Question

Describe the relationship between total utility and marginal utility. Explain if marginal utility can be negative.

Examine the diamond-water paradox. Why are diamonds more expensive than water? Evaluate the law of diminishing marginal utility. Identify some items, explaining your reasoning, that do not follow the law of diminishing marginal utility. Evaluate how the law of diminishing marginal utility can explain the diamond-water paradox.

No plagiarism please 250-300 words.

Answer 1

Utility gives the satisfaction that a consumer derives from consuming some units of a commodity. Total utility gives the total amount of satisfaction derived after consuming all of the good demanded by the consumer. Marginal utility on the other hand gives the satisfaction derived from consuming an additional unit of the commodity. For example, Gary consumes 2 litres of water and his total utility is 10. After consuming 1 litre of water, his total utility is 6. Therefore, the marginal utlity of the second litre of water is 4 units.

Water is an essential commodity. It can save lives and is an integral component of our daily lives. We use it regularly. On the other hand, uses of diamonds are limited and not essential for our survival. Yet, diamonds are more valuable in the market than water. This illustrates a paradoxical situation and is know as the water-diamond paradox. This happens due to the relative scarcity of the two goods. While the amount of water is plentiful, diamonds are limited. This causes difference in relative valuations of the two goods.

The Law of diminishing marginal utility states that as the amount of consumption of a good increases, the marginal utility from the consumption of each unit of good decreases. The law operates under certain assumptions and if the assumptions get violated, the law will not operate. For example, if the preference of the consumer changes, then the law may not hold. One specific case is that of a drug addict. His marginal utility from consuming an additional unit of the drug keeps on increasing. Therefore, this is an exception.

Marginal utility of water is lower from consuming an additional unit of it. Therefore, the marginal utility decreases over time. For diamonds, the marginal utility is much higher than water owing to the relative scarcity.