Minimum prices and optimal production under multiple sources of risk: a note
Eeckhoudt, L.; Hansen, P.
European Review of Agricultural Economics 16(3): 411-418
In a competitive market where only output price is uncertain, risk averse producers always respond positively to a better protection against downward price fluctuations. This note analyses the robustness of this result when there is more than one source of risk and concludes that: (1) if the financial and technological risks enter additively into the objective function their joint consideration does not affect the result obtained with only financial uncertainty; and (2) with a multiplicative specification, matters are less clear cut. Sufficient conditions to retain the classical result are presented but it is shown through a numerical example that when the conditions are not met, counterintuitive results may occur.