Lecture32-2004 - Lecture XXXII State Contingent Production...

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1 Lecture XXXII State Contingent Production Model: The Stochastic Production Set I. Differences between state contingent production and stochastic production functions. A. Material taken from Chambers, Robert G. and John Quiggin Uncertainty, Production, Choice and Agency: The State-Contingent Approach New York: Cambridge University Press, 2000 Chapters 1 and 2. B. Historically most applications of risk to production theory have been based on a stochastic production function. 1. In its simplest format the stochastic production function is simply a production function with a random error term added to it: ( ) 12 yfx x x αβ ε = =+ Under this formulation the risk (dispersion) created by the error term did not affect the input decisions. 2. In a slightly more complex scenario, the simple formulation was expanded to allow the risk to be a function of one or both inputs: ( ) ( ) 1 2 , x x x ==+ ± 3. Even with the expansion of the error function to include relative effects of each input, the assumptions used to parameterize the model imply that the ratio of input use did not change. C. Adapting this formulation slightly, Chambers and Quiggin depict this
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This note was uploaded on 07/15/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

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Lecture32-2004 - Lecture XXXII State Contingent Production...

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