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3.Early Classical economists found the following "diamond/water" paradox perplexing: "Why is water, which is so useful and so necessary, so cheap, when diamonds, which are so relatively unnecessary, are so expensive?" In modern economic terms, explain the water/diamond paradox.

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Water is more useful in terms of survival but diamond is more costlier and this is what is called as "diamond/water"paradox.Adam smith, explained this by saying that the value of hardship or labor involved in producing one unit of water is much less than the same required for producing one unit of diamond. He explained on the basis of labor theory of value. But the modern economists have rejected that theory and in turn replaced it with the theory of 'Marginal Utility'.The theory of marginal utility, which is based on the subjective theory of value, says that the price at which an ...

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