What is an output contract?

• A. An output contract is a contract under which a seller agrees to sell all that she manufactures of a product to the buyer.
• B. An output contract is a contract where the buyer agrees to purchase all of the seller's output regardless of quantity.
• C. An output contract requires the buyer to purchase all the seller's output in exchange for a fixed price.
• D. An output contract is a contract that requires consideration from the buyer but not the seller.

Answer: (A)

Output contracts involve a seller agreeing to sell all of the seller’s production of a given good to a single buyer, with the buyer agreeing to purchase all of the seller’s output. This creates a bilateral arrangement: the seller commits to turning over all that is produced, and the buyer commits to taking all of it. The quantity isn’t fixed in advance; it’s whatever the seller produces during the period, which helps both sides plan around production and supply.

This explains why the described option is best: it accurately states that the seller will sell all that she manufactures to the buyer and that the buyer will purchase all of the seller’s output. The other statements are off: one omits the seller’s reciprocal obligation, another adds a fixed price that isn’t a defining feature, and the last suggests one-sided consideration.