the law of diminishing marginal utility 2

Prior to beginning work on this discussion, read Farah Mohammed’s article, Why Are Diamonds More Expensive Than Water?, as well as Chapter 5 in your textbook, especially Sections 5.1 and 5.3, and respond to the following:

  • 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.

The Law of Diminishing Marginal Utility paper

  • Must be three to five double-spaced pages in length (not including title and references pages) and formatted according to APA style as outlined in the Ashford Writing Center’s APA Style resource.
  • Must include a separate title page with the following:
    • Title of paper
    • Student’s name
    • Course name and number
    • Instructor’s name
    • Date submitted
  • For further assistance with the formatting and the title page, refer to APA Formatting for Word 2013.
  • Must utilize academic voice. See the Academic Voice resource for additional guidance.
  • Must include an introduction and conclusion paragraph. Your introduction paragraph needs to end with a clear thesis statement that indicates the purpose of your paper.
  • Must use at least three scholarly, peer-reviewed, and/or other credible sources in addition to the course text.
    • The Scholarly, Peer-Reviewed, and Other Credible Sources table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source for a particular assignment.
  • Must document any information used from sources in APA style as outlined in the Ashford Writing Center’s Citing Within Your Paper guide.
  • Must include a separate references page that is formatted according to APA style as outlined in the Ashford Writing Center. See the Formatting Your References List resource in the Ashford Writing Center for specifications.

Why Are Diamonds More Expensive Than Water?

Water is simultaneously one of the few things we absolutely cannot live without, and one of the things we value least. There’s an economic rationale behind that.

Cape Town has weathered three years of drought, and the city is rapidly approaching what they’ve labelled “Day Zero”—the day the dams drop below 13% capacity, and the city switches its water supply off. This will force residents to collect their allotted 25 liters per day in person, watched by security forces.

Suddenly, Cape Town is realizing what many of us take for granted as we run water at full blast while washing our teeth, filling dishwashers daily, and hosing our cars down weekly. Water is simultaneously one of the few things we absolutely cannot live without, and one of the things we value least.

Economist Adam Smith famously posed the question, “Why are diamonds more valuable than water?” He meant to highlight that diamonds, for all their cultural significance, are functionally useless. Writing for the American Water Works Association, marketing strategist and executive Melanie Goetz addressed this paradox.

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The answer is a complicated phrase—”the law of diminishing marginal utility” —with a straightforward meaning. The greater the supply we have of something and the more we use it, the less we value it. We have oceans of water, pumped to many of us ceaselessly by the gallon. We have far fewer diamonds, hidden and embedded in rock. Their intrinsic value becomes secondary to the subjective value we assign them.

“Economists tell us that the law of diminishing marginal utility dictates that consumers place a greater value on diamonds than on life-giving water. It’s just the way consumers prioritize price—by a product’s ‘least-value usage,’” writes Goetz, explaining that the lowest value usage of water is to clean gutters and sewer systems. Meanwhile, “water may save your life in the desert, but even the lowliest of industrial diamonds carries a certain sexiness that invariably outstrips the redoubtable H2O.” She goes on to quote humorist P.J. O’Rourke: “‘With an additional eight ounces of water, all we get is a trip to the bathroom in the middle of the night. With an additional eight ounces of gold, we get the upfront payment to lease a Lexus. Marginal utility explains why gold, vital to the life of no one except hip-hop performers and fiancés, is so high-priced.’”

Yet, if Cape Town was now charging for water, its price per liter would be skyrocketing. As we plunge into a future of climate change and rapidly diminishing resources, it seems that many cities will soon be reconsidering how much we value those resources we need the most.

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