A) they are sold by selected firms with monopolistic powers.
B) their marginal utility to buyers is higher than that of water.
C) their total utility to buyers is higher than that of water.
D) consumers do not buy them at lower prices.
Correct Answer: B
Solution :
The water diamond paradox or puzzle was a mystery of Adam Smith who observed that the price of diamonds was much higher than that of water even though water seemed to offer for more utility than diamonds. The resolution of this puzzle or paradox is based on the distinction between marginal utility and total utility. The marginal utility of diamonds is very high and so consumers are willing to pay higher prices for diamond than for water.
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