Manifesting General Equilibrium on Married Couple’s Household:

Is It Possible to Achieve Pareto Optimal Allocation?

Writen by
Adnan Yasir
1906387221

FACULTY OF ECONOMICS AND BUSINESS

UNIVERSITY OF INDONESIA
DEPOK, DECEMBER 2021
 STATEMENT OF AUTHORSHIP

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Nama : Adnan Yasir
NPM : 1906387221
Tanda tangan :

Mata kuliah : Mikroekonomi 2

Judul paper : Manifesting General Equilibrium on Married Couple’s Household: Is It Possible
to Achieve Pareto Optimal Allocation?
Dosen : Teguh Dartanto, SE, M.Ec., Ph.D.
I. Introduction
For some people, getting married is one of the best things in life. Two individuals who decided to
life together under the contract, agreed to fulfill love, commitment, and companion to each other.
In some cases, both spouses must make an agreement through negotiation that will give most
beneficiaries for them. Despite, they recognize any risk and conflict that could be occur in
managing household. Study from Friedberg & Stern (2003) state several sources of possible
conflict that may get in the way of two spouses acting in concert to maximize a family utility
function. Consider, for example given a certain amount of goods which is available to spend, how
will couples decide to allocate those goods? Does it give more to husband or wife? However, even
if we make hard-hearted assumptions about the nature of bargaining, we might consider the
possibility that couples derive some utility from their partner's well-being.
In this situation – couple’s allocation household – facing the basic economic problem of
distribution. Thus, we attempt to examine the solution problem by using microeconomics
approach. This paper will begin by describing theoretical framework related to the general
equilibrium in very general term such as key assumption, distribution model, and describe of the
two-person exchange economy consist of feasible allocation, initial endowments, and barter
equilibrium. Then we proceed the application of Pareto optimal allocation in mathematical
calculation in case of married couple’s household.
II. Theoretical Framework
Here we expand the basic economic problem of distribution in a very simple society without
organised markets. The objective is to describe the kind of outcomes that could result from a
voluntary exchange process. By examining the outcomes of this process, we can establish a
benchmark against which the equilibria achieved under competitive market systems can be
compared. Before we get any further, there are key assumptions needed for analyzing equilibrium
exchange which consist of:
- Both spouses are self-interested and have the same bargaining power
- Only two goods and two consumers in the household
- There is no production in the household
- A voluntary, non-coersive exchange
Because of non-coercive, and because consumers are self-interested, voluntary exchange
means which commodities may be redistributed from the initial (endowment) distribution. In a
pure exchange economy, no price exists, and for simplification, all agents are consumers where
they are described completely by:
E = {N, (𝑋𝑖)𝑛𝑖=1, (𝑊𝑖)𝑛𝑖=1, (𝑖 ≥)𝑛𝑖=1}
Where we need a minimum N ≥ 2 for exchange:
• N : the agents {2, 3,…, n}
• X : each consumer i € N has a consumption set x € X
• W : each consumer i € N has an initial endowment
 • 𝑖≥ : each consumer i € N has a preference relation 𝑖 ≥
To visualize the description of the two-person exchange economy, suppose each consumer
has preferences represented by a usual, convex indifference map. In Figure 2, consumer 1’s
indifference curve increases north-easterly, and consumer 2’s increases southwesterly. One
indifference curve for each consumer passes through every point in the box. The wavy line C - C
is the subset of allocations where the consumers’ indifference curves are tangent to each other, and
it is called the contract curve. At any point off the contract curve, the consumers’ indifference
curves through that point must cut each other. Given initial endowments at e, the first requirement
is that the allocations can be somewhere as long as inside the box, because only those allocation
are feasible.
But not every feasible allocation can be a barter equilibrium. For instance, suppose we
reallocate from point e to point A. The Consumer 2 would be better off because his/her indifference
curve increaring, but consumer 1 would be worse off because his/her indifference curve
decreasing. Reminds that economy relies on voluntary exchange, and because consumers are self-
interested, the reallocation to point A would be refused by consumer 1, and so the initial
endowment would still there and could not shift. It also can be effecct vice versa, all allocation to
the left of consumer 1’s indifference curve through e would be refused by consumer 1.
Figure 2. Equilibrium in two-person exchange

Source: Jehle (2011:197)

This remains only allocations inside and on the boundary of the lens-shaped area delineated
by the two consumers’ indifference curves through e as potential barter equilibria. One consumer
will be better off and the other will be not worse off at every point along the boundary. At every
allocation inside the lens, however, both consumers will be strictly better off than they are at e. To
achieve these gains, the consumers must arrange a trade.
Consider a point D in line labeled c - c of the contract curve. A shift from e to point D will
make both parties better off. Moreover, there are no feasible trades that result in further mutual
gain. D is a barter equilibrium because it locates along c - c. Then both parties should the agree to
trade and so find themselves at any allocation on c – c. Point D is considered as Pareto optimal
allocation. An allocation is Pareto optimal if there is no other feasible allocation and no consumer
will object to it because it makes everyone better off as they were before.
III. Discussion - Mathematical calculation for Pareto optimal allocation
For analyzing barter equilibrium especially Pareto optimal allocation of married couple in simple
household, suppose there is only two individuals namely Husband (H) and Wife (W) while they
only consume two goods which are Rice (x) and Chicken (y). They both have the initial endownent
denoted by (W = WH + WW). From now on, superscripts will be used to denote goods and
subscripts to denote consumers. So, the intitial endowment for both spouses completely can be
written below:
𝑦 𝑦
WH = {𝑊𝐻𝑥 , 𝑊𝐻 } and WW = {𝑊𝑊𝑥 , 𝑊𝑊 }
Individuals also have its utility for consuming goods. Husband’s utility function is given by:
UH (𝑥𝐻 , 𝑦𝐻 ) = (𝑥𝐻 𝑦𝐻 )2
Then, Wife’s utility function is given by:

