If water is essential for life, while diamonds are not, then why is water cheaper than diamonds?
A) Because most people would rather die with a big diamond ring than live without one.
B) Because the total utility generated by diamonds is larger than the total utility generated by water.
C) Because most people do not understand their total need for water.
D) Because water is abundant, the marginal utility of water is low, and price reflects marginal utility, not total utility.

Question

Quizplus · Accepted Answer

The price of a good is determined by its marginal utility, not total utility. While water is essential for life, it is abundant and has a low marginal utility for most people, meaning that the value of each additional unit of water they consume is not very high. Conversely, diamonds are relatively scarce and have a high marginal utility for many people, meaning that the value of each additional diamond they acquire is relatively high. Therefore, even though water is more essential for life than diamonds, it is cheaper because its abundance and low marginal utility drive the market price down.

If Water Is Essential for Life, While Diamonds Are Not