Professor Charalambos D. Aliprantis (Auth.) - Problems in Equilibrium Theory (1996, Springer)

Problems in Equilibrium Theory
Springer-Verlag Berlin Heidelberg GmbH

Charalambos D. Aliprantis
Problems
in Equilibrium Theory
With 27 Figures
Springer
Professor Charalambos D. Aliprantis
IUPUI
Department of Mathematical Sciences
402 N. Blackford Street
Indianapolis, IN 46202-3216, USA
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Problem. In equl\lbrium theory / Cbaralambos D. Allprantil. -
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Tokyo: Sprinler. 1996
ISBN 978-3-642-08237-5 ISBN 978-3-662-03233-6 (eBook)

DOI 10.1007/978-3-662-03233-6
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Originally published by Springer-Verlag Berlin Heidelberg New York in 1996.
Softcover reprint of the hardcover 1st edition 1996
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4213\11-54) :ll- Printed on acid-free paper
Forword
This volume contains complete solutions to all the problems in the book by
C. D. Aliprantis, D. J. Brown and O. Burkinshaw, Existence and Optimality
0/ Competitive Equilibria (Springer-Verlag, 1990). The problems are listed by
sections following the format of the book. For instance, Problem 3.5.2 refers to
Problem 2 of Section 5 in Chapter 3.
The solutions are based on the material covered in the book. Although sev-
eral mathematical facts in the solutions are extensively discussed and illustrated
for the benefit of the reader, some familiarity with the standard mathematical
background is assumed. The problems in Chapter 1 can be solved with the knowl-
edge of a good advanced calculus course. Subsequent chapters require familiarity
with material from a standard course in functional analysis.
This book will be beneficial to students provided they use it properly. This
means that the student will read a solution only after a serious attempt has been
made to solve the problem. Providing alternate solutions to the problems should
be a real challenge (and a goal) for the reader.
I thank Professor Nicholas Yannelis for his critical reading of the manuscript.
Special thanks are also due to Mike Maxwell, who not only made numerous
corrections to the manuscript, but also provided solutions to several problems.
c. D. Aliprantis
December, 1995
Contents
Forward v
1. The Arrow-Debreu Model 1

1.1 Preferences and utility functions . 2
1.2 Maximal elements 25
1.3 Demand functions 33
1.4 Exchange economies 40
1.5 Optimality in exchange economies 47
1.6 Optimality and decentralization 54
1.7 Production economies 65
2. Riesz Spaces of Commodities and Prices 81

2.1 Partially ordered vector spaces 86
2.2 Positive linear functionals 93
2.3 Topological Riesz spaces 100
2.4 Banach lattices . . . . 107
VIII Contents
3. Markets With Infinitely Many Commodities 115

3.1 The economic models .. . . 115
3.2 Proper and myopic preferences 116
3.3 Edgeworth equilibria and the core 126
3.4 Walrasian equilibria and quasiequilibria 132
3.5 Pareto optimality . . . . . . . 145
3.6 Examples of exchange economies 154
4. Production With Infinitely Many Commodities 167

4.1 The model of a production economy . . 167
4.2 Edgeworth equilibria and the core . . . 172
4.4 Approximate supportability. . . . 184
4.5 Properness and the welfare theorems 189
5. The Overlapping Generations Model 197

5.1 The setting of the OLG model 202
5.2 The OLG commodity-price duality . 209
5.3 Malinvaud optimality 214
5.4 Existence of competitive equilibria . 223
Bibliography . . . . . . . . . . . . . . . . . " 243
Index. . . . . . . . . . . . . . . . . . . . . . . 245
Chapter 1
The Arrow-Debreu Model
The problems in this chapter deal with the finite dimensional model of general
equilibrium theory. This classical model was introduced by K. J. Arrow and
G. Debreu [11] and independently by L. W. McKenzie [19]. Although some
knowledge of real analysis, convexity theory and functional analysis is required,
most problems can be solved by using the techniques of a good advanced calculus
course. In particular, for several problems the reader should be familiar with
the Lagrange Multiplier Method, which usually refers to the following classical
theorem of J. L. Lagrange; for a proof see [9, Theorem 13.12, p. 381].
Theorem (The Lagrange Multiplier Method) Let 0 be an open subset of

some Euclidean space lRl and let f: () -lR and gi: () - lR be real functions with
continuous partial derivatives, where i =
1, ... , m for some m < f. Also, let
r = {x E 0: 9i(X) =0 for all i = 1, ... , m} .

If f has a local extremum Xo over r (i.e., if there exists some open ball B(xo) ~ 0
such that either f(x) ~ f(xo} for each x E B(xo) n r or f(x) ~ f(xo} for all
x E B(xo) n f) and
det [
~
8"1
.
8g m (Xo)
8"1
then there exist scalars Al , ... ,Am (called Lagrange's multipliers) such that
This theorem is a powerful tool for extrema problems and especially ap-
plicable for computing equilibria in finite dimensional economic models. Let
2 Chapter 1: The Arrow-Debreu Model
us indicate the form in which it will be used mainly in this chapter. Assume
that a (utility) function u: lR~ - R is continuous, strictly monotone and van-
ishes on the boundary of R~. If we wish to maximize u over a (budget) set
=
B {x E R~: p. x :::; p. w}, where w > 0 and p > 0 are given vectors (the
total endowment and the price vector), then the maximizers of u over B (which
exist by Weierstrass' classical theorem) must lie in the interior of R~ and on the
"budget line" p' x = p' w. In other words, any maximizer x of u over B satisfies
x > 0 and p. x = p . w. Under these circumstances, it should be immediate
that Lagrange's Theorem applies and guarantees the existence of some scalar A
such that
Vu(x) Ap.=
The latter equality is then used in conjuction with the constraint p . x =p .w
to find the maximizers of u over B.
1.1 Preferences and utility functions
Problem 1.1.1. Consider the relation t on 1R~ defined by x t y whenever

x ~ y, i.e.,
t= {(x,Y)ER~xR~: x~y}.
Describe the properties of t and show that in general t is not a preference
relation. Under what condition is t a preference relation?
Solution: The relation t is defined on 1R~ by saying that x t y whenever
Xi ~ Yi for each i = 1, ... ,i. From this definition it is easy to see that t is
1. reflexive,
2. transitive,
3. continuous, and
4. complete if and only if l = 1.
To see that the relation t is not complete if l ~ 2, notice that the two vectors
el = =
(1,0,0, ... ,0) and e2 (0,1,0, ... ,0) are not comparable. Therefore, t is
a preference relation (Le., t is reflexive, transitive, and complete) if and only if
l =1..
In order to state the next problem, we need some preliminary discussion.
Recall that an n x n matrix A =
[aij] is said to be negative (resp. positive)
1.1 Preferences and utility functions 3
semidefinite if xAx' ~ 0 (resp. xAx' ? 0) for all x = (:1:1, ... ,:l:n ) E JRn , where
as usual, x' is the vector x written as a column vector. Similarly, A is said to be
negative (resp. positive) definite if xAxt < 0 (resp. xAx' > 0) for all x =I O.
= =
Now consider a symmetric n x n matrix A [aij), i.e., aij aji holds for all
i and j. Then, there exists an orthogonal matrix U that diagonalizes A.1 That
is, U- 1 AU = diag{A1, ... , An}, where the Ai are the eigenvalues of A (which,
since A is symmetric, are all real numbers). Since for the orthogonal matrix U
= =
we have U- 1 = Ut , by letting y xU t we see that x yU, xt = Utyt and
= L AiY; .
n
xAxt = yU AUtyt
i=1
This shows that a symmetric matrix A is negative (resp. positive) semidefinite if

and only if each eigenvalue of A is non-positive (resp. non-negative). Similarly,
a symmetric matrix is negative (resp. positive) definite if and only if all the
eigenvalues of the matrix are negative (resp. positive).
Now let 0 be an open subset of some Euclidean space JRn , and let f: 0 --+ JR
be a C 2-function (i.e., f has continuous second order partial derivatives). Then
the first and second derivatives of f at a point x E 0 are given by the matrices
f'(x) = Vf(x) = (8~1~), ... , 8££~)) and f"(x) = [:~£~:]] .

Note f'(x) is a vector and f"(x) is an n x n matrix. Since f is a C 2-function, we
know that ~~!~:1 =
~~!~!! for all i and jj see [9, Theorem 12.12, p. 359]. This
means that at any given vector the second derivative matrix of a C2-function is
necessarily a symmetric matrix.
Problem 1.1.2. Let C be a non-empty, open and convex subset of JRi . For a
C 2 -function f: C --+ JR establish the following properties.
1. f is concave if and only if the second derivative matrix f"(x) is negative
semidefinite for each x E C.
2. f is convex if and only if the second derivative matrix f"(x) is positive
semidefinite for each x E C.
3. f is strictly concave if and only if the second derivative matrix f"(x) IS
negative definite for each x E C.
4. f is strictly convex if and only if the second derivative matrix f"(x) is
positive definite for each x E C.
1 An n x n matrix A is said to be orthogonal if its rows consist of mutually orthogonal
unit vectors, i.e., if AtA = AAt = I.
Solution: Assume that C is a non-empty, open and convex subset of Rl and

that f: C - JR is a C 2-function. We shall prove (1) and leave the proofs of the
other statements for the reader. In order to establish (1), we shall employ the
classical second order Taylor formula which states that for each x E C we
have
=
f(x + h) - f(x) f'(x) . h + ~h!,,(x)h' + o{lIhIl2), (T)
where 0(') is a real valued function of a real variable such that lim,-+o ~ =0
(and so limh-+o O\I~I~~) = 0). Replacing h by -h in (T), we can also write
f(x - h) - f(x) =-f'(x)· h + ~h!,,(x)ht + o{lIhIl 2),

which when added to (T) yields
f(x + h) - 2f(x) + f(x - h) = h!"(x)h' + o{lIhIl2) . (*)
Assume now that f is concave and fix x E C. Then
f(x + h) - 2f(x) + f(x - h) = 2[!f(x - h) + ~f(x + h) - f(x)] ~ O.
This combined with (*) shows that
Now if y E JRl satisfies lIyll = 1, then by letting h = AY in (**) and dividing by

II h ll 2 = A2 , we get
yf
"( x )' O(~~) - hJ'1x)h'
y +~ - IIhll~
~
+ Ij"Iijj"2 ~
0
.
By letting A - 0, we get y f"(x)yt ~ 0 for all y E JRl with lIyll = 1. This implies
that f"(x) is a negative semidefinite matrix.
For the converse, we shall use the following general version of the Mean-Value
Theorem. (For a proof see [9, Theorem 12.9, p. 355].)
(Mean-Value Theorem) Let S be a non-empty, open convex subset ofJR" , and
=
let 9 (g1, ... ,gm): S - JRm be a differentiable function. If x, yES, then for
each a E JRm there exists some vector z on the "open" line segment joining x
and y such that
a· [g(y) - g(x)] =a· [Dg(z)(y - x)t] ,
where Dg(z) is the m x n matrix Dg(z) = [Bt~~)].

J
Now assume that the n x n matrix f"(x) is negative semidefinite for each
x E C. Fix x,y E C and 0 < a < 1 and let z = ax+ (1- a)y. Clearly,
x - z = (1 - a)(x - y) and y - z = -a(x - y) .
Now the above Mean-Value Theorem guarantees the existence of three vectors
r, s, t in the order shown in Figure 1 such that
af(x) + (1 - a)f(y) - fez) a [f(x) - fez)] + (1 - a)[f(y) - fez)]

aJ'(r) . (x - z) + (1 - a)f'(s) . (y - z)
a(1- a)(x - y) . [J'(r) - f'(S)]
a(1- a)(x - y)!,,(t)(r - s)t .
Now notice that there exist 0 < J-l, A < 1 with J-l < A such that r = AX + (1- A)y
= =
and s J-lX + (1 - J-l)Y. Then, r - s (A - J-l)(x - y), and so
af(x) + (1 - a)f(y) - fez) = a(1 - a)(A - J-l)(x - y)f"(t)(x - y)t :5 o.

