General Equilibrium Foundation of Partial Equilibrium Analysis by Takashi Hayashi

Author:Takashi Hayashi
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

Then, the set of Pareto-efficient allocations is depicted as in Fig. 4.8, which is a vertical line. This is because when equality of marginal rates of substitution between A and B holds it holds at any point vertically above or below since indifference curves are parallel along the vertical axis due to the assumption of no income effect. Thus, while the allocation of Good 1 is uniquely determined the allocation of Good 2 is totally undetermined.

In competitive equilibrium marginal willingness to pay for all consumers and marginal cost are equal to the price, that is,

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