The fact that diamonds have a much higher price than water
A) violates the rules of utility maximization because water is necessary for life.
B) does not violate the rules of utility maximization because globally, fresh water is actually very rare.
C) does not violate the rules of utility maximization because water's marginal utility is low.
D) violates the rules of utility maximization because diamonds are not necessities.
E) violates the rules of utility maximization because the consumer actually consumes a large amount of water.

Question

Quizplus · Accepted Answer

The rules of utility maximization dictate that individuals allocate their spending to maximize their overall satisfaction or utility. Diamond's high price is due to its low availability and high demand, which makes it a luxury good. On the other hand, water is necessary for life, but its marginal utility is low since it is abundant and readily available. Therefore, it is not violating the rules of utility maximization that diamonds have a higher price than water because they have different marginal utilities.

The Fact That Diamonds Have a Much Higher Price Than