What is the paradox of value and how is the paradox resolved?
What will be an ideal response?
The paradox of value asks: "Why is water, which is essential to life, far cheaper than diamonds, which are not essential?" Consumers have diminishing marginal utility for water. The marginal utility of the last unit of water consumed is low because water is readily available and so the quantity consumed is very high. Consumers also have diminishing marginal utility for diamonds. The marginal utility of the last diamond consumed is high because diamonds are very scarce and so the quantity consumed is very low. Consumers maximize utility by equating the marginal utility per dollar for both goods. The scarcity of diamonds (high marginal utility) and the abundance of water (low marginal utility) indicate people are willing to pay a higher price for an additional unit of diamonds than for an additional unit of water.
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When economic agents transfer resources through time, it is referred to as:
A) clockwise transformations. B) time-wise transformations. C) chronological transformations. D) intertemporal transformations.
Refer to Figure 10-9. If the consumer has $240 to spend on DVDs and CDs, what is the price of a DVD if the budget constraint is BC1?
A) $10 B) $20 C) $24 D) $40
An individual who stores wealth in art rather than money will find that he/she:
A. has far more liquidity than most savers. B. suffers larger real losses during periods of high inflation. C. will incur higher transaction costs when he/she ultimately makes purchases. D. will have to resort to barter exchanging the art for desired goods.
To maintain market power, firms will sometimes purchase their competitors.
Answer the following statement true (T) or false (F)