Abstract
We analyze a competitive firm facing output price uncertainty in Yaari's dual theory of choice under risk. In Yaari's dual theory the preference functional is linear in profit but is compatible with risk aversion or risk inclination. We obtain a characterization of output and input decisions of firms which, unlike the von Neumann-Morgenstern theory of the firm, closely resembles that of the theory of the firm under certainty. We find intuitive comparative statics effects of increases in risk and risk aversion. We show how Hotelling's lemma can be applied to find the firm's output supply and input demand functions.
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