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The fact that diamonds have a much higher price than water a. violates the rules

ID: 1249083 • Letter: T

Question

The fact that diamonds have a much higher price than water

a. violates the rules of utility maximization because the consumer actually consumes a large amount of water.
b. violates the rules of utility maximization because diamonds are not necessities.
c. violates the rules of utility maximization because water is necessary for life.
d. does not violate the rules of utility maximization because globally, fresh water is actually very rare.
e. does not violate the rules of utility maximization because water's marginal utility is low.

Explanation / Answer

Diamonds have a higher price than water because they have a higher demand a lower supply or both. Most likely, the difference has to do with the fact that the supply of diamonds is much much lower than the supply of water. A. is incorrect. The rules of utility maximization are fine. B. is incorrect. The rules of utility maximization are fine. C. is incorrect. The rules of utility maximization are fine. D. is incorrect because rare fresh water would imply a higher price for water relative to diamonds. E. is correct. The marginal utility of water is low because we have lots of water to consumer. The marginal utility of diamonds is high because we have fewer diamonds to consume.

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