Q. Diamond costs more than water because:
Answer: their marginal utility to buyers is higher than that of water.
Notes: The water diamond paradox was a mystery of Adam Smith, who observed that diamonds were worth much more than water, even though water offered a greater utility than diamonds. The solution of this riddle or paradox is based on the difference between marginal utility and total utility. The marginal utility of diamond is very high and hence consumers are willing to pay a higher price for diamond than for water.