Abstract
AbstractThe validity of producer and consumer surplus measures of firm welfare under risk is examined. Under constant absolute risk aversion and output price uncertainty only, these measures are an exact measure of firm welfare as defined by compensating variation, equivalent variation or the change in the certainty equivalent. Under decreasing absolute risk aversion, qualitative comparisons of various measures are discussed. For example, producer's surplus as measured by the area above the uncompensated risk averse supply curve overstates the compensating variation of a change in expected price of output. Procedures for calculating firm welfare under production uncertainty and a variety of economic environments are proposed. Generally, these procedures are applicable only when absolute risk aversion is constant.
Published Version
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