Thus, af(x) + (1 - a)f(y) :5 fez), which shows that f is a concave function.
Figure 1
According to the discussion preceding this problem, we may reformulate the

statements as follows.
1. f is concave if and only if for each x E C the eigenvalues of the second
derivative matrix f"(x) are all non-positive.
2. f is convex if and only if for each x E C the eigenvalues of the second
derivative matrix f"(x) are all non-negative.
3. f is strictly concave if and only if for each x E C the eigenvalues of the
second derivative matrix f"(x) are all negative.
4. f is strictly convex if and only if for each x E C the eigenvalues of the
second derivative matrix f"(x) are all positive .•
Problem 1.1.3. If a function f: (a, b) -+ It satisfies I" (x) < 0 for all x in
(a, b), then show that f is strictly concave. Similarly, if a function f: (a, b) -+ It
satisfies I"(x) > 0 for each x E (a, b), then f is strictly convex.
Solution: This problem is a special case of the preceding problem. We present
below a more direct proof. Assume that f: (a, b) -+ It satisfies I"(x) < 0 for
each x E (a,b). So, fix two points s,t E (a,b) with s < t and 0 < a < 1, and let
r = as + (1 - a )t. Then, in view of the Mean-Value Theorem, there exist ( and
T with s < ( < r < T < t such that
af(s) + (1- a)f(t) - f(r) = a[f(s) - f(r)] + (1- a)[f(t) - f(r)]

= af'«)(s - r) + (1- a)f'(T)(t - r)
= af'«)(I- a)(s - t) + (1- a)f'(T)a(t - s)
a(1 - a)(t - S)[f'(T) - f'«()].
The Mean-Value Theorem guarantees once more the existence of some eE «, T)

such that f'(T) - f'«) = l"(e)(T - (). Therefore,
af(s) + (1- a)f(t) - f(r) =a(l- a)(t - S)(T - ()!"(e) < 0.

That is, af(s) + (1- a)f(t) < f(as + (1- a)t) , which means that f is strictly
concave.
The second part follows by observing that a function f is strictly convex if
and only if - f is strictly concave .•
Problem 1.1.4. Show that the function f: [0,00) -+ It defined by f(x) = x 2 is

strictly quasi-concave but fails to be a concave function.
Solution: Since I"(x) = 2 > 0 for all x E (0,00), it follows from Problem 1.1.3
that f is strictly convex on (0,00). This implies that f cannot be concave on
[0,00). Alternatively, the inequality
f(~2 + ~4) = 9 < 10 = ~f(2) + ~f(4)
also shows that f is not concave.

To see that f is strictly quasi-concave, let 0 :5 x < y < 00 and fix 0 < a < 1.
Now notice that the inequality
j(ax + (1- a)y) [ax + (1 - a)y] 2 = a 2x 2 + 2a(l- a)xy + (1 _ a)2y2

> x 2 [a 2 + 2a(l- a) + (1- a)2] x 2 =
= min{J(x),/(y)}
shows that f is indeed a strictly quasi-concave function. _
Problem 1.1.5. For a utility function u: C - JR, where C is a convex subset

of a vector space, establish the following properties.
1. U is quasi-concave if and only if

n
u( L>~iXi) ~ min{ U(Xi): i = 1, ... , n}

i=1
holds for each convex combination E~1 Cl:iXi of C.
2. U is strictly quasi-concave if and only if

n
U(L:Cl:iXi) >min{u(xi): i=l, ... ,n}

i=1
holds for each proper convex combination E?=1 Cl:iXj of C.
3. U is concave if and only if

n n
u( L: Cl:jXi) ~ L: Cl:iU(Xi)
i=1 j=l
holds for each convex combination E~1 aiXi of C.
4. U is strictly concave if and only if

n n
u(L:aixi) > L:aiu(Xi)

i=l j=1
holds for each proper convex combination E?=1 ajXj of C.
Solution: Recall that a convex combination E~=l Cl:iXi is said to be a proper

convex combination if 0 < Cl:j < 1 holds for each i. We shall prove (1). The
other proofs are similar.
So, assume that U is quasi-concave. We proceed by induction on n. For n = 1
the inequality (in fact, equality) is obvious. So, for the induction step, assume
that the inequality is true for any convex combination of n vectors of C, and let
E?;-/ Cl:jZi be a convex combination of n + 1 vectors of C. We can assume that
=
0< Cl: n +1 < 1. Then, in view of J - Cl:n +1 E?=1 Cl:i, we see that E?=l 1-~:+t Xi
is a convex combination of n elements of C. Therefore, the quasi-concavity of u

and our induction hypothesis imply
n
= u(an+1Xn+1 + (1- an+d"
L....J --=--1
a
-a,,+l Xi)
;=1
n
> min{ u(xn+1)' u(2: 1-~~+1 Xi)}

;=1
> min {u(xn+d, min {u(x;): i = 1, ... , n}}
= min { u(xd, ... , u(Xn), u(xn+d},
which shows that the inequality is true for convex combinations of n + 1 vectors
of C. This establishes the desired inequality.
Finally, notice that the converse is obvious. Indeed, if u satisfies the stated
inequality, then u automatically becomes a quasi-concave function .•
Problem 1.1.6. Let t be a preference relation defined on a topological space X.

If u: X --+ R is a utility function representing t (i. e., X t y {::::} u( x) ~ u(y»
and t is continuous, is then the utility function u necessarily continuous?
Solution: No. For a counterexample, consider the preference t represented on
=
R by the utility function u(x) x. That is, we define x t y if and only if x ~ y.
Clearly, t is a continuous preference since every continuous function represents
a continuous preference.
Now consider the utility function U1: R - R defined by
if x < 0,
if x ~ o.
An easy argument shows that Ul(X) ~ U1(y) if and only if x ~ y. In other words,
the discontinuous function Ul also represents the continuous preference t .•
Problem 1.1.7. Let C be a convex subset of a vector space and let u:C-R
be a utility function. Show that u is strictly quasi-concave if and only if the
preference represented by u is strictly convex.
Solution: Assume first that the preference t represented by u is strictly convex.
This means that whenever x, y, z E C satisfy y t x and z t x with y # z, then
ay + (1 - a)z >- x for all 0 < a < 1.
To see that u is strictly quasi-concave, let x, y E C satisfy x # y and fix
0< a < 1. We can assume x t y. Since y t y is always true, it follows from our
hypothesis that ax + (1 - a)y ~ y. Therefore,

u(ax + (1 - a)y) > u(y) = min {u(x), u(y)} ,
showing that u is a strictly quasi-concave utility function.
For the converse, assume that u is a strictly quasi-concave utility function.
To see that the preference t represented by u is strictly convex, let x, y, z E C
satisfy y t x, z t x and y =1= z. Then u(y) ~ u(x) and u(z) ~ u(x). If 0 < a < 1,
then the strict quasi-concavity of u implies
u(ay+ (1- a)z) > min{u(y),u(z)} ~ u(x) ,
and so ay + (1 - a)z ~ x. This proves that t is strictly convex .•
Problem 1.1.8. Show that a continuous, strictly monotone and strictly convex
preference defined on the positive cone JR.~ can be represented by a continuous,
strictly monotone and strictly quasi-concave utility function.
Solution: Let t be a continuous, strictly monotone and strictly convex prefer-
ence relation on JR.~. Note that every utility function representing t must be
strictly monotone and, by Problem 1.1.7, strictly quasi-concave. So, what re-
mains to be shown is that t can be represented by a continuous utility function.
The proof is similar to the proof of [3, Theorem 1.2.12, p. 10]. The diagram
associated with the proof is depicted in Figure 2 below.
Indifference curve passing through s
Figure 2
Put e = (1,1, ... ,1) and define u: JR.~ -+ JR. by

u(x) = inf{a > 0: ae t x}.
Fix x E JR.~. Since all components of e are positive, there exists some a > 0
such that ae > x. Monotonicity then ensures that ae t x must hold, and so
U(x) is well defined. Next, we shall verify by steps that u is the desired utility
function.
1) We have u(x) = 0 for x E 1R~ if and only if x = O.
To see this notice that the monotonicity of t implies ae t 0 for all a > 0
and so u(O) = O. Now assume that x > O. By the strict monotonicity of t we
have x ~ O. So, if u(x) = 0, then using once more the strict monotonicity of t,
we see that ae t x for each a > O. But then the continuity of t implies 0 t x,
a contradiction. Hence, u(x) = 0 implies x = O.
2) For x E 1R~, u(x) is the only non-negative scalar satisfying u(x)e fV x.
Fix x E 1R~. Since a > f3 ~ 0 implies ae > f3e, it follows from the strict
monotonicity of t that ae ~ f3e. This shows that there exists at most one non-
negative scalar a such that ae x. From part (1) we see that u(O) 0 and so
fV =
u(O)e 0 is trivially true. This means that we can suppose x > O. By part (1)
fV
we are guaranteed that u(x) > O.

Since the set {y E 1R~: y t x} is closed, it easily follows that u(x)e t x
holds. On the other hand, from the definition of u(x), we see that for all e > 0
sufficiently small we must have [u(x) - e]e 't. x so that x t [u(x) - e]e. Letting
£ - 4 0 yields x t u(x)e. Consequently, u(x)e x. fV
3) The utility function u represents t and is continuous.

If u(x) ~ u(y), then u(x)e ~ u(y)e and from the monotonicity of t, we get
x ,.., u(x)e t u(y)e ,.., y, i.e., x t y. Now if x t y, then u(x)e t u(y)e and
from this it easily follows that u(x) 2: u(y). In other words, x t y if and only if
u(x) ~ u(y), which means that u represents t.
Finally, the continuity of u follows from the identities
{x E 1R~: u(x) ~ r} = {x E 1R~: u(x)e ~ re} = {x E 1R~: x ~ re}
and
{x E 1R~: u(x) ~ r} = {x E R~: u(x)e ~ re} = {x E R~: x t re}
and the continuity of t .•
Problem 1.1.9. Consider the five preference relations on R~ defined by the

utility functions
Ul(X, y) == x + y, U2(X, V) == xv, U3(X, V) == ..jZ + v1i,
u4(x,Y)==V(1+x) and u5(x,y)==(x+1)(y+2).
Describe the properties of these preference relations and sketch the shape of
their indifference cUnJes.
Solution: (1) The utility function Ul is continuous, strictly monotone, and linear
(and hence both convex and concave). However, it fails to be strictly convex or
strictly concave. For an example, notice that
(2) Now let us consider the utility function U2. Clearly, U2 is continuous and
monotone. It fails to be strictly monotone on R!. (For instance (1,0) < (2,0)
but u2(1,0) = u2(2,0) = 0.) However, U2 is strictly monotone in the interior of
R!.
The utility function U2 can be considered defined on all of R2. A direct
computation of the second derivative matrix shows that for each (x, y) we have
U"(x,y) = [~ ~].
The eigenvalues of this matrix are 1 and -1. From Problem 1.1.2, we see that U
is neither convex nor concave on any open convex subset of R2.
In spite of this, U2 is quasi-concave and, in fact, strictly quasi-concave in
the interior of R!. To see this, let t denote the preference represented by U2
on R!. Define v: Int(R!) -+ R via v( x, y) = In x + In y and note that it also
represents t on Int(R!). From
"
v (x,y) = [_x-
° 2
we see that the eigenvalues of v"(x,y) are _x- 2 and _y-2. So, v"(x,y) has
negative eigenvalues for each (x, y) E Int(1R!). By Problem 1.1.2, v is strictly
concave on Int(R!). Now by Problem 1.1.7, the preference t is strictly convex.
But then, by the same problem, we infer that U2 is strictly quasi-concave on
Int(1R!). To show U2 is quasi-concave on all of R! note U2 is continuous and
quasi-concave on Int(R!), which is dense in R!. So,
U2 (ax + (1 - a)y) 2: min {U2(X), U2(y)}
on Int(R!) implies u2(ax+ (1- a)y) 2: min{u2(x),U2(Y)} on R!.

