The correct answer is: A. Total utility
The diamond-water paradox is a paradox that arises from the observation that water, which is essential to life, is less expensive than diamonds, which are not essential to life. This paradox can be explained by the concept of total utility.
Total utility is the total satisfaction that a consumer receives from consuming a good or service. The total utility from consuming a good or service increases as the consumer consumes more of the good or service. However, the marginal utility, which is the additional satisfaction that a consumer receives from consuming one more unit of a good or service, decreases as the consumer consumes more of the good or service.
In the case of water, the total utility is high because water is essential to life. However, the marginal utility is low because water is a necessity. In the case of diamonds, the total utility is low because diamonds are not essential to life. However, the marginal utility is high because diamonds are a luxury good.
The diamond-water paradox can be explained by the fact that total utility is more important than marginal utility in determining the price of a good or service. Water has a high total utility, but a low marginal utility. Diamonds have a low total utility, but a high marginal utility. Therefore, water is less expensive than diamonds.
Here is a brief explanation of each option:
- Total utility is the total satisfaction that a consumer receives from consuming a good or service. The total utility from consuming a good or service increases as the consumer consumes more of the good or service. However, the marginal utility, which is the additional satisfaction that a consumer receives from consuming one more unit of a good or service, decreases as the consumer consumes more of the good or service.
- Marginal utility is the additional satisfaction that a consumer receives from consuming one more unit of a good or service. Marginal utility decreases as the consumer consumes more of a good or service.
- Price offered is the price that a consumer is willing to pay for a good or service. Price offered is determined by the consumer’s willingness and ability to pay.
- Quantity supplied is the amount of a good or service that a producer is willing and able to supply at a given price. Quantity supplied is determined by the producer’s costs and the market price.