In this section, we focus on the investment response of a risk-averse firm to change
in uncertainty within the stated setting. The uncertainty adjustment is assumed to
take the form of a mean-preserving spread in the density g(r) along the lines of
Rothschild and Stiglitz ( 1970).4 Let i=ar+ 8, where initially a= 1 and 0 =0.5 An
adjustment in uncertainty is initiated by a change in a with the mean-preserving
property de/da = -p. The objective is to evaluate dK*/da. Substituting i for r and
differentiating the first-order condition [Eq. (l)] with respect to a yields: