One Possible Solution to an Incentive Problem Arising Under Unobservable

question 18

Multiple Choice

One possible solution to an incentive problem arising under unobservable actions is:

• A) pay more and make the worker efficient.
• B) be the boss and fire the inefficient worker and send a signal to others.
• C) buy the agent's right to his total output.
• D) sell the agent the right to the total production.

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Definitions:

Trade or Business

An activity conducted for the purpose of earning income from selling goods or services, characterized by regularity and continuity.

Depreciation

The accounting process of allocating the cost of a tangible asset over its useful life, representing the decrease in value of the asset over time.

Section 1231

Refers to a tax provision in the United States that includes the tax treatment of gains and losses on the sale or exchange of real or depreciable property used in a trade or business and held for more than one year.

Ordinary Asset

An asset used in a business or trade which is subject to ordinary income tax rates rather than capital gains tax rates if sold or exchanged.