Question

1. Please answer all in microsoft word
2. What is the relationship and significance of the Law of Diminishing Marginal Utility and consumer decision making?
3. What is the Diamond-Water Paradox?
4. How does the Diamond-Water Paradox relate to utility?

Answer 1

Law of diminishing marginal utility states that as a consumer increases consumption of a good, the utility starts to decline. So a rational consumer would stop consuming the good where the marginal utility derived is more than the unit price of the good. The law gets significance while making decision in allocating scarce fund efficiently so that it helps to derive maximum utility.

The Diamond-Water paradox is that water being most important for survival of human life is low priced while diamond which is not important for existence of human life gets a price. This is because of scarcity of availability of diamond while water which is available in abundance.

The utility is the value derived by consuming a good which is linked with the cost involved in getting the good to the market. So a person would derive more utility in consuming diamond as it would be more costlier to buy than water.