UW (𝑥𝑊 , 𝑦𝑊 ) = √𝑥𝑊 𝑦𝑊

Notice that Husband has a relative preference for good x and y represent by having higher
exponential (2) rather than Wife which only (0.5). Hence, we might expect that the Pareto optimal
allocation in this model would have the property that Husband would consume relatively more x
and y and person B would consume relatively less x and y. For feasible allocation we assume that
we use Walrasian Law, where excess agreagate demand is equal to zero; so, the total demand is
equal to total endowment. However, we have 2 equations for each good:
𝑦 𝑦
For good x: 𝑥𝐻 + 𝑥𝑊 = 𝑊𝐻𝑥 + 𝑊𝑊𝑥 For good y: 𝑦𝐻 + 𝑦𝑊 = 𝑊𝐻 + , 𝑊𝑊

𝑥𝐻 + 𝑥𝑊 = Wx 𝑦𝐻 + 𝑦𝑊 = Wy
𝑥𝑊 = Wx - 𝑥𝐻 (1) 𝑦𝑊 = Wy - 𝑦𝐻 (2)
To find Pareto optimal allocation, indifference curve of both spouses must be tangent. Hence,
Pareto optimal requires:
𝐻𝑢𝑠𝑏𝑎𝑛𝑑 𝑊𝑖𝑓𝑒
MRS𝑥𝑦 = MRS𝑥𝑦

To find these allocations explicitly, we need to find a way of dividing the available goods in such
a way that the utility of person. Those can be written below:
𝐻𝑢𝑠𝑏𝑎𝑛𝑑 𝜕𝑈 /𝜕𝑋 𝑦
MRS𝑥𝑦 = 𝜕𝑈𝐻 /𝜕𝑌𝐻 = 𝑥𝐻
𝐻 𝐻 𝐻

𝑊𝑖𝑓𝑒 𝜕𝑈 /𝜕𝑋 𝑦
MRS𝑥𝑦 = 𝜕𝑈𝑊 /𝜕𝑌𝑊 = 𝑥𝑊
𝑊 𝑊 𝑊

𝑌𝐻 𝑌𝑊
=
𝑋𝐻 𝑋𝑊
 𝑥𝑊 . 𝑦𝐻 = 𝑦𝑊 . 𝑥𝐻 (𝟑)
Then substitute (1) and (2) to (3)
(𝑊 𝑥 − 𝑥𝐻 )𝑦𝐻 = 𝑥𝐻 (𝑊 𝑦 − 𝑦𝐻 )
𝑊 𝑥 𝑦𝐻 − 𝑥𝐻 𝑦𝐻 = 𝑊 𝑦 𝑥𝐻 − 𝑥𝐻 𝑦𝐻
𝑊 𝑦 𝑥𝐻
𝑦𝐻 = (4)
𝑊𝑥

Then substitute to (1) to (2)

𝑊 𝑦 𝑥𝐻
𝑦
𝑊 𝑥 𝑊 𝑦 − 𝑊 𝑦 𝑥𝐻
𝑦𝑊 = 𝑊 − → 𝑦𝑊 =
𝑊𝑥 𝑊𝑥
Finally, we find the Pareto optimal allocation (In this case 𝑥𝐻 ):
{(𝑥𝐻 , 𝑦𝐻 ); (𝑥𝑊 , 𝑦𝑊 )}
𝑊 𝑦 𝑥𝐻 𝑊 𝑥 𝑊 𝑦 −𝑊 𝑦 𝑥𝐻
{(𝑥𝐻 , ); (Wx - 𝑥𝐻 , ), 0 ≤ 𝑥𝐻 ≤ Wx}
𝑊𝑥 𝑊𝑥

IV. Conclusion
Based on the discussion, we now know the result of Pareto optimal allocation is a set of {(𝑥𝐻 ,
𝑊 𝑦 𝑥𝐻 𝑊 𝑥 𝑊 𝑦 −𝑊 𝑦 𝑥𝐻
); (Wx - 𝑥𝐻 , ), 0 ≤ 𝑥𝐻 ≤ Wx}. Thus, if the amount of goods x and y that they
𝑊𝑥 𝑊𝑥
consumed are exclude the set or out of the range, then it will not be a Pareto optimal allocation.
The amount of each spouse consumes goods x dan y is determined by the individual’s utility. In
this case the distribution for Husband is relative more consume Rice (x) in the amount of (𝑥𝐻 ) and
𝑊 𝑦 𝑥𝐻
Chicken in the amount of ( ). Meanwhile the distribution for Wife is relative less than husband
𝑊𝑥
that she only consumes Rice (x) in the amount of (Wx - 𝑥𝐻 ) and Chicken in the amount of
𝑊 𝑥 𝑊 𝑦 −𝑊 𝑦 𝑥𝐻
( ).
𝑊𝑥

Overall, Pareto optimal allocation can be reached if only they both implement the process
of voluntary exchange. In other words, a spouse who selfish and self-interested in the managing
of distribution source, most likely their relationship become unstable. It’s a must that each spouse
supposed to complete and complement to their loved ones. Thus, however, would create a fairness
environment and long-lasting relationship.
References
Friedberg, L & Stern, S. (2003). The Economics of Marriage and Divorce. University of
Virginia. https://doi.org/10.4324/9780429034381-3
Jehle, G. A., & Reny, P. J. (2011). Advanced Microeconomic Theory. Essex: Pearson.
Nicholson, W & Snyder, C. (2017). Microeconomic Theory: Basic, Principles, & Extensions.
Boston: Cengage Learning