Question

2. In the eighteenth century, the "diamonds and water paradox" was discussed at great length. The paradox was this: Why are diamonds, which are useless baubles, so valuable when water, which is essential to life, is so cheap? Resolve the paradox using marginal utility analysis.

Answer 1

Diamond water paradox raises a very important question as to why diamonds are priced more than water though water is more useful to humans than diamonds. This paradox was finally solved using the marginal utility analysis.

Three economists namely Jevons, Menger and Walras explained that economic decisions are based on marginal benefit rather than total benefit. This means that consumers are not choosing between all units of diamond and all units of water, rather they are choosing between one additional unit of diamond and one additional unit of water. They are not willing to pay a lot for ond additional unit of water. However, because a lot of efforts go into obtaining one additional unit of diamond owing to it's scarcity, it is priced more and consumers are willing to pay more for the additional unit of a diamond.