(3) The utility function U3 is continuous, strictly monotone and strictly con-
by g(x) Vi satisfies g"(x) = °

cave. To see the last property, note first that the function g: (0,00) -+ R defined
= -~x-! < for all x > 0. By Problem 1.1.3, 9
is strictly concave on (0,00), and consequently 9 is also strictly concave on [0,00).
12 Cbapter 1: Tbe Arrow-Debreu Model
Ua(a(Zl,yt} + (1- a)(z2,Y2») = Ua(azl + (1- a)z2,aYl + (1- a)Y2)

Jazl + (1- a)z2 + JaYl + (1- a)Y2
> aFt + (1 - a)..fi2 + a..fiji + (1 - a)y'jj2
= aUa(Zt.Yl) + (1- a)Ua(Z2,Y2),
which shows that Ua is strictly concave.

(4) The utility function U4 is clearly continuous and monotone. In fact, U4
is the "same" as the utility function U2 with its origin shifted to (-1,0). This
means that U4 is quasi-concave in [-1, 00) x [0, 00) and strictly quasi-concave
in the interior (-1,00) x (O,oo~ of [-1,00) x [0,00). In particular, U4 is quasi-
concave on the convex subset R+ and strictly quasi-concave on the convex subset
(0,00) x (0,00).
Now notice that in the interior of R~ the second derivative matrix of U4 is
given by
U~(Z,y) = [~ ~].
The two eigenvalues ofthis ma.trix are 1 and -1. In view of Problem 1.1.2, U4
is neither concave nor convex in the interior of R~, and so U2 is neither concave
nor convex on JR~.
(5) The utility function U5 is the same utility function as U2 with its origin
moved to (-1, -2). That is, U5 possesses the same properties as U2 relative to the
"quadrant" [-1,00) x [-2,00). Since R~ is in the interior of [-1,00) x [-2,00),
it follows that U5 is continuous, strictly monotone and strictly quasi-concave.
However, it is neither convex nor concave. For instance,
and
Us (j(l, 1) + H3,3») = us(2, 2) = 12 < 13 = jU5(1, 1) + iU5(3, 3).
The indifference curves of these utility functions are sketched in Figure 3.•
y y
y
y
Figure 3
Problem 1.1.10. Consider the two preferences on R~ defined by the utility

functions
1.41(X, y) = x and 1.42(X, y) = y.
Describe the properties of these preference relations and sketch the shape of
their indifference curves.
Solution: The reader can easily verify that both 1.41 and 1.42 are continuous,
monotone, and linear (and hence convex and concave). However, they are neither
strictly monotone nor strictly concave. Their indifference curves are illustrated
in Figure 4 .•
Indifference curves of
u1 are vertical lines Indifference curves of
y y u2 are horizontal lines
c .........--........----~u2=c
c x x
Figure 4
Problem 1.1.11. Does the utility function 1.4(x, y, z) = x 2 + y2 + z2 on Rt

represent a convex preference? Also, sketch the indifference curves of 1.4.
Solution: No. This follows easily by observing that the sets of the form
{(x,y,z) E Rt: (x,y,z) t (XO,YO,zo)}
are not convex. For instance, the set
is not convex. Indeed, notice that the convex combination ~(1, 0, 0)+ ~(O, 1,0) =
(i, j, 0) does not belong to P although (1,0,0) and (0,1,0) both do.
The indifference curves are spherical surfaces lying in Rt; see Figure 5.•
Figure 5
Problem 1.1.12. Let C be a non-empty convex subset of a vector space, and

let u: C - R be a function. Show that u is concave if and only if the set
£ = {(x,a) E C x R: a::; u(x)}

is convex, and that u is convex if and only if the set
g = {(x, a) EC x R: a ~ u( x) }
is convex.
Solution: Let u: C - R be a function where C is a convex subset of a vector
space V. Assume first that u is a concave function. Let (Xl, ad, (X2, 0'2) E £
and fix 0 < f3 < 1. From the concavity of u, we see that
allowing us to conclude that
This shows that f, is a convex subset of the vector space V x R.

For the converse, assume that £ is a convex subset of the vector space V x R.
Let X1>X2 E C and fix 0 < f3 < 1. From (x1,u(xd), (X2,U(X2)) E f, and the
convexity of f" we obtain
f3(X1, u(xd) + (1- f3)(X2, U(X2)) = (.8x1+ (1- f3)X2, .8u(xt) + (1- f3)U(X2)) E £ .
This implies U(f3X1 + (1 - .8)X2) ~ f3u(xt} + (1- f3)U(X2), which shows that u is
a concave function.
The convex case can be proven in similar fashion .•
Problem 1.1.13. Is every continuous quasi-concave utility function on IR~

necessarily monotone ~
Solution: No. For a counterexample, consider the function u: ~ -+ IR defined
by U(Xb ... , Xl) =
1-(x1 +X2+" ·+Xt). Clearly, U is continuous and decreasing.
So, U is not monotone (increasing). Now the sets of the form
{xEIR~: u(x)~c} {xEm,~: 1-(X1+X2+"'+Xl)~C}

= {xEm,~: x1+x2+···+xt~1-c}
are clearly all convex. The latter, in view of Theorem 1.1.8, shows that U is a
quasi-concave function. _
Problem 1.1.14. For each i =

1, ... , m let Ui: e -+ m, be a utility function,
where e is a convex subset of a vector space. If Ai > 0, i =
1, ... ,m, are fixed
positive real numbers, then the function V: m,m -+ m, defined by
m
V(t1, ... , t m ) = 2: Ai t ;
i=1
is known as a social welfare function. Consider the function U: em -+ m,
defined by U(Xb"" xm) = V(U1(Xt), ... , Um(Xm)) = L:~1 Aiui(xi).
a. If each Ui is concave, then show that U is also concave.
b. If each Ui is strictly concave, then show that U is likewise strictly concave.
c. If each Ui is quasi-concave, is U necessarily quasi-concave ~
Solution: Assume that the functions Ui, V and U are defined as above.
a) Assume that each Ui is a concave function.
To see that U is concave, let x = (X1, ... ,X m ) and Y = (Y1, ... ,Ym) be two
vectors in em and fix 0 < a < 1. Then
U(ax + (1 - a)y)
m
L Aiui(axi + (1 - a)Yi)
i=1
m
> L Ai [aui(Xi) + (1- a)ui(Yi)1
i=1
m m
= a [2: Aiui(xi)] + (1- a) [2: Aiui(Y;)]
i=1 i=1
aU(x) + (1 - a)U(y),
indicating that U is a concave function.

b) Assume that each Ui is a strictly concave function.
Pick :t:, y E e with :t: i: y and let 0 < a < 1. Since :t: i: y, there exists some
k such that :t:k i: Yk. The strict convexity of the functions Ui implies
for each i where the inequality is strict for Uk. Consequently,
i=1
m
> L: Ai [aUi(:t:i) + (1 - a)Ui(Yi)]
i=1
m m
a [L: A;u;(xd] +(1-a)[L:A;Ui(Yi)]
;=1 ;=1
aU(x) + (1 - a)U(y) ,
which proves that U is strictly concave.

c) If all the Ui are quasi-concave, then U need not be quasi-concave.
Here is a counterexample. Define the utility functions U1, U2: [0,00) - R by
U1(X) =x 2 and U2(:t:) =
-x. We already know from Problem 1.1.4 that U1 is
quasi-concave but not concave. Since U2 is concave (in fact, U2 is linear), it is
also quasi-concave. We claim that the function U: [0,00)2 - R defined by
U(:t:l, :t:2) = U1(:t:t) + U2(:t:2) = :t:~ -:t:2
is not a quasi-concave function. To see this, note first that U(I, 1) = U(O,O) = 0,
and then observe that the inequality
Un(l, 1) + ~(O, 0)) = U(~,~) = -~ < 0 = min{U(l, 1), U(O, O)}

guarantees that U is not a quasi-concave utility function. _
Problem 1.1.15. For each i = 1, ... , m let Ui: e -

R be a utility function,
where eis a convex subset of a vector space. If each Ui is quasi-concave, then
show that the function V: em -
R defined by
is likewise a quasi-concave function. If all the Uj are concave, is V necessarily a

concave function?
= =
Solution: Let x (Xl,"" xm) and Y (Yl,"" Ym) be two vectors in em and
let 0 < 0 < 1. Clearly, u(xj) 2: V(x) and u(Yd 2: V(y) for all i. Now the
quasi-concavity of each Uj implies
Uj (OXi + (1- O)Yi) 2: min{ u(x;), u(yd} 2: min{ V(x), V(y)} .

Consequently,
V(OX + (1- o)y) min{ Ui(OXi + (1 - O)Yi): i = 1, ... , m}

> min { V ( x ), V ( y)} ,
so that V is a quasi-concave function.
If all the Uj are concave functions, then V is likewise a concave function.
The proof is similar to the one above. It goes as follows. Assume that each Uj
is a concave function. Fix x = =
(Xl, ... , Iud and Y (Yl," . ,Ym) in em and let
o < 0 < 1. Clearly,
Ui(aIi + (1- O)Yi) 2: aUj(x;) + (1- a)ui(Y;) 2: aV(x) + (1 - a)V(y)
holds for each i. Therefore,
V(ax + (1 - a)y) min{ ui(aXj + (1 -

a)Yi): i = 1, ... , m}
> oV(x) + (1 - o)V(y),
which shows that V is concave. _
Problem 1.1.16. If a monotone pl'fjerence ~ on ffi~ has an extremely desirable

bundle, then show that every w E lnt(ffi~) is also extremely desirable.
Is a continuous, monotone and convex preference on ffi~ with an extremely
desirable bundle necessarily strictly monotone on Int(ffi~)?
Solution: Let v be an extremely desirable bundle for a monotone preference ~
on ffi~ and let w E Int(ffi~). Also, fix x E ffi~ and a > O.
Since aw is also an interior point of ffi~, there exists some j3 > 0 such that
aw - j3v 2: O. So, by the monotonicity of~, we see that
x + aw = x + (aw - j3v) + j3v ~ x + j3v ;:- x ,

proving that w is also an extremely desirable bundle.
The answer to the second part is no. For instance, consider the preference
~ on ffi~ represented by the continuous, monotone and quasi-concave utility
function u(x, y) = min{x, y}. Then ~ is a continuous, monotone and convex

preference on JR~. However, it fails to be strictly monotone on Int(JR~). For
details, see Problem 1.2.1(c). _
Problem 1.1.11. If a preference ~ on JR~ is lower semicontinuous, convex and

strictly monotone, then show that x >- y in JR~ implies ax + (1 - a)y >- y for
each 0 < a ~ 1.
Solution: Let ~ be a convex, lower semi continuous and strictly monotone pref-
erence on JR~. Assume x >- y and fix 0 < a < 1.
Since ~ is lower semicontinuous and limeTl cX = x, there is some 0 < c < 1
such that cx >- y. Now the convexity of ~ implies a(cx) + (1 - a)y ~ y and
from the strict monotonicity of ~, we see that
ax + (1 - a)y = [a(cx) + (1 - a)y] + a(1 - c)x >- a(cx) + (1 - a)y ~ y.
Hence, ax + (1- a)y >- y, as claimed. _
Problem 1.1.18. If f:(a,b) -+ JR is a concave function, then show that f has

a right and left-hand derivative at each point x E (a, b) . Moreover, if f'- and ff.
denote the right and left-hand derivatives of f, then
a. f'- and ff. are both decreasing /unctions, and
b. ff.(x) ~ f'-(x) holds for each x E (a, b).
Solution: Let f: (a, b) -+ JR be a concave function. Fix three points r, 8, t E (a, b)

with r < 8 < t. We claim that
!(.)-!(r) > !(t)-!(r) > !(t)-!(.)
(1)
.-r - t-r - t-.
The above inequalities are illustrated geometrically in Figure 6.

