CONSISTENT FIRM CHOICE AND THE THEORY OFSUPPLY

This paper analyzes the problem of deriving predictions, regarding supply behavior of acompetitive firm, from prior consistency postulates about input-output choices made by such afirm. It extends the literature by introducing a consistency postulate for firm choice, which isweaker than profit-maximization. This consistency postulate is nevertheless both necessary andsufficient for supply responses predicted by the standard theory of firm choice based on thepostulate of profit-maximization. Furthermore, our rationality postulate, in conjunction withanother condition, is shown to be equivalent to firm choice behavior that can be rationalized interms of profit maximization.