Suppose that the utility of diamonds and water increase as shown in Table 1.
| Water | Diamonds | ||
|---|---|---|---|
| Gallons | Utility | Carats | Utility |
| 1 | 1,000,000 | 1 | 15 |
| 2 | 1,000,100 | 2 | 29 |
| 3 | 1,000,110 | 3 | 42 |
| 4 | 1,000,111 | 4 | 54 |
| 5 | 1,000,111 | 5 | 64 |
Now suppose consumer already has 3 gallons of water but no diamonds. The fourth gallon of water would give her only one additional unit of utility. However, the first diamond would give her 15 units of utility. Thus, she would be willing to spend 15 times as much for a one-carat diamond as for a gallon of water.
Copyright