Utility, Production and Uncertainty

A rational individual can choose under conditions of certainty, as we have assumed up until now, or under conditions of uncertainty, as we shall see in this chapter. The key issue is how to order the different alternatives in the presence of uncertainty in accordance with the individual’s preferences. This issue has had three different responses throughout the history of the development of utility. Here they will be summarised in three stages. Later, we shall address a situation in which the company produces under conditions of uncertainty. To end this chapter, we shall set out the main critiques of expected-utility theory and connect such critiques with the theory of limited rationality.