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Duality, income and substitution effects for the competitive firm under price uncertainty

Author

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  • Carmen F. Menezes

    (Department of Economics, University of Missouri-Columbia, Columbia, MO 65211, USA)

  • X. Henry Wang

    (Department of Economics, University of Missouri-Columbia, Columbia, MO 65211, USA)

Abstract

This paper uses duality theory to decompose the total effect on the competitive firm's output of an increase in the riskiness of output price into income and substitution effects. Properties of preferences that control the sign of each effect are identified. The analysis extends to the general class of quasi-linear decision models in which the payoff is linear in the random variable. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Carmen F. Menezes & X. Henry Wang, 2005. "Duality, income and substitution effects for the competitive firm under price uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 249-257.
    • Handle: RePEc:wly:mgtdec:v:26:y:2005:i:4:p:249-257
    DOI: 10.1002/mde.1217
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    References listed on IDEAS

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    1. Mirman, Leonard J, 1971. "Uncertainty and Optimal Consumption Decisions," Econometrica, Econometric Society, vol. 39(1), pages 179-185, January.
    2. Block, M K & Heineke, J M, 1973. "The Allocation of Effort under Uncertainty: The Case of Risk-averse Behavior," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 376-385, Part I, M.
    3. Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 537-548, May/June.
    4. David L. Hanson & Carmen F. Menezes, 1978. "The Effect of Capital Risk on Optimal Saving Decisions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(4), pages 653-670.
    5. Davis, George K, 1989. "Income and Substitution Effects for Mean-Preserving Spreads," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 131-136, February.
    6. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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    Cited by:

    1. Thomas Eichner, 2010. "Slutzky equations and substitution effects of risks in terms of mean-variance preferences," Theory and Decision, Springer, vol. 69(1), pages 17-26, July.
    2. Eichner, Thomas, 2011. "Portfolio selection and duality under mean variance preferences," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 146-152, January.

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