Week 6 Lab 2 delta change loop (1) - WordReferencesMailingsReviewViewHelpO Tell me what you want to doAaBbCcDc AaBbCcDc AaBbC AaBbCcl AaB AA.1 Normal1 No Spac. Heading 1Heading 2TitleParagraphStylesDiamonds clearly satisfy less important needs than water, which is essential to life. Yetaccording to market prices, the essential commodity, water, is worth less than the less essentialcommodity, diamonds. Why would a vital commodity such as water sell for so much less thandiamonds? Does this imply that there is something wrong with a market system that valuesdiamonds more than water? Explain using demand and supply curves for water and diamonds.(Could you also add a graph)lyp

Answered: Week 6 Lab 2 delta change loop (1) -…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Week 6 Lab 2 delta change loop (1) - Word
References
Mailings
Review
View
Help
O Tell me what you want to do
AaBbCcDc AaBbCcDc AaBbC AaBbCcl AaB A
A.
1 Normal
1 No Spac. Heading 1
Heading 2
Title
Paragraph
Styles
Diamonds clearly satisfy less important needs than water, which is essential to life. Yet
according to market prices, the essential commodity, water, is worth less than the less essential
commodity, diamonds. Why would a vital commodity such as water sell for so much less than
diamonds? Does this imply that there is something wrong with a market system that values
diamonds more than water? Explain using demand and supply curves for water and diamonds.
(Could you also add a graph)
lyp

Expert Solution

Step 1

The supply of water is large in the world, but the supply of diamonds is much lower than water. The marginal utility of water is low because any particular unit of water becomes worthless to people as the supply is increasing, but as the lower supply of diamonds that the usefulness of one extra unit of a diamond is greater than the usefulness of one extra unit of water. Diamond is a luxury good and the elasticity of demand, and supply for luxury goods is more elastic. People are willing to pay a higher price for one diamond than for one more glass of water because the elasticity of demand and supply for water is inelastic.

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