The long run behavior of the firm under uncertainty
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A group of monopolistically competitive, risk averse firms exhibiting diminishing absolute risk aversion shrinks in number in the long run due to an increase in the price of any normal input.
The output of a monopolistically competitive, risk averse firm exhibiting diminishing absolute risk aversion rises in the long run in response to an increase in the price of any normal input.
A risk averse, monopolistically competitive firm exhibiting diminishing absolute-and increasing partial relative-risk aversion reduces its output in the long run in response to an increase in uncertainty about output price. In the case of such a firm, an increase in uncertainty about price also leads to a higher expected price in the long run.
A group of monopolistically competitive, risk averse firms exhibiting diminishing absolute- and increasing partial relative-risk aversion shrinks in number in the long run in the face of increased uncertainty about out-put price.
Given the high predictive content of the model developed, issues of competitive advertising in the long run under uncertainty can easily be studied in this framework. Another immediate extension that is possible in this framework is the examination of such normative aspects of monopolistic competition as optimum product differentiation in the long run under uncertainty.
KeywordsRisk Aversion International Economic Product Differentiation Public Finance Optimum Product
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