I would have used wine, rather than water, to illustrate Principle #1. At least with water, people generally agree that it's all the same and the $2 bottle is a ripoff. But with wine, you often hear about things like blind taste tests, where the cheap wines often come out ahead.

But it's more complex than that. People who buy wine may have other motives and will want a more expensive wine for whatever reason (special occasions, showing off, etc.). What's more is that one's experience of something like food depends on how you feel about the food. And price contributes to how you feel.

In other words, you might rerun the same taste test you did blindly before and have people pick the expensive wine the next time. So quality is complex: there may be both real and imaginary parts and which item people will pay more for depends on how it gets compared to the alternatives. And that's not even getting into things like branding, where people feel a certain way about a brand and that contributes to their enjoyment (or lack of enjoyment) of a product, etc.