"Because the price of a diamond is much greater than the price of a gallon of water, the consumer surplus from diamonds is greater than the consumer surplus from water." Is the previous analysis CORRECT? Explain your answer
What will be an ideal response?
No, the analysis is incorrect. The paradox of value points out the error. Diamonds are scarce, so they have a high price and a high marginal utility. Water is abundant, so it has a low price and a low marginal utility. But the total utility from water (vastly) exceeds that from diamonds and so the consumer surplus from water (vastly) exceeds that from diamonds.
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Lenders prefer to lend to firms with high net worth because
A) such firms are usually willing to pay higher interest rates. B) the owners of such firms have more to lose if the firm defaults on a loan. C) the government requires most bank loans to be made to such firms. D) such firms usually are unable to raise funds directly through financial markets.
What is true of marginal cost when marginal returns are decreasing?
a. It is negative and increasing. b. It is negative and decreasing. c. It is positive and increasing. d. It is positive and decreasing. e. It is positive and has a constant slope.