To prove (1), notice that from the convex combination 8 =
:=:r+ :=;t and
the concavity of I, we have 1(8) ~ :=:I(r) + ::; I(t). Consequently,
f(t) - f(8) ~ I(t) - !=;f(r) - :=; I(t) = !=; [I(t) - I(r)] ,
from which it follows that I(t)-I(r)

t-r -
> I(t)-I(').
t-.
Similarly from
'
f(8) - f(r) ~ :=; [I(t) - I(r)] ,
we see that I(a)-f(r) > f(t)-I(r).

,-r - t-r
y y=f(x)
a r s b x
Figure 6
Now fix Zo E (a,b) and let Z1,Z2,:1:3 E (a,b) satisfy Z1 < Z2 < Zo < Z3.
Applying (1) with the roles of r, s, t assumed by Z1, Z2, Zo, we see that
/(:1:0)-/(:1:1) > /(:1:0)-/(:1:3) .
:1:0-:1:1 - :1:0-:1:3
Also, applying (1) once more with the roles of r,s,t assumed by Z2,ZO,Z3, we
obtain 1(:1:0)-/(:1:,) > 1(:1: 3 )-/(:1: 0 ). Therefore
ZO-1:2 - %,:1 1:0 '
This implies that the difference quotient /(:I:;~=!(:I:) is decreasing for Z E (a, zo)
and is bounded from below. Hence,
I -, (z 0 ) = lim_ /(:1:0)-/(:1:)
:1:0-:1:
= lim
1~o
/(:1:0)-/(:1:)
:1:0-:1:
X--+1:0 z:
exists in R for each Zo E (a, b).

To see that P_ is decreasing, let Z2 < :1:3. If Z1 and Zo in (a, b) satisfy
:1:1 < Z2 < Zo < Z3, then it follows from (1) that
/(:l:3)-/(:I:!l > /(:1:0)-/(:1:3) > /(:1:3)-/(:1:0)

:1:3-:1:1 - :1:0-:1:2 - :1:3-:1:0 '
and consequently
I -, (z 2 ) = lim 1(:1:3)- /(:l:d > lim /(:1:3)-/(:1:0) = I' (z ).

:1:1 1:1:, :1:,:1:1 - :1:0 1:1:3 :1:3-:1:0 - 3
The fact that 1+

(z) exists for every Z E (a, b) and that is decreasing can 1+
be established in a similar manner. Finally, letting r 1 s and t ! s in (1), we see
that 1'-(8) ~ '+(8) for all 8 E (a,b). (For an extensive discussion about concave
and convex functions see [1, pp. 129-134].) •
Problem 1.1.19. II I: [a, b] -+ IR is a concave lunction, then show that / i8

Riemann integrable and that
~ [!(a) + I(b)] ~ b~a 1b I(x) dx ~ I(~) .
Solution: Let I: [a, b] -+ IR be a concave function. Put m* = I(bt!(a). From

the inequality (1) in the solution of Problem 1.1.18, we see that 1("'2=!(a) ~ m*
for each a < x < b, and so
/(x) ;::: /(a) + m*(x - a) (t)

for all x E (a, b).
Next, fix any c E (a, b). Since '+(c) ~ I'-(c) (see Problem 1.1.18), there
exists some real number m such that '+(c) ~ m ~ /'-(c). From this and the ar-
gumentsin the solution of Problem 1.1.18 , we see that I("')-I(c)
",-c >
- m >
- I(!I)-I(c)
!I-C
for all a < x < c and each c < y < b. Consequently, from the above inequaJities,
we get
I(x) ~ I(c) + m(x - c) (tt)
for all x E (a, b).
From (t) and (tt), we infer that I is bounded on [a, b]. Since I is also
continuous on (a, b) (according to Problem 1.1.18 it has right and left derivatives
at each point of (a, b», it follows that I is Riemann integrable over [a, b]. (Recall
that a bounded function g: [a, b] -+ IR is Riema.I1n integrable if and only if the
set of discontinuities of 9 has Lebesgue measure zero.)
Now from (t), we obtain
1b /(x) dz > /(a)(b - a) + m* 1\1: - a) dx = /(a)(b - a) + ~. (b - a)2
= H/(a) + I(b)](b - a).
On the other hand, if we let c = ~ in (tt) and integrate, we get

1b I(x) dx ~ I(c)(b - a) + m 1b (x - c) dx = I(c)(b - a).
The above inequalities show that H/(a) + I(b)] ~ b~a I: I(x)dz ~ I(~) .•
For the next problem we need to recall the notion of supportability of a set
by a linear functional. Let A be a subset of a vector space X. Then we say
that a linear functional I: X -+ 1R supports the set A at the vector a E A if
I(;c) ~ I(a) holds true for all ;c E A. The geometric meaning of the supporting
functional can be seen in Figure 7a.
Fig.7a Fig.7b
Figure 7
Now recall that if a preference t is defined on a subset S of a vector space

X , then we say that a linear functional I :X -+ R supports t at ;Co E S if
;c t ;Co implies I(;c) ~ I(;co). That is, a linear functional I supports a preference
at a vector ;Co if the linear functional I supports the set {;c E S: ;c t ;co} at
;Co. Similarly, if 1£: S -+ It is a utility function defined on a subset S of a vector
space X, then we say that a linear functional I: X -+ R supports 1£ at ;Co E S
if I supports the preference represented by 1£ at ;Co, i.e., if 1£(;c) ~ 1£(;co) implies
I(;c) ~ I(;co).
Problem 1.1.20. Let C be a non-empty open convex subset of some Euclidean

space JR.l and let 1£: C -+ R be a utility /unction which is differentiable at some
point Xo with Vu(xo) :f O. Then establish the following properties.
1. If p is a price supporting u at Xo, then p =
oX V u( xo), i. e., V u( xo) is
essentially the only possible price supporting u at Xo.
2. If u is quasi-concave, then (aside of a scalar multiple) Vu(xo) is the one
and only price supporting u at Xo.
Solution: Recall that the differentiability of u at Xo guarantees the validity of
the first order Taylor formula
u(xo + h) - u(xo) = [\7u(xo)] . h + o(lIhlD .
(1) To establish this part, we need to employ the Cauchy-Schwarz inequality.

We shall denote by IIxll the Euclidean norm of an arbitrary vector x E JRl, Le.,
= =
IIxll (l:~=l xl) t , so that IIxll 2 x . x.
• (The Cauchy-Schwarz Inequality) If a and b are two arbitrary vectors

in Rl, then
la . bl ~ lIall ·lIbll·
Equality holds if and only if the vectors a and b are linearly dependent.
To see this, fix a, b E JRl and consider the quadratic
Since the quadratic assumes only non-negative values, it means that its discrim-
inant is non-positive, i.e., 4[(a· b)2 -lIall2 . lib II 2] ~ O. This yields the validity of
the Cauchy-Schwarz inequality. On the other hand, equality holds if and only
the discriminant is equal to zero which in turn is equivalent to saying that a = Ab
for some A E JR.
Now assume that a vector p i= 0 in JRl supports u at Xo, and assume by
way of contradiction that p is not a scalar multiple of \7u(xo). Clearly, we may
suppose IIpll = lI\7u(xo)lI. If we set
c = IIpll2 - P . \7u(xo) = lI\7u(xo)1I 2 - P . \7u(xo) ,
then c > 0 holds by the Cauchy-Schwarz inequality. Hence, the fact that
u(xo + t[\7u(xo) - pD - u(xo) o(t)

\7u(xo) . [\7u(xo) - p] + -t-
t
o(t)
c+-t- ~ c>O
shows that u(xo + t[\7u(xo) - pD ~ u(xo) for sufficiently small t > O. But p
supports u at Xo. So for t > 0 sufficiently small,
p . (xo + t[\7u(xo) - pD = p . Xo + tp . [\7u(xo) - p] ~ p . Xo ,
=
reducing to p. \7u(xo) -lIpll2 -c ~ 0, or c ~ 0, a contradiction. Therefore, p
must be a scalar multiple of \7u(xo).
(2) Assume u is quasi-concave and let y E C satisfy u(y) ~ u(xo). Note that
for 0 < t < 1 we have
u(xo + t(y - xo)) = u(ty + (1 - t)xo) ~ min { u(y), u(xo)} = u(xo).

Consequently,
T'7
vu ( Xo ) . ( Y - Xo ) = I·t!O
1m u(xo + t(y - xo)) -
t
u(xo) > 0 ,
-
and 80 [Vu(xo)] . Y ~ [Vu(xo)] . Xo· Thus Vu(xo) supports u at xo. By (1),

Vu(xo) is (aside of a scalar multiple) the only price supporting u at Xo. For the
geometry of the situation see Figure 7b .•
Problem 1.1.21. If C is a non-empty open convex subset of some Euclidean

space ntl and u: C --. 1R is a utility function which is concave and differentiable
at each point, then show that
u(y) - u(x) $ Vu(x) . (y - x)
for al/x,y E C.
Solution: Fix x, Y E C. Since C is open and convex, we can fix 6 > 0 so that
the function g: (-6, 1+6) --. R given by g(t) = u(ty+(I-t)x) = u(x+t(y-x))
is well defined and differentiable. To see that 9 is concave, fix t1, t2 E (-6,1 + 6),
o E (0,1) and set {3 = 1 - o. Then the concavity of u shows that
og(td + {3g(t2) = OU(t1Y + (1 - tt}x) + {3U(t2Y + (1 - t2)X)

< U(Ot1Y + 0(1 - tdx + {3t2Y + {3(1 - t2)X)
= U(ot1 + {3t2)Y + (1- Ot1 - {3t2)X)
g(Otl + {3t 2) ,
i.e., 9 is concave. Applying the Mean-Value Theorem and Problem 1.1.18(a) to

g, we get
u(y) - u(x) =g(l) - g(O) = g'ee) $ leO) = Vu(x) . (y - x),
as desired .•
1.2 Maximal elements
5 y
4
3
2
I 2 3 4 x 2 x
Figure 8
Problem 1.2.1. Consider the convex compact set
C = {(x, y) E 1R~ : x + 2y ~ 2}
as shown in Figure 8. Find the unique maximal element in C for the utility
functions
a. u(x, y) = X 2 Yi
b. u(x, y) =(x + 2)Yi and

c. u(x,y) = min{x,y}.
Solution: (a) The utility function u is strictly monotone and strictly quasi-
concave in the interior of 1R~. Since u vanishes along the x- and y-axes, it
follows that the (unique) maximal vector of u over C is on the segment of the
=
line x + 2y 2 lying in the interior of 1R~ . Using Lagrange Multipliers, we find
that ~: = ,\ and ~ =
2,\. That is, the maximizer (x, y) of u over C is the
solution of the system
&u _ 2&u
&11 - 8:1: and x+2y = 2 .
Differentiating and substituting, we get x 2 = =

4xy and x + 2y 2. Solving the
system yields (~, ~) . In other words, (~,~) is the maximal vector of u over C .
(b) The strict monotonicity and strict quasi-concavity of u(x, y) (x + 2)y =
in the interior of 1R~ guarantees that u has a unique maximizer over C which is
=
on the portion of the line x + 2y 2 lying in 1R~. If this maximum takes place
in the interior of this line segment, then it must be the solution of system (*),
which in this case is
:I: +2 = 2y and :I:+2y = 2.
Solving this simple system, we get :I: 0 and y = =

1, a solution which is not in
the interior of R.!.
Since u(2,0) = 0, it follows that the maximum of U over C
must occur at the vector (0,1).
( c) A moment's thought reveals that
u(:I:,y) =min{:I:,y} = H:I: + y -1:1: - yl).

