Homework Assignment 11 3 points Explain diamondwater paradox

Homework Assignment #11 (3 points) Explain diamond-water paradox. Can you think of other examples of this 1 water paradox phenomenon? Explain Which do you think is more likely to happen to you? Why? (4 points) Watch the following Ted Talk on choices 2 (3 points) What are the \"hot hand fallacy\" and the gambler\'s fallacy?\" Give an example of each. 3. https:/www.ted com/talks/sheena_iyengar_ choosing what to choose Do you think the speaker\'s ideas on making choices make sense or not? Explain your answer.

Solution

1. Adam Smith observed that even though water is essential for the existence of life, it was way more cheaper than diamonds which are not even essential. This dilemma is famously known as diamond-water paradox where an essential commodity necessary for life is cheaper than other commodity which is not essential.

This dilemma was solved by the theory of marginal utility. As water is available in large amounts as compared to diamonds which are scarece, additional units of consumption of water leads to its utility being decreasing and hence its lower price.

Another example that can be thought of is of an expensive video game which can cost upto $500 and a pair of shoes which cost $50. As shoes are more readily available their price is less and people tend to decrease the amount of utlity attached with them as more and more units of it are consumed. On the other hand, video games, though not necessary, are limited in supply and hence the marginal utility increases.