A contract containing an adjustment provision which allows the supplier to recover a fraction of his additional costs when input prices cross a certain level, is considered efficient because:
A)it reallocates the supplier's risk while checking his activities.
B)it reallocates risks completely to the buyers.
C)it allows the supplier to take up risks.
D)it allows the buyers to partially reallocate their risks.

Question

Quizplus · Accepted Answer

The adjustment provision allows the supplier to recover a fraction of his additional costs when input prices cross a certain level. This provision acts as a risk allocation mechanism, realigning the supplier's risk and ensuring that he is accountable for his activities while keeping his participation in the transaction. This provision implies that additional costs beyond a certain threshold are borne by the entity that is best able to handle them.

A Contract Containing an Adjustment Provision Which Allows the Supplier