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Price Uncertainty, The Competitive Firm and the Dual Theory of Choice Under Risk

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Abstract

This paper undertakes an analysis of the competitive firm facing output price uncertainty based on Yaari's dual theory of choice under risk. The axiomatic foundation of Yaari's non-expected utility approach permits the formulation of a preference functional which is linear in profit but non-linear in distribution. Yaari's approach allows seperation of the firm's attitude towards risk from its attitude towards wealth and is consistent with experimental evidence on decision-making under uncertainty. In Yaar's dual theory the linearity in profit of the preference funcional stems from a constant marginal utility of wealth and is compatible with either risk aversion or risk inclination. This appealing feature of the dual theory allows us (1) to obtain a characterization of output and input decisions of firms which , unlike the von Neumann-Morgenstern theory of the firm, is in comformity with the main results of the theory of the firm under certainty; (2) to find intuitive comparative statistics effects of increases in risk and risk aversion; (3) to define the profit function for a firm with dual theoretic preferences and show how Hotelling's lemma can be applied to find the firm's output supply and input demand functions.

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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Industrial Organization Research Unit (CIORU) with number 89-09.

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Length: 31 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:car:ciorup:89-09

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Keywords: theory of the firm; risk; risk aversion; increase in risk; non-expected utility model; duality and the profit function.;

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Cited by:
  1. Volij, Oscar & Winter, Eyal, 2002. "On Risk Aversion and Bargaining Outcomes," Staff General Research Papers 10130, Iowa State University, Department of Economics.
  2. U Schmidt & H Zank, 2002. "A Simple Model of Cumulative Prospect Theory," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0206, Economics, The University of Manchester.
  3. Kolstad, Charles D. & Kelly, David L. & Mitchell, Glenn, 1999. "Adjustment Costs from Environmental Change Induced by Incomplete Information and Learning," University of California at Santa Barbara, Economics Working Paper Series qt9mx119gc, Department of Economics, UC Santa Barbara.
  4. Bernhard Arnold & Ingrid Größl & Peter Stahlecker, 2000. "Competitive supply behavior when price information is fuzzy," Journal of Economics, Springer, Springer, vol. 72(1), pages 45-66, February.
  5. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ?
    [The new models of decision under risk or uncertainty : What approach?]
    ," MPRA Paper 25442, University Library of Munich, Germany.

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