Question

Point of saturation refers to a situation when ______.

Options

• TU is rising

• TU is falling

• MU is negative

• MU is zero

Answer 1

Point of saturation refers to a situation when MU is zero.

Explanation:

Water has low marginal utility as water is available in plenty and, hence, its total utility soon reaches the point of saturation (i.e., marginal utility becomes almost zero). Therefore, price of water is very low (almost zero). On the other hand, the total utility of diamond never reaches the point of saturation because of very limited availability of diamond. Therefore, marginal utility of diamond is very high, leading to a very high market price of diamond.