Water Diamond Paradox

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The question of “value” vs. “price” has been at the forefront of philosophers" minds since as early as the time of Plato. Why is it that a tiny quantity of diamonds are so much more valuable than that same quantity of water, when water is so much more necessary for life to continue functioning, whereas diamonds are not.

This is a question that you guys are equipped to answer now! However, I want you to see the paradox in two frameworks we covered this week.

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1.)

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I want you to imagine for a second that you are a consumer with 72.00$ in budget to spend on either water or diamonds. Calculate the optimal consumption of both water and diamonds assuming both cost $3 each, using the table of utilities below.

Quantity Total Utility Diamonds MU Diamonds Total Utility Water MU Water
1 100
200
2 140
280
3 170
340
4 199
375
5 237
405
6 245
430
7 250
450
8 252
465
9 253
475
10 253
484
11 252
491
12 250
496
13 245
500
14 240
503
15 235
505
16 225
505
17 215
503
18 200
495
19 170
480
20 120
460

How many Diamonds are Purchased, how many waters? What is the total value for each? Do I have money left over? Why?

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2.) \(~\) Now, change the price of diamonds to $30. How many diamonds and waters do I buy?

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3.)

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Now, using a typical indifference curve, illustrate how, given some fixed total utility level, one might still buy diamonds under prices much higher than that of water.

Final Answer

Using terms from the course, explain the diamond-water paradox.

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