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c 

  

c  It refers to a situation in which variability of the outcome can be measured in


quantitative way.


  It is the state of mind in which one can only guess the outcomes to a particular
action, i.e. the probability of outcome is not estimated, but it is purely subjective nature.

c  
  

1. It can be measured in a 1. Can't be measured.


quantitative way.
2. It is included in the cost. 2. It can't be included in the cost.
3. The risk does not affect the 3. It affects the decision process, because the
decision. future outcome is not estimated.
4. Risk can be insured also. 4. No direct insurance is taken. e.g.
earthquake, flood, drought.

Burning a house or theft of asset is uncertainty for individual person. But the Insurance Co.,
based on its past experience, can measure by estimating the probability of occurrence in
that region. i.e. the uncertainty is conve rted into risk.

Ô
   classified the knowledge situation as under:

1] 
     : One of the assumptions of production function. A definite plan can
be drawn in this situation.

2] 
    

i) Risk: a) A priori

b) Statistical probability: i.e. based on the part data.

ii) Uncertainty:


c  

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i.e. based on our value judgment. e.g. suppose in a hilly area, a hailstorm occurs every year
during the specific month, using this Priori information, the decisio n can be taken
accordingly. Another example is transportation of eggs from one to another place, in which
there are chance of breakage on the road, if this is to be repeated every time, it is treated as
risk and can be measured through probability. It is i ncluded in the cost, it does not affect the
decision.

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- Large sample is needed

- Repetitive nature of event / observation

- Observations should be knowledge independent

An example of different knowledge situations and decision making:

Units Marginal Perfect Imperfect knowledge


of cost knowledge of
Risk Uncertainty
input Marginal
returns Marginal returns with Possible range of
probability of marginal returns

0.10 0.25 0.65

1 6 16 14 16 15 - 3 to + 28

2 6 14 13 13 10 ͞

3 6 13 8 10 7 ͞

4 6 9 7 9 6 ͞

5 6 6 6 7 4 ͞

6 6 4 5 6 3 ͞
Ôor getting the maximum profit under the perfect knowledge, 5 units o f input should be
used where MR = MC. But when the knowledge about marginal returns is imperfect, it is
difficult to apply profit maximizing principle. Hence, if the farmer is using 3 units of input,
the marginal returns are greater than marginal cost even under the most adverse situation.
At 4th unit of input, there are 65% chances of MR = MC .......In this type of situation, the
decision rule is governed on the basis of risk bearing ability of the farmer.

In case of uncertainty situation, only a range of MR is known, i.e. -3 to + 28. In such a


situation, the decision maker has to make certain assumptions regarding the possibilities of
occurrence of any value of marginal returns.

 
 $
  

The uncertainty of input and output price is important, however, the product price
uncertainty is relatively more important because it fluctuates more widely. The price
uncertainty is occurring mainly due to the government policy, natural hazards, m .

 % $
  

The crop yield or livestock productivity varies from season to s eason and place to place also.
This uncertainty in mainly due to : Weather conditions, pest and disease attack to the crops,
intensity of sunrise and other natural factors,ї New variety may be evolved for the crops.
Appropriate animal breeding policies may be adapted to ј productivity.


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†ifferent kinds of technologies, e.g. high yielding varieties, Tractor v/s labor, new breed of
animal. Thus, the role of technology in production uncertainty is very important, especially
in the long run. The technological uncertainty in relatively higher in case of industry.

'  $ $


  

e.g. uncertainty of credit, electricity, inputs, irrigation facilities, etc. under these
circumstances, the farmer is unable to take suitable decisions.

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e.g. land ceiling and land tenure system are the examples of legal uncertainty, similarly, an
advancement in machinery may reduce the human labor i.e. creators unemployment.

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Unstable Govt. has definite impact on share markets and other policies too.

( (   ) 
  

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i.e. the enterprise having low variability should be selected, based on its past data or the
crop - loss ratio can be estimated, i.e. sum of deviation of the yield divided by total yield of
all the years under study.

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i.e. based on the crop productivity, i.e. the farmer will select a variety of a crop giving higher
productivity / returns.

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It is also one means of safeguard in against risk, uncertainty of price can be reduced up to
certain extent by making a forward contract of sale. Similarly, the requirement of inputs
which are in short supply can be booked in advance. Engaging a permanent labor for a year
ensures the labor supply especially for peak periods.
J $
 

e.g. crop insurance, cattle insurance, insurance for poultry birds. Insurance is a cost and if
everything goes well, it is loss to the farmers in adverse situation; it ensures some pre-
determined level of income.

- . *
    

It means selecting more than one enterprise in order to meet the risk or reduce the income
variability. e.g. Crop + †airy + Poultry.

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