PRICE UNCERTAINTY AND CONSUMER'S BENEFIT

Abstract

This paper intends to argue whether the consumer benefits from increased uncertainty about the level of future consumer's price. The analytical instrument is the two-period approach familiar to us. It is assumed that the consumer's beliefs about the level of future consumer's price can be summarized in a subjective probability density function with non-negative standard deviation and that the consumer behaves so as to maximize his expected utility function E[u(c₁, c₂)] whose arguments are present consumption c₁ and future one c₂ subject to his appropriate budget constraint. And we measure the degree of uncertainty concerning the level of future consumer's price by the magnitude of γ_p and the consumer's benefit by the level of his expected utility.
As a result of our analysis, we obtain the following proposition:
∂E[u(c₁, c₂)]/∂γp_??_0 as R_RT_??_2, where R_RT=-c₂u₂₂(c₁, c₂)/u₂(c₁, c₂) which is called the temporal relative risk aversion function in this paper.