Elsevier

European Economic Review

Volume 34, Issue 6, September 1990, Pages 1181-1199
European Economic Review

Price uncertainty, the competitive firm and the dual theory of choice under risk

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Abstract

We analyze a competitive firm facing output price uncertainty in Yaari's dual theory of choice under risk. In Yaari's dual theory the preference functional is linear in profit but is compatible with risk aversion or risk inclination. We obtain a characterization of output and input decisions of firms which, unlike the von Neumann-Morgenstern theory of the firm, closely resembles that of the theory of the firm under certainty. We find intuitive comparative statics effects of increases in risk and risk aversion. We show how Hotelling's lemma can be applied to find the firm's output supply and input demand functions.

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  • Cited by (0)

    This paper was written while the authors were Visiting Assistant Professors at the University of British Columbia. The authors are very grateful to Professor Agnar Sandmo for his valuable comments which provided guidance in the revision of this paper. They also benefited from the comments of an anonymous referee and from helpful discussions with Erwin Diewert, Christian Gilles and Moshe Kim. They thank the Social Sciences and Humanities Research Council of Canada for financial support.

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