Which of the following economic mysteries does the law of diminishing marginal utility help explain?

• A. Why monopolies can set prices above competitive levels
• B. Why governments impose price ceilings on certain goods
• C. Why water, despite being essential, is often cheaper than diamonds
• D. Why opportunity cost is important in decision-making

Answer: (C)

Verified step by step guidance

1. Understand the law of diminishing marginal utility: it states that as a consumer consumes more units of a good, the additional satisfaction (utility) gained from each extra unit decreases.
2. Recognize that this law helps explain why some essential goods, like water, can have a low price despite their importance, because the marginal utility of additional units is low due to abundance.
3. Contrast this with goods like diamonds, which are scarce and provide high marginal utility per unit, leading to higher prices despite being less essential.
4. Analyze why this law does not directly explain why monopolies set prices above competitive levels, why governments impose price ceilings, or why opportunity cost matters.
5. Conclude that the law of diminishing marginal utility primarily explains the paradox of why water is cheap compared to diamonds, despite water's essential nature.