This shows that U is a continuous function. From Problems 1.1.10 and 1.1.15,
we know that U is a quasi-concave function. Also, U is monotone but not strictly
monotone. The indifference curves of U are shown in Figure 9.
Since:l: > :1:1 and y > Y1 imply u(x,y) > u(x1,yd, it follows that the
maximizer of U over C is on the segment of the line x + 2y = 2 lying in R.!.
The
maximizer must also lie on the bisector line y = :1:. That is, the maximal vector
of U over C is the solution of the system
:I:=y and x+2y = 2.
Solving the system, we get (j, j) .•
Indifference Curves of
Y I
y
x
x
Figure 9
Probiem 1.2.2. Consider the disk K = {(:I:, y) E 1R2: (:I: - 3)2 + (y _ ~1)2 $ ~~}
shown in Figure 8. Find the unique maximal element in K for the utility function
u(:I:,y) = :l:y.
Solution: We know from the solution to Problem 1.1.9 that the continuous
function U is strictly quasi-concave in the interior of R!. This implies that u has
exactly one maximal element in K. Since u is strictly monotone in the interior

of 1R~, this maximal element must lie on the boundary of the disk, so that
lI:(x, y) = (x - 3)2 + (y _ 251 ) 2 - ~~ = O.

Using Lagrange Multipliers, we find that the maximizing point (x, y) must
satisfy the equations ~~ =
A~= and ~~ =
A~;. Differentiating, we get the
= =
equations y A( x - 3) and x A(y - 25 ). Eliminating the parameter A, we get
1
=
1/..
1:
~, or 5x 2 - 15x - 5y2 + 21y
11-, =
o. Also, expanding the squares in the
=
equation 11:( x, y) 0 and simplifying, we get 5x 2 - 30x + 5y2 - 42y + 125 O. In =
other words, the unique maximizer (x, y) of u over K is a solution of the system
5x 2 - 15x - 5y2 + 21y o (1)

5x 2 - 30x + 5y2 - 42y + 125 O. (2)
We now proceed to solve the system. Multiplying (1) by 2 and adding it to

(2), we get
y2 = 3z 2 - 12z + 25 . (3)
Replacing this value of y2 in (1) gives
21y = 5(2x2 - 9x + 25) . (4)
Therefore, from (3) and (4), we see that
(21)2y2 = 441(3x2 - 12x + 25) = [5(2x2 - 9x + 25)] 2.
Performing the tedious algebra and simplifying, we obtain
50x 4 - 450z 3 + 1, 601x 2 - 2, 979z + 2,300 = 0,
which factors to
(z - 4)(50z 3 - 250z 2 + 601z - 575) = O. (5)
Now consider the factor p(x) = 50x 3 - 250x 2 + 601x - 575 of (5). Since
p(l) = -174 and p(2) =
27, we see that p has a root between 1 and 2. Now
=
notice that p'(X) 150z2 - 500x + 601. The discriminant of this quadratic is
D = (500)2 - 4·150·601 = -110,600 < o.

So, p' (x) > 0 for each x, which shows that p( z) has only one root-the one
between 1 and 2. Since the maximizer (z, y) of u over K must satisfy z > 3
=
(why?), it follows from (5) that x 4. Substituting into (3) yields y2 = 25, and
=
so Y 5. Thus, (4,5) maximizes u over K .•
Problem 1.2.3. Consider the utility function u: 1R~ - R defined by
u(x, y) =min{x 2y, xy}

for each (x,y) E R~.
a. Describe the indifference curves of u.
b. Show that u is a continuous, monotone and quasi-concave utility function.
c. Find the unique maximal element for the utility function u in the convex
compact set C ={(x, y) E 1R~: x2 + y2 :5 I}.
Solution: (a) The indifference curves of u are shown in Figure 10 below.
Figure 10
(b) Since the identity min{a, b} = l(a + b -Ia - bl) holds for any pair ofreal
numbers a and b, it follows that
This formula easily guarantees that u is a continuous function on 1R~. Clearly,

u is monotone but not strictly monotone . However, u is strictly monotone in
the interior of 1R~ . Indeed, if (x,y) > (Xl,yt) with Xl > 0 and Yl > 0, then
x2y > X~Yl and xy > XlYlJ and so u(x,y) > U(Xl,Yl).
To see that u is quasi-concave notice that the infimum of quasi-concave func-
tions is likewise quasi-concave; see Problem 1.1.15. (For an indirect proof that the
=
utility function v(x, y) x2y is quasi-concave, see the solution of Problem 1.3.4.)
(c) If 0 ~ x ~ 1, then x 2 ~ x and so x 2y ~ xy. This ensures u(x, y) x 2y =

for all (x, y) E C. Thus, in order to find the maximal vector of u over C, it
=
suffices to maximize vex, y) x 2 y over C. Clearly, the maximum will take place
on the boundary of the disk. But then, we have the following simple calculus
problem: maximize fey) = (1 - y2)y = Y - y3 subject to 0 ~ y ~ 1.
Clearly, we may restrict attention to 0 < y < 1. Differentiating, we get
I'(y) = I - 3y2 and f"(y) = -6y < O. Obviously y = :/I
is the only root of f'
and so a simple algebraic computation shows that (~,:/I) is the maximizer of
v (and hence of u) over C .•
Problem 1.2.4. Let ~ be a preference relation on a set X, and let A be a

non-empty subset of X. Show that an element a E A is a maximal element if
and only if a ~ x holds for all x E A.
Solution: Recall that an element a E A is said to be a maximal element for
~ on A if there is no other element bE A satisfying b>- a.
Now, if a E A is a maximal element for ~ on A, it follows from the com-
pleteness of ~ that a ~ x must hold for all x E A. On the other hand, if a ~ x
holds for all x E A, there can be no b E A satisfying b >- a, which means that a
is a maximal element for ~ on A .•
Problem 1.2.5. Fix a vector P E JRL and define the utility function u: JRL -+ JR
by
1
u(x)=p·x= LPjXj.
j:;;:l
If C is the convex hull of a finite number of vectors Xl, ... ,Xm of JRl , i. e.,
m m
C= {L QiXi: Qi ~0 for all i and L Qi = I},
i:;;:l i:;;:l
then show that at least one of the Xi is a maximal element in C for u.

Solution: Fix some k E {I, 2, ... , m} such that U(Xk) = P·Xk ~ P·Xi = U(Xi) for
=
alII ~ i ~ m. Now if X L:~1 QiXi is a convex combination of Xl, X2,.··, X m ,
then note that
m m
u(X) =p. X P . (L QiXi) =L QiP . Xi

i:::;;l i:;;:l
m m
< LQiP ·Xk = (LQi)P . Xl: = P . Xl: = U(Xl:) ,
i=l i=l
proving that XI: is a maximal element in C for u. The geometric meaning of this
situation is illustrated in Figure 11 .•
Figure 11
Problem 1.2.6. Let (X,E,p) be a finite measure space and let 1 < p, q < 00
t
satisfy; + = 1. Consider the utility function u: Lt(X, E, p) -+ R defined by
u(f) = 1.,fi dp .
a. Show that u is well defined, i.e., show that Vl is in Lt(X, E, p) whenever

f is in Lt(X,E,p).
b. Show that u is strictly concave, strictly monotone and norm continuous.
c. Show that the utility function u has a unique maximal element in the
convex set
d. Find the unique maximal element of u in B.
Solution: (a) Let f E Lt(X, E, p). Put t = 2p > 1 and consider its "conjugate
exponent" 8 = t !=
2:!1 > 1, i.e., + 1. Clearly, Vl E Lt(X, E, p) and,
since (X,E,p) is a finite measure space, 1 E Lt(X,E,p). Now Holder's classical
=
inequality (see, for instance, [6, Theorem 25.3, p. 205]) implies that Vl 1·...fl
belongs to Lt(X,E,p) and
(b) Before proceeding to establish the claims, we shall mention one thing
regarding the order structure in Lp(X, E, j1). The assertion I i 9 in Lp(X, E, j1)
means that the measurable set {x EX: I( x) i g( x)} has positive measure.
Similarly, I > 9 in Lp(X,E,j1) means I(x) ~ g(x) for almost all x and that the
measurable set {x EX: I(x) > g(x)} has positive measure.
The proof of part (b) will be based on the following two properties.
i. 110 ~ s < t and 0 < a < 1, then vas + (1- a)t > aVs + (1- a)0.
ii. II I, 9 E L 1 (X, E, j1) satisfy I > g, then J I dj1 > J9 dj1.
Property (i) follows from the fact that the function h: [0, 00) - R defined by
h(x) = Vi satisfies h"(X) = -ix-j < 0 for all x> O. In view of Problem 1.1.3,
h is strictly concave on (0,00) and from this the validity of (i) follows easily. The
inequality in (ii) follows from the fact that a function I E Lt(X,E,j1) satisfies
J I dj1 = 0 if and only if 1= 0 a.e.; see [6, Theorem 18.7, p. 133].
The strict monotonicity of 1.1 follows immediately from part (a), the strict
monotonicity of the square root function and property (ii) above. Now to see
that 1.1 is strictly concave, let I, 9 E Lt(X, E, j1) satisfy I i 9 and fix 0 < a < 1.
Hence, from (i), val + (1 - a)g > aVl + (1- a).j9 in L 1 (X, E, j1), and by (ii)
u{al + (1- a)g) J + val (1- a)gdj1
> J + [a0 (1 - a)..;g] dj1
aJ0 + dj1 (1 - a) J
..;g dj1
au (I) + (1 - a )u(g) .
To establish the norm continuity of the function 1.1, assume that a sequence
{In} of Lt(X,E,j1) satisfies II/n - Ilip - 0 for some I E Lt(X,E,j1). If
u(ln) f+ 1.1(1), then there exists some c: > 0 and some subsequence of {In}
(which we shall denote without loss of generality by {In} again) satisfying
IU(ln) - 1.1(1)1 > c: (2)

for all n. Now from II/n - Ilip - 0, it follows that there exists a further subse-
quence of Un} (which we shall denote by Un} again) and some 9 E Lt(X,E,j1)
satisfying In - I a.e. and In ~ 9 a.e. for each n; see [6, p. 207]. This implies
...;r;: - VI a.e. and 0 ~ ../Tn ~ ..;g a.e. Consequently, from the Lebesgue
Dominated Convergence Theorem, we see that u(ln) - 1.1(1), contrary to (2).
This contradiction establishes that 1.1 is norm continuous.
(c) Since the Banach space Lp(X,E,/-L) is reflexive, its closed unit ball is a
weakly compact set (relative to the dual system (Lp(X, E, j1), Lq(X, E, /-L))); see,
for instance [1, Theorem 5.29, p. 196]. Since the positive cone Lt(X, E, 1-') is
norm closed in Lp(X,E,I-'), it follows that B is a non-empty, convex and weakly
compact subset of Lp(X, E, 1-'). Now notice that the norm topology coincides with
the Mackey topology; see [1, Corollary 5.27, p. 195]. So, by [3, Corollary 1.2.6,
p. 16], U has exactly one maximal element in B. That is, there exists exactly
=
one function 9 E B satisfying u(g) maxfEB u(f).
( d) If fEB, then a glance at (1) guarantees that
(3)
Now let 9 = [I-'(X)] -}1. Then
and so 9 E B. Now note that
Thus, taking into account (3), we see that

'p-1
u(g) = maxu(f) = [I-'(X)) 'p .
fEB
In other words, 9 = [1-'(X)r}l is the (unique) maximizer of u over B .•

Problem 1.2.7. Let u: X -+ IR be a utility function representing a preference t
on a topological space X. If Xa -+ x in X implies limsuPa u(xa) :s: u(x), then
show that the preference relation t is upper semicontinuous.
Solution: Assume that a preference relation t on a topological space X is
represented by a utility function u: X -+ IR which satisfies the stated property.
Fix y E X and consider the set
P = {x EX: xt y} = {x EX: u(x) ~ u(y)} .
We must establish that P is a closed set.

