Does the fact that diamonds, which we do not need to survive, are more expensive than water, which is a necessity, constitute a violation of utility maximization?
What will be an ideal response?
No, the fact that diamonds are less useful but more expensive than water reflects the paradox of value. The resolution to this paradox comes from the observation that utility maximization involves marginal utility (specifically, marginal utility per dollar) not total utility. Water has a low marginal utility, because people have a lot of it, but a very high total utility, because it is essential to life. Diamonds have a high marginal utility, because people have fewer diamonds, but a relatively low total utility because diamonds are not necessary to life. Hence the low marginal utility of water is reflected in the low price of water, while the high marginal utility of diamonds is reflected in the high price of a diamond.
You might also like to view...
Wealthy people are more likely than poor people to use airplanes rather than busses for interurban travel because
A) their demand for transportation is more elastic. B) their demand for transportation is more inelastic. C) they can better afford to use a higher-cost mode of transportation. D) they are more likely to ignore the relative costs of busses and airplanes. E) traveling by airplane usually costs them less than traveling by bus.
Harmonization of standards can institutionalize a set of inferior standards
Indicate whether the statement is true or false