The paradox of value with respect to water and diamonds can be explained using consumer surplus because
A) water is cheap but provides a large consumer surplus, while diamonds are expensive with a small consumer surplus.
B) diamonds are in large supply relative to their demand, while water is scarce in supply relative to its demand.
C) water is cheap but provides a small consumer surplus, while diamonds are expensive but provide a large consumer surplus.
D) the total consumer surplus from diamonds is greater than the total consumer surplus from water.
E) None of the above answers is correct.

Question

Quizplus · Accepted Answer

The paradox of value refers to the apparent contradiction that something as essential as water is cheap while something as non-essential as diamonds is expensive. Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay. Water may be essential, but its abundance means that its marginal utility is low, and hence its price is low. Therefore, the consumer surplus generated by water is high. Diamonds, on the other hand, are scarce, and their marginal utility is high, which explains their high price. However, their non-essential nature means that the consumer surplus generated by diamonds is low. So, A is the correct answer because it explains the paradox of value using the concept of consumer surplus.

The Paradox of Value with Respect to Water and Diamonds