To this end, assume that a net {xa} of P satisfies Xa -+ x in X. Since
{xa} ~ P, we have u(x a ) ~ u(y) for each u. Consequently,
u(X) ~ lim sup u(x a )

a
=1\ V u(xj3) ~ u(y).
Thus, x t y and so x E P. In other words, P is a closed set, as desired .•
Problem 1.2.8. Let (X, X') be a dual system, let C be a non-empty, convex
and weakly closed subset of X, and let u: C -+ .IR be a quasi-concave Mackey-
continuous function. Show that Xa ~ x in C implies limsuPa u(x a ) ~ u(x).
Solution: Let u: C -+ JR be a quasi-concave Mackey-continuous utility function.
If Xa ~x in C and lim sup a u(x a ) > u(x), then there is some c E .IR such
that lim sup a u(x a ) > c > u(x). By passing to a subnet, we may assume that
u(x a ) > c for all a sufficiently large. Now by [3, Lemma 1.24, p. 15], u is weakly
upper semicontinuous. This implies u(x) ~ c > u(x), a contradiction. Hence,
limsuPa u(xa) ~ u(x) .•
1.3 Demand functions
Problem 1.3.1. Show that a function f: X -+ .IRl , where X is a topological

space, is continuous if and only if
a. f has a closed graph; and
b. for each x E X there exist a neighborhood V of x and some real number
M > 0 such that IIf(y)lh ~ M holds for each y E V.
Solution: Let f: X -+ JRl be a function. If f is continuous, then (a) and (b)

are clearly true. For the converse, assume that f satisfies (a) and (b) and let
Xa -+ x. We must show that f(xa) -+ f(x) in JRi .
To see this, pick a neighborhood V of x and some M > 0 such that IIf(y)lh ~
M for each y E V. Without loss of generality, we can suppose that Xa E V for
each a. Since the function f: X -+ JRl has closed graph, it follows that the
function I: V -+ [-M, M]l also has closed graph (why?). The compactness of
[-M, M]i implies f: V -+ [-M, MY is continuous; see [3, Lemma 1.3.7, p. 23]. In
particular, we have I(x a ) -+ I(x) in [-M,MY and consequently I(x a ) -+ I(x)
in JRi . •
Problem 1.3.2. Find the demand function for the preference relation on JR~
=
represented by the utility function u( X, y) ..;x +..;y given an initial endowment
w = (1,2).
Solution: The utility function u(x, y) = Vi + vy is continuous, strictly mono-

tone, and strictly concave on lR~ j see Problem 1.1.9. Hence, u has a unique
maximizer on every non-empty convex and compact subset of lR~.
=
Now let w (I, 2) and fix a strictly positive price p = (PI, P2) E Int(lR~).
=
Then the maximum of u over the budget set Bw (p) {x E lR~: p. x ~ p . w}
must take place on the budget line p . x = p . w. If the maximizer (xo, Yo)
is in the interior of lR~, then the Lagrange Multiplier Method guarantees that
= =
(xo, Yo) satisfies the equations ~ ~PI and ~ Ap2. This implies ~ = ~ ~u .
Differentiating and simplifying, we see that if (xo, Yo) is in the interior of lR!,
then it must be the solution of the system
y= (~)2x and
Solving the system, we get
and
In particular, u(xo, Yo) = J~ii~;ll (If; + jf;). At the end points (O,~)
and (~, 0) of the budget line we have
u(O,~) = Jpi~;pa < u(xo,Yo) and u(~,O) = Jpit~pa < u(XO,yo).

This implies that (xo, Yo) is the unique maximizer of u over the budget set Bw(p),
In other words, the demand function is given by
Problem 1.3.3. Find the demand function for the preference relation on lRt
represented by the utility function u(x,y,z) = min{x,y,z} given the initial en-
=
dowment w (1,2,3).
Solution: Fix an arbitrary p = (PbP2,PS) E Int(m.t). We claim that the vector
xo = (xo, xo, xo) which satisfies p. xo = p. w is the unique maximizer of u over
the budget set Bw (p).
To find Xo, we see from p. xo = p. w that XO(PI + P2 + Ps) = PI + 2P2 + 3ps
and so Xo = Pd,;patSp3. To see that xo is the maximal element of u over Bw(p),
Pi P2 P3
assume that x = (x,y,z) E m.t satisfies (x,y,z) >- (xo,xo,xo), i.e., assume that
u(x,y,z) > u(xo,xo,xo). This implies x? Xo, y? Xo and z? xo with at least
one of these inequalities being strict. But then,
p. x =PIX + P2Y + PsZ > PIXO + P2 XO+ PsXo =PI + 2P2 + 3ps = p. w,
forcing (x,y,z) tt Bw(p). This shows that Xo is the desired maximal element.
Therefore,
x(p) = x o = x 0(1" 1 1) = p!±2p,t3pa (1 1 1)
P1+P,+P3' ,
is the demand function. The reader should notice that this utility function does
not define a neoclassical preference. _
Problem 1.3.4. Consider the preference relation ~ on R~ represented by a

Cobb-Douglas utility function
where OIj > 0 for each j.

a. Show that ~ is a neoclassical preference, and
b. Find the demand function of ~ for an arbitrary initial endowment w > O.
Solution: Consider a preference ~ on R~ represented by a utility function

u: Rl -+ R defined by the formula
where 011,012, ••• ,Oil are arbitrary fixed positive constants.

(a) Clearly, u is continuous, vanishes on the boundary of R~, and is strictly
monotone in the interior of R~. To finish the proof of this part, we need to
verify that ~ is strictly convex on Int(R~). To establish this, observe that ~ is
also represented on Int(R~) by the utility function
V(X1"" ,Xl) = In (u(xl, ... ,Xl)) = 0I1lnX1 + 0I21nx2 + ... + OIllnXl'

A direct computation shows that the second derivative matrix of v is given by
0 0
."(z" ... ,z,) ~ ~

[-~ :1:1
-!!f
:1:,
0
0 0
0 0
This shows that VI/~X1"" ,Xl) has only negative eigenvalues at each (Xl, ... ,Xl)
in the interior of R+. By Problem 1.1.2, the utility function v is strictly concave
on Int(R~). Consequently, the preference relation ~ it represents on Int(R~) is
strictly convex.
(b) Now let 0 < w E lR~ and let P =

(Pl,P2,: .. ,Pt) E Int(R~). Since ~ is
strictly convex on Int(lR~), it follows that ~ has a unique maximal element on
the budget set 8 w (p). Since u vanishes on the boundary of lR~, we infer that
the maximal element of t over 8 w (p) resides in the interior of lR~. By the strict
monotonicity of u on Int(lR~), we see that this maximizer must also lie on the
=
budget line p . x p . w. So, the Lagrange Multiplier Method is applicable. This
means that for some scalar A, the maximizing vector satisfies the equations
au --
8Xi
£llu
3;i - \p
- 1 ' \ i,
; - 1 2
Ir- , ,
0
••• ,.[..
Therefore, CtiU = APiXi for i = 1, ... ,f. Adding these f equations, we get
and so A = (a +p:!a )u.

1 l Substituting this value of A in (*), we discover that
Xi = (al;.;-~~:l)P; for each i =
1, ... ,f. Consequently, the demand function for
~ is given by
X( P ) -- a l +---+al
pow (!!L ~ ~)
PI' P2 ' ... , Pl
for each p = (PI, ... ,Pt) E Int(lR~) and each w > o.•
Problem 1.3.5. In [3, Theorem 1.3.9, p. 26} we saw that if {Pn} ~ Int(R~)
satisfies Pn - P E alR~ and P . w > 0, then the collective demand IIx(Pn)lh =
2::=1 Xi(Pn) converges to infinity. This exercise shows that although the demand
collectively tends to infinity, the demand for a single commodity can remain
bounded in spite of the fact that the price for that commodity may converge to
zero.
Consider the preference relation on lRt represented by the utility function
u(x,y,z) = VX+..jY+y+ l~Z'
and let w > O.

a. Show that u is a continuous, strictly monotone and strictly concave utility
function.
b. If(x,y,Z)ElRt andz>O, then show that
(x,y+ z,O) >- (x,y,z).

c. If a price P = (PbP2,P3) ~ 0 satisfies P2 =P3, then show that the demand
bundle x(p) = (x(p), y(p), z(p)) satisfies z(p) = 0.
d. Consider the sequence {Pn} ~ Int(IR~) of prices defined by Pn = (1,~, ~)

and note that Pn -+ (1,0,0). If X(Pn) = (X(Pn), Y(Pn), Z(Pn») is the
=
demand sequence, then show that z(Pn) 0 holds for each n-and hence,
the demand for the third commodity remains bounded in spite of the fact
that the prices of the third commodity converge to zero.
e. Show that n_oo
lim Y(Pn) = 00.
Solution: (a) The continuity of u should be obvious. For the other properties
consider the three functions f, g, h: (0, 00) -+ IR defined by
f(x) = -Ii, g(y) = ../y + Y, and h(z) = 1+Z .
Note that f'(x) = ~x-!, g'(y) = 1 + h-! and h'(z) = (1;Z) •.
This easily
implies that all three functions are strictly increasing on [0,00). In particular, it
follows that u is strictly monotone on IRt.
= =
Clearly, f"(x) -tX-~ < 0, g"(y) -ty-~ < 0, and h"(z) -(1':Z)" < 0 =
for all x, y, z E (0,00). Using Problem 1.1.3, we see that f, g, and h are all strictly
concave over [0,00). From this, it easily follows that
u(x, y, z) = f(x) + g(y) + h(z)
is a strictly concave function on IRt. (We can also use the above expression to
prove that u is strictly concave by invoking Problem 1.1.14(b).)
(b) Assume that (x,y,z) E IRt satisfies z> O. Then z > 1+% implies
u(x,y+ z,O) = -Ii + vy+ z + y+ z > -Ii + ../Y+ y+ 1+z = u(x,y,z),

and so (x, y + z, 0) ~ (x, y, z).
( c) Assume that a price p = (PI, P2, Pa) sat~sfies P2 = Pa > 0 and PI > o.
=
Also, let 0 < wE IRt. From (a), we know that x(p) (x(p), y(p), z(p» exists.
Yet the bundle x = (x(p), y(p) + z(p), 0) also satisfies p. x = p. w. If z(p) > 0
then by part (b) we would have x ~ x(p). This contradiction shows that if x(p)
is the maximal vector for ~ on Bw(p), then necessarily z(p) = O.
(d) By part (c), we see that z(Pn) = 0 for each n.
(e) By the first part of [3, Theorem 1.3.9, p. 26], we know that the sequence
{x(Pn)} is bounded. Also, from the second part of the same theorem we know
that
Consequently, Y(Pn) -+ 00 .•
Problem 1.3.6. For this exercise ~ will denote a continuous and convex prefer-
ence relation on IR~ which is either strictly monotone or else is strictly monotone
38 Cllapter 1: Tile Arrow-Debreu Model
in the interior with anything in the interior preferred to everything on the bound-
ary. Also, let w > 0 be a fixed vector. Consider the demand correspondence
(i. e., the set valued function) x: Int(R~) -+ 2R~ defined by
x(p) {x E Bw(p): x t y holds for all Y E Bw(p)}

= {x E Bw(p): x is maximal in Bw(p)} .
Note that if the preference t is strictly convex, then the demand correspondence
coincides with the demand function. Establish the following properties of the
demand correspondence.
a. For each P ~ 0 the set x(p) is non-empty, convex and compact, i.e., the
demand correspondence is non-empty, convex-valued and compact-valued.
b. For each y E x(p), we have p. y = p . w.
c. The demand correspondence is homogeneous of degree zero. In other
words, x(p) = X(Ap) holds for each p ~ 0 and each A > O.
d. If {Pn} ~ Int(R~) satisfies Pn -+ P ~ 0, then there exists a bounded
subset B of R~ such that X(Pn) ~ B holds for each n.
e. Assume {Pn} ~ Int(R~) satisfies Pn -+ P E 8R~ \ {OJ and p. w > O. If

{yn} ~ R~ satisfies Yn E x(Pn) for each n, then limn-+oo IIYnih = 00.
f. If Pn -+ P holds in Int(R~) and Yn E X(Pn) for each n, then there exists
a subsequence {zn} of the sequence {Yn} such that Zn -+ Z E x(p).
g. The demand correspondence has a closed graph, i.e., the set
G = {(p,y) E Int(R~) X R~: Y E x(p)}
is a closed subset ofInt(R~) x R~.
Solution: (a) Since P ~ 0, it follows that the budget set Bw(p) is a non-empty,
convex and compact subset of R~. Now for each x E Bw(p) consider the set
Px = {Y E Bw(p): Y t x}.
The convexity and continuity of t imply that each P x is non-empty, convex
and compact. In addition, the family {P x : x E Bw (p)} has the finite intersection
property. Consequently, from the identity
x(p) = n Px ,
XEB ... (P)
we see that x(p) has the desired properties.

