The Production Responses of the Competitive Firm to Three Conventional Distributional Shifts: A Unified Perspective

Abstract

This paper presents a unified perspective on the production responses of the competitive firm to three conventional distributional shifts: (i) a rightward shift of the distribution, (ii) a Rothschild-Stiglitz increase in risk, and (iii) a Menezes et al. increase in downside risk. In particular, assuming that the von Neumann-Morgenstern utility is increasing and concave, and assuming its higher-order derivatives are uniformly signed, we demonstrate that the production responses are unambiguous in the case of price less than or equal to marginal cost. In the alternative case of price greater than marginal cost, we then demonstrate that the production responses can be signed unambiguously by reference to sufficient conditions motivated by absolute risk aversion and by absolute prudence.

JEL Classification: D24