Loehman, Edna T.

December, 1992

By: Loehman, Edna T.; Nelson, Carl H.
For production risk with identified physical causes, the nature of risk, production characteristics, risk preference, and prices determine optimal input use. Here, a two-way classification for pairs of inputs - each input as being risk increasing or decreasing and pairs as being risk substitutes or complements - provides sufficient conditions to determine how risk aversion should affect input use. Unlike the Sandmo price risk averse firm may produce more expected output and use more inputs than a risk neutral firm. Sufficient conditions to determine types for pairs of inputs are also related to properties of the production function.