(b) Assume that some vector x = (Xl, ... ,Xl) E Bw(p) satisfies the inequality
P . x 0 the vector
Xc = (Xl + €, X2 + €, ... ,Zl + €) satisfies p. Xc - X and so
x ~ x(p). In other words, x E x(p) implies P . x P . w. =
(c) Observe that for each ~ > 0 we have
Bw (~p) = {x E R~: (~p). x :::; (~p) . w} = {x E R~: p. x :::; p . w} = Bw (p) .

So, the collection x(~p) of all maximal vectors of ~ on Bw(~p) coincides with
the collection of all maximal vectors of ~ on Bw(p), That is, x(~p) x(p). =
(d) Let Pn = (pi, P2 , ... ,pi) -+ P ~ 0 hold in the interior of R~ and let
e = (1,1, ... ,1). Then there exist € oe and
> 0 and 0 > 0 such that €e :::; Pn :::;
w :::; oe. Now if x E X(Pn), then from
it follows that 0 < Xi :::; ~~./ :::; 6;l = c. So, if B = [0, c]l, then B is a bounded
subset of R~ and X(Pn) ~ B holds for each n.
(e) Assume that a sequence {Pn} ~ Int(R~) satisfies Pn -+ P E oR~ \ {O}
and p' w > O. Also, assume that a sequence {Yn} of R~ satisfies Yn E x(Pn)
for each n.
Now suppose by way of contradiction that llYn/it 00. This means (by
passing to a subsequence if necessary) that Yn -+ Y E R+. From Pn . Yn Pn . w
t =
and the joint continuity of the dot product, it follows that P . Y = P . w. Thus,
Y E Bw(p).
Next, we claim that Y is a maximal element for ~ in the budget set Bw(p).
To see this, fix x E Bw(p). Since p. w > 0, for each 0 < ~ < 1 we have
p. (~x) = ~(p . w) < p. w. From Pn -+ p, it follows that Pn . (~x) < Pn . w
for all sufficiently large n. This implies AX E Bw(Pn) for all sufficiently large n,
and thus Yn ~ AX for all sufficiently large n and each 0 < ~ < 1. The continuity
of ~ implies Y ~ ~x for all 0 < ~ < 1. Letting ~ t 1 and using once more the
continuity of ~, we see that Y ~ x. Since x E Bw (p) is arbitrary, this merely
says that Y is a maximal vector for the preference ~ in Bw(p). However, from [3,
Theorem 1.3.3, p. 21], we know that ~ does not have maximal elements in Bw(p).
This contradiction establishes that llYn/II -+ 00.
(f) Assume that the sequences {Pn} and {yn} satisfy the stated properties.
By part (d), the sequence {Yn} is a bounded sequence of R~. So, there exists a
subsequence {zn} of {yn} satisfying Zn -+ Z in R~. Now repeat the arguments
of the preceding part to conclude that Z E x(p).
(g) Let {(Pn, Yn)} be a sequence of the graph satisfying (Pn, Yn) -+ (p, y),
where (p,y) E Int(R~) x R~. According to part (f), there exists a subsequence
{zn} of {yn} satisfying Zn -+ Z in R~ and Z E x(p). Since Yn -+ Y, we see that
Y = z. Therefore, Y E x(p), proving that (p,y) E G. In other words, the graph
G is a closed subset of Int(R~) x R~ .•
1.4 Exchange economies
Problem 1.4.1. Consider an exchange economy with commodity space R2 hav-

ing three consumers with the following characteristics:
Consumer 1. Initial endowment (1,2) and utility function y) = Vi +..;Y.
Ul(X,
Consumer 2. Initial endowment (3,4) and utility function U2(x,y)=min{x,y}.

Consumer 3. Initial endowment (1,1) and utility function ua(x, y) = ye3:.
Find the excess demand function and the equilibrium prices for this exchange
economy.
Solution: Let 0 ~ p = (Pl,P2) E R!. To simplify the algebra, we introduce
the parameter t = ~. According to Problem 1.3.2, the demand function Xl(-)
for consumer 1 is gi~en by
Xl
(P ) -- ~(h £1.) -
Pl+P~ Pl'P~ -
!.±11(t
l+t
1)
't .
To find the demand of consumer 2, we argue as we did in the solution of

Problem 1.3.3. The maximizer X2 (p) = (xo, Yo) of the utility function U2 satisfies
Xo = Yo and lies on the budget line. So from PlXO + P2XO = 3Pl + 4P2, it follows
that
X2(p) = a~~*;~a (1, 1) = ~\~t (1,1).
The reader should notice that the preference represented by the utility function
U2 is not neoclassical.
Next, we shall find the demand function for consumer 3. Observe that the
preference represented by Ua is also not neoclassical. Clearly, Ua vanishes along
the x-axis and is strictly monotone on [0,00) x (0,00). This implies that the
maximizers of U3 must lie on the budget line PIX + P2Y =
PI + P2 subject to
y > O. Now if a maximizer (xo, Yo) of Ua on the budget line also lies in the
interior of R!, then according to the Lagrange Multiplier Method it must satisfy
the equations
So, Yo ~= =t
and Xo ~ = =
t. Now notice that the boundary point
(0,1+~) = (0,1+ t)
on the budget line satisfies
U3(0, 1 + t) = 1 + t = t(1 + t) < tef = u(t, t) = u(xo, Yo).
Hence (t, t) is the only maximizer of U3 over the budget set. That is,
X3(p) = (t, t).

Now the excess demand function (: Int(JR~) -+ JR2 is given by
(p) X1(p) + X2(p) + X3(p) - [(1,2) + (3,4) + (1, 1)]

= 1i;.;' (t, t) + 3it~t(l, 1) + (t, t) - (5,7)
= (3t - 2, 2~3t) .
Therefore, (p) = (3t - 2, 2~3') = 0 if and only ift = ~ = j.

It follows that the Walrasian equilibrium for this (non-neoclassical) exchange
economy is
(( 14 21) (17 17) (2
15' 10 ' 5' 5 ' 3'"2
3») '
which is supported by the strictly positive vectors p =P1 (1, ~), P1 > O.•
Problem 1.4.2. Consider the function (: Int(JR~) -+ JR2 defined by
(p)=(-~,~)
a. Show that ( is homogeneous of degree zero.

b. Show that ( is continuous.
c. Show that ( satisfies Walms' Law.
d. Can ( be the excess demand function for a neoclassical exchange economy
with commodity space JR2 'I
Solution: Clearly, ( is continuous. To see that ( is homogeneous of degree zero,

note that
for each .A > O. For Walras' Law observe that
p .(p) =P1(-~) +P2(~) = O.

The function ( cannot be the excess demand function for a neoclassical

exchange economy with commodity space R2. It fails to satisfy the boundary
condition. For instance, if Pn = (~, 1 - ~), then Pn --. (0,1) E 8R~ \ to} and
((Pn)
1_.1..1.)
= ( -y, t = (1n - 1)
1, n
for each n. This implies 1I((Pn)lh = 1 for each n . •
Problem 1.4.3. For this exercise w denotes a fixed strictly positive vector oJRi.
Fix two non-zero vectors a and b in Ri and define the function (: Int(R~) --. Ri
by
..r()
P =~b
p.w - ~
p.w a.
a. Show that ( is homogeneous of degree zero.

h. Show that ( is a continuous function.
c. Show that ( satisfies Walras' Law.
d. Show that ( cannot be the excess demand function Jor any neoclassical
exchange economy with commodity space Ri.
e. Does ( have an equilibrium price?
Solution: The continuity of ( follows from the continuity of the dot product
function (x, y) 1-+ X • y. To see that , is homogeneous of degree zero, observe
that
' )-~b
, ( "P - ~ - ~ ~ a --~b p.w - ~p.w a -_r()
.. p
for each oX > O. For Walras' Law note that
. r( ) = . (~ b _ ~ a) = (p·a)(p·b) _ (p.b)(p.a) = O.
P .. P P p·w p·w p·w p·w
To see that ( cannot be the excess demand function of a neoclassical exchange

economy with commodity space Ri notice that ( as defined is also continuous on
all of R~ \ to}. Indeed, if Pn --. P holds in R~ \ to}, then the strict positivity
of w implies p . w > O. So from the joint continuity of the dot product, we get
..r( Pn ) -- &:!
p ... w b - pp .....·b
wa --+
~
p.w b - ~
p.w a -- ..r( p ) .
In particular, it follows that ( does not satisfy the familiar boundary condition
of an excess demand function.
To find the equilibrium prices of (, i.e., the vectors p > 0 such that «p) =0,
=
notice first that having «p) 0 for some p > 0 is equivalent to
(p. a)b =(p. b)a and p> o.

Equation (*) need not have a solution. As we shall see below, this depends on
the relationship between the vectors a and b. Assume that a vector p > 0 is a
solution of (*). We distinguish two cases.
1. The vector p is orthogonal to the vector space generated by a and b, that is,
p·a=p· b = O.
In this case, (*) is trivially true. This means that every vector p > 0 that satisfies
= =
p . a p . b 0 is automatically an equilibrium price for (.
2. The vector p is orthogonal neither to a nor to b.
In this case, b = (~)a, i.e., the vectors a and bare colinear. Thus, in
case b = '\a and p . a "10, equation (*) is equivalent to
p . b = '\p . a "I 0 .
Now it is not difficult to construct examples where cases (1) and (2) cannot
occur. For instance, in 1R3 if we choose a = (1,1,1) and b = (1,2,3), then the
corresponding function ( does not have any equilibrium prices. _
Problem 1.4.4. If«·) is the excess demand function for a neoclassical exchange
economy and some price p :> 0 satisfies either «p) ~ 0 or «p) ~ 0, then show
that «p) = 0 holds.
Solution: Assume that for some p :> 0 we have «p) ~ o. If «p) > 0, then
p . «p) > O. However, the latter contradicts Walras' Law according to which
=
p . «p) O. Hence, «p) ~ 0 (or «p) ~ 0) implies «p) O. _ =
Problem 1.4.5. This exercise presents yet another proof of the Arrow-Debreu
Theorem in a more general context. Consider an exchange economy with m
consumers. Each consumer i has an initial endowment Wi and a continuous
convex preference b which is either strictly monotone or else is strictly mono-
tone in the interior with anything in the interior preferred to everything on the
boundary. We also assume that W = L:~l Wi :> O. In this case-as we saw in
Problem 1.3.6-the demand Xi(-) of consumer i is a non-empty, convex-valued
and compact-valued correspondence.
Define the excess demand correspondence (: Int(R~) -+ 2Rl by

