In this paper, we develop an integrated model of production in the presence of capital asset market equilibrium. Our theory indicates that, in a stochastic environment, production and financial variables are inextricably interrelated. But stockholders can alter their distributions of returns by altering firms' production decisions as well as by altering their portfolios. We develop equilibrium conditions which must be satisfied by production decisions.
Profit maximization is indeed optimal for a firm whose profits are riskless.
But risky firms' outputs depend on financial as well as cost variables, and the equilibrium conditions lead to a theory of production under uncertainty which replaces the now-vacuous notion of profit maximization. Cowles Foundation Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. Requests for single copies of a Paper will be filled by the Cowles Foundation within the limits of the supply.