Suppose we consider producers in a competitive market. Hence all producers are price takers and earn profit π = pq - c (q), where p is a random variable. Thus, the mean of profit is E(π) = μpq - c (q), and variance of profit is

Further, suppose that each producer has an expected utility of wealth function that can be approximated as

and that each behaves so as to maximize expected utility of wealth. Consider that some producers are overconfident and others are not. Which will produce more (larger q)? Which will obtain a higher profit on average? Suppose that the mean price declines over time. What is the condition for shut down? Will rational or overconfident producers shut down first? What does this say about the rationality of firms in a competitive environment?

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VAR (7) = 0a