Rationality in the Theory of the Firm

TL;DR

This paper revises the mathematical derivation of the Keen equilibrium in firm theory, extends it to asymmetric cases, and discusses the role of rationality in a two-player game setting.

Contribution

It corrects previous mathematical errors, generalizes the Keen equilibrium to asymmetric scenarios, and analyzes rationality in a two-player context.

Findings

Corrected the derivation of the Keen equilibrium.

Generalized the equilibrium to asymmetric cases.

Discussed the implications of rationality in a two-player game.

Abstract

We have previously presented a critique of the standard Marshallian theory of the firm, and developed an alternative formulation that better agreed with the results of simulation. An incorrect mathematical fact was used in our previous presentation. This paper deals with correcting the derivation of the Keen equilibrium, and generalising the result to the asymmetric case. As well, we discuss the notion of rationality employed, and how this plays out in a two player version of the game.