doubts

[Var1995]

Two states of the worls. p(s1)= p(s2) = ½. When s1, energy prices are high, weh ; When s2, energy prices are low, wel. Government is considering the policy for firms to pay only expected prices , E(w) each period. Firm is risk neutral and only seeks to maximize expected profit , E(p,w) each period (p is the price of the product which firm sells) What is true about firm’s decision?

m not getting this question. someone help.

with this too:
Assume that expenditure functions of two agents A and B, are given by eA(p,u) = k(u)g(p) and eB(p,u) = 2 eA(p,u), where k’(u) >0 , then observable market behaviour of A and B are the same.

[varnika1880]

Expenditure function is inverse of IUF ...given its a positive monotonic transformation preferences will be preserved

[knowpraveen]

My two cents here. You can correct me if you find it wrong. Given the firm is risk neutral which goes on to mean that the preferences could be a linear function in profits. Since the firm is risk neutral the decision to charge the expected price 1/2(weh+wel) should not be in the best interest of the firm since it doesn't make things any different for the firm but they'd be okay with both pricing policies. Had it been a little skewed towards the higher side, let's say in state 1, the probability is 1/4 and in state 2 happens with a probability 3/4, a risk averse firm might settle with the expected price (1/4(weh)+3/4(wel)) but a risk loving firm might go with the ordinary pricing. Consider for this problem sake, a utility function U=aP+b where P is the profit, py - 1/2(weh+wel)

Let me know your thoughts on this.

[varnika1880]

What I believe is that the function is weekly convex (linear function ) ...so I suppose he will operate at E value >_functional value ,(like every convex )

[knowpraveen]

In that case isn't it weakly concave as well, which made me rule out that case.

[varnika1880]

In my opinion if we take it as concave he won't be an expected utility maximizer ....ruling out the less than equal to case

[knowpraveen]

Looks like I should revisit the concept. Thanks. =)

[varnika1880]

@Varsha if u can provide the options ...that will be very helpful ...thnx

[Var1995]

i m still confused :( if u could explain it again...