CMA Foundation · Fundamentals of Business Economics and Management · Utility, Wealth, Production
The 'diamond-water paradox' of value is resolved by the idea that:
The paradox is resolved by distinguishing total and marginal utility. Water gives enormous total utility but, being plentiful, its marginal utility and price are low. Diamonds are scarce, so their marginal utility and price are high even though their total utility is smaller.
- AWater has higher total utility but diamonds have higher marginal utility because of their scarcityCorrect
- BDiamonds have higher total utility than water
- CPrice depends only on total utility, not on marginal utility
- DWater has no utility because it is available free in nature
Explanation
Water is abundant, so its marginal utility is low and so is its price, though its total utility is very high. Diamonds are scarce, so their marginal utility and price are high despite lower total utility. Price is linked to marginal, not total, utility.
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