Investment Under Demand Uncertainty: the Newsboy Problem Revisited

Georges Dionne () and Tahar Mounsif

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: In this article we study the effect of uncertainty on an entrepreneur who must choose the capacity of his business before knowing the demand for his product. The unit profit of operation is known with certainty but there is no flexibility in our one-period framework. We show how the introduction of global uncertainty reduces the investment of the risk neutral entrepreneur and, even more, that the risk averse one. We also show how marginal increases in risk reduce the optimal capacity of both the risk neutral and the risk averse entrepreneur, without any restriction on the concave utility function and with limited restrictions on the definition of a mean preserving spread. These general results are explained by the fact that the newsboy has a piecewise-linear, and concave, monetary payoff witha kink endogenously determined at the level of optimal capacity. Our results are compared with those in the two literatures on price uncertainty and demand uncertainty, and particularly, with the recent contributions of Eeckhoudt, Gollier and Schlesinger (1991, 1995).

Keywords: Uncertainty; investment; newsboy oblem; increase in risk; oimal cacity (search for similar items in EconPapers)
JEL-codes: D80 D81 E22 (search for similar items in EconPapers)
Pages: 16 pages
Date: 1996
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Investment Under Demand Uncertainty: The Newsboy Problem Revisited (1996)
Working Paper: Investment under Demand Uncertainty: The Newsboy Problem Revisited (1996)
Working Paper: Investment Under Demand Uncertainty: The Newsboy Poblem Revidited (1996)
Working Paper: Investment Under Demand Uncertainty: The Newsboy Problem Revisited (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:9610

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