Question Seven (worth six points)

(a) Assume we have a good where the value of the first few units of a good consumed is very high and the value of the last few units consumed is very low. Assume that the cost of producing each unit of the good starts out very low and stays very low over the entire range of output we are looking at. Draw the supply and demand curves and determine whether the equilibrium price will be high or low and whether the total value of the good consumed will be high or low. Explain your reasoning.

(b) Assume we have a good where the value of the first few units starts out high and stays high. Assume that the cost of the first few units is very high and the cost of additional units goes up sharply. Draw the supply and demand curves and determine whether the equilibrium price will be high or low and whether the total value of the good consumed will be, compared to the value of the good in part (a), relatively high or low. Explain your reasoning.

Question Eight (worth two points)

One of the goods described in Question Seven is water and the other is diamonds. Which is which? Why does that make sense?