Slutsky, Let Me Introduce You to Arrow-Pratt: Competitive Price Effects with Uncertain Production

The purpose of this article is to characterize the effect of a competitive price change on a producer’s commodity transactions under uncertainty and impatience. The novelty comes from a methodological approach inspired by both Slutsky and Arrow-Pratt. Combining and generalizing these methodological frameworks illuminates natural analogues between production and consumption with and without uncertainty, while facilitating the analysis of certain, risky, and uncertain choice within a consistent framework. Contributions include (i) the introduction of the immediate profit function — a generalization of cost function to an economic environment with uncertainty and impatience, (ii) a generalization of Arrow-Pratt risk aversion to characterize preferences over time as well as over uncertainty, (ii) a generalization of Arrow-Pratt risk aversion to characterize technological and market uncertainty, (iv) the decomposition of price effects on commodity choices with uncertainty and impatience using Slutsky substitution and income effects, and the generalized Arrow-Pratt characterizations of uncertainty aversion, patience aversion, technological uncertainty and market uncertainty; and (v) a reexamination of Sandmo’s seminal comparative static analysis of a producer facing price risk in the context of price uncertainty and impatience.


Issue Date:
2016-12
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/250204
Total Pages:
30
JEL Codes:
D21; D8




 Record created 2017-04-01, last modified 2018-01-23

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