water paradox. Why are diamonds more expensive than water?

09 Oct 2022,10:56 PM

 

  • Describe the relationship between total utility and marginal utility.
  • Explain if marginal utility can be negative.
  • Examine the diamond-water paradox. Why are diamonds more expensive than water?
  • Evaluate the law of diminishing marginal utility.
  • Identify some items, explaining your reasoning, that do not follow the law of diminishing marginal utility.
  • Evaluate how the law of diminishing marginal utility can explain the diamond-water paradox.

Expert answer

 

The diamond-water paradox is puzzling because diamonds seem to be much more expensive than water. One possible explanation is that diamonds are rarer than water. Another explanation is that water is essential for life, while diamonds are not.

 

A third explanation is that the price of diamonds reflects the cost of extracting them from the ground, while the price of water does not. This is because water is readily available from rivers and lakes, while diamonds are not. Finally, it may be that people simply value diamonds more than water, for reasons that are not entirely rational.

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