The diamond-water paradox arises because:

• A. consumers always pay the same price for all goods regardless of their utility
• B. the price of a good is determined by its marginal utility rather than its total utility
• C. the supply of water is more limited than the supply of diamonds
• D. consumer surplus is always higher for goods with greater total utility

Answer: (B)

Verified step by step guidance

1. Understand the diamond-water paradox: it highlights why diamonds, which have less total utility than water, are priced much higher in the market.
2. Recall the concept of total utility, which is the overall satisfaction a consumer gets from consuming a certain quantity of a good.
3. Recall the concept of marginal utility, which is the additional satisfaction gained from consuming one more unit of a good.
4. Recognize that prices in a market are determined by marginal utility rather than total utility, meaning the value of the last unit consumed influences price.
5. Apply this understanding to the paradox: water has high total utility but low marginal utility due to its abundance, while diamonds have low total utility but high marginal utility due to their scarcity, explaining the price difference.