Risk has been recognized as potentially important in determining agricultural supply. However, supply response models have either incorporated risk. A rational expectations supply response model incorporating price risk for cotton in Khorasan province has been developed (during 1986-2006). Expected prices are obtained by fitting autoregressive models, and then the results were estimated in an equations system. Results show that variation in price risk has negative effect on annual variation of cotton acreage in Khorasan. This means that when price risk increases, supply of farmers decreases, or cotton farmers in Khorasan show rational behavior.
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