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Supply Theory sans Profit-Maximization

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  • Dasgupta, Indraneel

    ()
    (Indian Statistical Institute)

Abstract

We utilize the analytical construct of a stochastic supply function to provide an aggregate representation of a finite collection of standard deterministic supply functions. We introduce a consistency postulate for a stochastic supply function that may be satisfied even if no underlying deterministic supply function is rationalizable in terms of profit maximization. Our consistency postulate is nonetheless equivalent to a stochastic expansion of supply inequality, which summarizes the predictive content of the traditional theory of competitive supply. A number of key results in the deterministic theory follow as special cases from this equivalence. In particular, it yields a probabilistic version of the law of supply, which implies the traditional specification. Our analysis thus provides a necessary and sufficient axiomatic foundation for a de-coupling of the predictive content of the classical theory of competitive firm behavior from its a priori roots in profit maximization, while subsuming the traditional theory as a special case.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4018.

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Length: 18 pages
Date of creation: Feb 2009
Date of revision:
Publication status: published in: B.E. Journal of Theoretical Economics: Contributions to Theoretical Economics, 2009, 9 (1), Article 26
Handle: RePEc:iza:izadps:dp4018

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Keywords: supply aggregation; stochastic consistency; stochastic supply inequality; stochastic supply function; law of supply; weak axiom of profit maximization;

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References

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  1. Bandyopadhyay, Taradas & Bandyopadhyay, Bandyopadhyay & Pattanaik, Prasanta K., 2002. "Demand Aggregation and the Weak Axiom of Stochastic Revealed Preference," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(2), pages 483-489, December.
  2. Daniel McFadden, 2005. "Revealed stochastic preference: a synthesis," Economic Theory, Springer, Springer, vol. 26(2), pages 245-264, 08.
  3. Bandyopadhyay, Taradas & Dasgupta, Indraneel & Pattanaik, Prasanta K., 1999. "Stochastic Revealed Preference and the Theory of Demand," Journal of Economic Theory, Elsevier, Elsevier, vol. 84(1), pages 95-110, January.
  4. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
  5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  6. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, Elsevier, vol. 30(1-2), pages 445-458.
  7. Taradas Bandyopadhyay & Indraneel Dasgupta & Prasanta Pattanaik, 2004. "A general revealed preference theorem for stochastic demand behavior," Economic Theory, Springer, Springer, vol. 23(3), pages 589-599, March.
  8. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents, Nobel Prize Committee 1978-1, Nobel Prize Committee.
  9. Indraneel Dasgupta & Prasanta Pattanaik, 2007. "‘Regular’ choice and the weak axiom of stochastic revealed preference," Economic Theory, Springer, Springer, vol. 31(1), pages 35-50, April.
  10. Indraneel Dasgupta, 2005. "Consistent firm choice and the theory of supply," Economic Theory, Springer, Springer, vol. 26(1), pages 167-175, 07.
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Cited by:
  1. Indraneel Dasgupta, . "Revealed Preference with Stochastic Demand Correspondence," Discussion Papers 07/06, University of Nottingham, School of Economics.
  2. Indraneel Dasgupta, 2011. "Contraction consistent stochastic choice correspondence," Social Choice and Welfare, Springer, Springer, vol. 37(4), pages 643-658, October.
  3. Jan Heufer, 2008. "Stochastic Revealed Preference and Rationalizability," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0070, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  4. Jan Heufer, 2009. "Stochastic homothetically revealed preference for tight stochastic demand functions," Economics Bulletin, AccessEcon, vol. 29(3), pages 2472-2477.

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