Q.Explain the 'water–diamond paradox' and how it is resolved.

The paradox contrasts water's enormous usefulness with its near-zero price, and a diamond's negligible usefulness with its very high price; it is resolved by noting that price tracks marginal utility relative to scarcity, not total usefulness. …

Adam Smith observed a puzzle: water, without which life is impossible, has an enormous value in use but almost no value in exchange (it is nearly free); a diamond, which satisfies no basic survival need, has very little value in use but an enormous value in exchange (it commands a very high price).

Resolution: exchange value (price) is governed not by a commodity's total usefulness but by its marginal utility, which in turn depends on scarcity relative to demand. Water is available in such abundance, in most places, that its marginal utility — the satisfaction from one more litre — is very low, so its price is low, even though the total utility of all the water a person consumes is enormous. Diamonds are extremely scarce relative to the largely ornamental demand for them, so the marginal utility of one more diamond stays high, keeping its price high, even though diamonds contribute almost nothing to survival. …

Explaining the paradox only descriptively ('diamonds are rare, water is common') without connecting it to the marginal utility principle — the expected answer needs the …