Explain the relative prices of water and diamonds

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Classical economists struggled with the "Water-Diamond Paradox" which seeks an explanation for why water (which is very useful) has a low price, whereas diamonds (which are not particularly important to life) have a high price. How would Smith explain the relative prices of water and diamonds? Would Ricardo's concept of diminishing returns pose some problem for this explanation? Can you resolve matters by using Marshall's model of supply and demand? If water is "very useful" to the demanders in Marshall's model, how would you know?

Reference no: EM13188318

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