Certainty equivalence in expected profit maximization implies impossibility of loss |
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| Institution: | 1. Economics Discipline Group, University of Technology Sydney, Australia;2. Centre for Applied Macroeconomic Analysis, Australian National University, Australia;3. Department of Management, Università Politecnica delle Marche, Italy;4. IRES Piemonte, Turin, Italy;5. Columbia University, New York, USA;1. Brandenburg University of Technology Cottbus-Senftenberg, Chair of Environmental Economics, Erich-Weinert-Str. 1, Lecture building 10, Room 532, 03046 Cottbus, Germany;2. Martin Luther University Halle-Wittenberg, Von-Seckendorff-Platz 4, 06120 Halle (Saale), Germany;3. UFZ – Helmholtz Centre for Environmental Research, Department of Ecological Modelling, Permoserstr. 15, 04318 Leipzig, Germany;4. Brandenburg University of Technology Cottbus-Senftenberg, Department of Freshwater Conservation, Research Station Bad Saarow, Seestraße 45, 15526 Bad Saarow, Germany;5. Institute of Grassland Science, Georg‐August‐Universität Göttingen, Wilhelmsplatz 1, 37073 Göttingen, Germany;1. Institute of Water Resources and Hydro-electric Engineering, Xi''an University of Technology, NO.5 South Jinhua Road, Xi''an, Shanxi 710048, China;2. State Key Laboratory of Eco-hydraulics in Northwest Arid Region of China (Xi''an University of Technology), NO.5 South Jinhua Road, Xi''an, Shanxi 710048, China;3. Institute of Hydraulic Engineering and Water Resources Management, Graz University of Technology, Graz, Styria 8010, Austria |
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| Abstract: | It is shown that, for a competitive firm under price uncertainty, expected profit maximization is in general inconsistent with certainty equivalence if the option of shutdown is taken into account. Expected profit maximization is consistent with certainty equivalence if and only if there is no possibility (in the sense of having probability measure zero) of negative profit, or equivalently, loss. |
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