Diamonds, which are unnecessary, command very high prices, while water, which is essential to life, has a very low price. Which of the following statements best explains the diamond-water paradox? A. The price of diamonds is artificially inflated by supply conditions, so consumers have to pay whatever the price is. B. The total utility from diamonds is much higher than the total utility obtained from water. C. Consumers do not correctly understand the utility received from water compared to the utility received from diamonds. D. Prices depend on marginal utility, not total utility, and the marginal utility of water is low because much is consumed.

D. Prices depend on marginal utility, not total utility, and the marginal utility of water is low because much is consumed.

Explanation:

Marginal utility is the benefit gained from consuming one additional unit of a particular good or service. Since water is essential, it is consumed very commonly, many times per day. On the other hand, a product such as pizza is consumed once in a while. After the first slice, there is satisfaction and a yearn to consume another, and then a third slice after. This shows that the benefit or value from the product is high. The same case happens with diamonds except since they are much less often consumed than pizza, the marginal utility is much higher and hence the high price.