Following a severe crop disease that sharply reduces the global supply of vanilla pods, the market price of vanilla escalates. Which of the following best describes how the rationing function of the price mechanism operates in this market?
The higher price increases the potential profitability of vanilla farming, providing an incentive for existing growers to increase their output.
The higher price rations the scarce vanilla pods by allocating them to buyers who are willing and able to pay the premium, contracting market demand to match the lower supply.
The higher price signals to food manufacturers that vanilla is now in abundant supply, encouraging them to expand their product lines.
The higher price ensures that vanilla resources are distributed equitably to all food manufacturers regardless of their size or financial strength.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.