m m m
(p) = LXi(P)- LWi = LXi(P)-W
i=1 i=1 i=1
m
{z E R~: Z = I>i - W for some Zi E Xi(p)}.
i=1
A price P is said to be an equilibrium price whenever 0 E (p). Prove that
the excess demand correspondence has an equilibrium price by establishing the
validity of the following statements.
a. The excess demand correspondence is non-empty, convex and compact-
valued.
h. For each Z E (p), we have p. Z = o.
c. If {Pn} ~ Int(R~) satisfies Pn -+ P E 8R~ \ {OJ and Zn E (Pn) for
each n, then limn_ oo IIznll1 = 00.
d. If Pn -+ P holds in Int(R~) and Zn E (Pn) for each n, then there exists

a subsequence {Yn} of the sequence {zn} such that Yn ~ Y E (p).
e. For each 0 < c < 1 there exists a closed ball Be such that (p) ~ Be holds
for each P ~ 0 satisfying c $ Pi $ 1 for all i.
f. For each 0 < c $ t,
let Se = {p E S: Pi ~ c for all i}. Show that there
exists some P E S£ such that Z E (p) implies
q . Z $ 0 for all q E S£ .
g. Show that ( has an equilibrium price, i.e., show that there exists some
P ~ 0 such that 0 E (p).
Solution: (a) For the proof of this part, we need the following fact.
• The sum of a finite collection of compact (resp. convex) subsets of nl is
compact (resp. convex).
To see this, let A and B be two subsets of Rl. If A and B are both convex, then
=
A + B {a + b: a E A, b E B} is also convex. Now assume that A and Bare
both compact. Then A x B is a compact subset of lRl x Rt. Since the addition
function !(x,y) = x + Y (from Rt x Itt to Ht) is continuous, it follows that
!(A, B) = A + B is a compact set. Now the general case can be proven easily
by induction.
1.4 Excbange economies 45
By part (a) of Problem 1.3.6 we know that for each P :> 0 the set Xi(p) is
nonempty, convex and compact. By the above fact, ((p) is a nonempty, convex
and compact subset of IRl.
(b) By part (b) of Problem 1.3.6, we know Zi E Xi(p) implies P·Zi = P·Wi.
=
So, if Z 2:::1 Zi - wE ((p), then
m m m
p .Z =L p . zi - P .w =L P·Wi - P .W =p. (L Wi - W) =0 .
i=1 i=1 i=1
(c) Since W :> 0 and P E aIR~ \ {O}, we have p. W > O. This means that
=
there is 1 ~ k ~ m such that P·Wk > O. Now let Zn 2:::1 Z~ - W E ((Pn) for
each n. Then from part (e) of Problem 1.3.6, we have IIz~lI1""ii+-OO. So, from
m m
IIznlh ~ 1I?>~1I1 -lIwlh = ~lIz~lh -lIwlh ~ IIz~1I1-lIwlh,

.=1 .=1
it follows that IIzn Ih --+ 00.
(d) Let Pn --+ P hold in Int(IR~) and assume that Zn = 2:::1 Z~ -w E ((Pn)
for each n. A simple argument using part (f) of Problem 1.3.6 guarantees a
subsequence {yn = 2:::1 y~ -w} of {zn} exists such that y~ --+ yi E Xi(p). But
then Yn --+ Y = 2:::1 yi - wE ((p).
(e) Fix 0 < e < 1 and let {j = IIwlh = 2:~1I1wilh. Next, choose P :> 0 such
that e ~ Pi ~ 1 for each i. If y E Xi(p), then from
it follows that 0 ~ Yi ~ ~ for each j. Thus, lIylh = 2:1=1 Yi < ¥ for each
y E Xi(p). So, if Z = 2:~1 Zi - wE ((p), then
m
IIzlh ~ L IIZilh + IIwlh ~ me6l + {j = r.
i=1
The closed ball centered at zero with radius r has the desired properties.
= =
(f) As usual, let S {p:> 0: IIpII1 PI + ... + Pl I}. Fix 0 < e ~ t and =
then use part (e) to select a closed ball Be containing ((p) whenever p ESe.
Clearly, the set Se is a non-empty, convex and compact subset of S.
Next, we claim that for each Z E IRl the set
is non-empty, convex and compact. Since Se is compact, closed ness and non-
emptiness follow from the continuity of the dot product. Convexity of -rPe(z) is
obvious.
Now define the correspondence If'e: Se x Be -+ 2 Sc xBc by
If'e(P, z) = -rPe(z) X «p).
We claim that the correspondence If'e has closed graph. To see this, assume
that an arbitrary sequence {(Pn,zn),(qn,Yn))} ~ Gtpe satisfies Pn -+ P ESe,
Zn -+ Z E Be, qn -+ q and Yn -+ y. From qn E -rP£(zn), we see that qn ·Zn ~ S·Zn
for each sESe, and so by taking limits q . Z ~ S . Z for each sESe. This implies
q E -rPe(z). Now from Yn E «Pn), Pn -+ P ~ 0, Yn -+ Y and part (d), we infer
that Y E «p). Therefore, (p,z),(q,y)) E Gtp., and so Gtpc is a closed set.
Now it should be clear that the correspondence If't satisfies the hypotheses
of Kakutani's Fixed Point Theorem [3, Theorem 1.4.7]. (Recall that -rP£(z) and
z(p) are convex.) So, If'e has a fixed point, say (p,z) E If't(p,z). This means
=
z E «p) and p E -rPe(z). But then, by part (b), p. Z 0 and so q . z ~ 0 for all
q ESe.
(g) For each n there exists, by part (f), some price Pn E S and some vector
Zn E «Pn) satisfying
q . Zn ~ 0 for all q E S Rh .
By passing to a subsequence (and relabelling), we can assume without loss of

generality that Pn -+ pEa = {s E lRt:
81 + 82 + ... + 8l = 1}.
Next, we claim that {zn} is bounded. To see this, write Zn = Yn - w with

Yn ~ O. Since (t,~, ... ,~) E SRh' it follows from (*) that tllYnlh ~ ~lIwlh
or IIYnih ~ IIwlh for each n. So, {yn} is a bounded sequence, and so {zn} is
likewise a bounded sequence. Now by passing to a subsequence again, we can
assume that Zn -+ z. The latter, in connection with part (c), implies that p ~ O.
From part (d), we obtain that Z E «p).
In addition, condition (*) shows that q . Z ~ 0 for all q E S. Since S is dense

in a, it follows that q. Z ~ 0 for all q E a. Therefore Z ~ 0, and in view of
p. Z = 0, we infer that Z = O. That is, 0 = Z E «p), and the proof is finished .•
1.5 Optimality in exchange economies
Problem 1.5.1. This exercise presents an alternate proof of the existence of

individually rational Pareto optimal allocations ([3, Theorem 1.5.3, p. 40]).
Assume that in an exchange economy with m consumers each preference t i
is represented by a continuous utility function Ui. Fix m positive real numbers
A1,A2, ... ,A m and consider the function U:(IR~)m -+IR defined by
m
U(Xl' X2, ... ,xm ) =L A,Ui(xd .

i=1
a. Show that U has a maximal element in Ar, the non-empty compact set of
all individually rational allocations.
b. Show that every maximal element of U in Ar is an individually rational

Pareto optimal allocation-and hence, individually rational Pareto opti-
mal allocations exist.
Solution: (a) Recall that the sets A and Ar of all allocations and all individually
rational allocations, respectively, are defined by
A = {(Xl> X2, ... ,Xm ): Xi E IR~ for each i and f:

i=1
Xi =W}
and
Ar = {(X1,X2,'" ,xm ) E A: Xi ti Wi for each i}.
Clearly, A and Ar are both non-empty, convex and compact subsets of (IRt)m.
The function U is clearly continuous on (IR~)m. So, U achieves a maximum
over the non-empty compact set A r . In other words, U has at least one maximal
element in A r •
(b) Let (X1,X2,'" ,xm ) EAr be a maximal element of U over A r . That is,
for each (Yl,Y2,'" ,Ym) EAr. If (Xl,X2,'" ,Xm ) is not Pareto optimal, then
there exists an allocation (Z1' Z2,"" zm) satisfying Zi b Xi for all i and Zi >-i Xi
for at least one i. But then (Z1' Z2, ... ,zm) EAr and
contrary to (*). Thus, every maximizer of U in Ar is an individually rational

Pareto optimal allocation .•
Problem 1.5.2. This exercise demonstrates existence of individually rational

weakly Pareto optimal allocations. Consider an exchange economy with m agents
such that each preference !::i is represented by a continuous utility function Ui.
Define the function V: (R~)m - R by
V(Xl' X2, ... , xm) = min{ Ul(Xl), U2(X2), ... , um(xm)} .
a. Show that V is a continuous function.

b. Show that V has a maximal element in the non-empty compact set Ar of
all individually rational allocations.
c. Show that every maximal element of V in Ar is an individually rational
weakly Pareto optimal allocation-and hence, individually rational weakly
Pareto optimal allocations exist.
Solution: (a) From Problem 1.1.15 we know that if each Ui is quasi-concave

(resp. concave), then V is quasi-concave (resp. concave). As mentioned in the
solution of Problem 1.2.1(c), for each pair of real numbers z and y we have
min{z,y} = ~(z+y-Iz-yl).
This implies that the function (z, y) t--+ min{x, y} is continuous. It is simple to
verify by induction that the real-valued function (Zl. ... ,xm) t--+ min{zl, ... ,xm }
is also continuous on Rm. This readily implies that if each Ui is continuous, then
V is also a continuous function.
(b) Every continuous real-valued function on (R~)m attains a maximum on
Ar since it is compact. In particular, V has a maximal element in A r .
(c) Assume that (Xl, ... ,Xm) EAr is a maximal element for V. That is,
(**)
for each (Yl, ... ,Ym) EAr. Now assume by way of contradiction that the
individually rational allocation (Xl. ... ,X m) is not weakly Pareto optimal. This
means that there exists another allocation (Zl, ... ,zm) satisfying u(zd > U(Xi)
=
for each i. In particular, (Zl, ... ,Zm) EAr. If k satisfies V(Zl, ... ,zm) U(Zk),
then we have
which contradicts (**). This contradiction guarantees that (Xl, ... ,Xm ) is an
individually rational weakly Pareto optimal allocation .•
Problem 1.5.3. Let N = {I, 2, ... , n}. If V is an n-person game and V(N)
is closed, then show that Core(V) is a closed set. If Core(V) is a closed set, is
V(N) necessarily a closed set?
Solution: The reader should recall that the core of an n-person game V is the
subset of JRn consisting of all vectors of V(N) that no coalition can improve
upon. That is,
Core(V) = {x E V(N): ~ SEN and Y E V(S) with Yi > Xi ViE S} ,

where as usual the symbol N denotes the collection of all non-empty subsets
(coalitions) of the set of n players N = {I, 2, ... , n}.
Let V be an n-person game such that V(N) is a closed subset of JRn . To
see that Core(V) is closed, let x E Core(V), the closure of Core(V). From
Core(V) C V(N) and the closedness of V(N), we see that x E V(N).
Now assume by way of contradiction that x ~ Core(V). This means that
there exists a coalition S of players and some y E V(S) satisfying Yi > Xi for
each i E S. Now note that open set {z E JRn: Yi > Zi for all i E S} is a
neighborhood of x. So, taking into account that x E Core(V), we infer that
there exists some a E Core(V) satisfying Yi > ai for all i E S. But this readily
contradicts the fact that a E Core(V). Hence, x E Core(V), which shows that
Core(V) is a closed set.
The core can be closed without V(N) being closed. For an example, consider
the 2-person game V defined by
V( {I, 2}) = (0,1) x (0,1) U {(I, I)} and V( {I}) = V( {2}) = (0,1) x (0,1).
Clearly V({I,2}) is not closed while Core (V) = {(I,I)} is .•

Problem 1.5.4. Consider the 3-person game V:N _ 2 R3 defined by:
V({l}) V({1,2}) = {(x,y,z) Ene: X $ I}

V({2}) V({2,3}) = {(x,y,z) E JR3: Y ~ I}
V({3}) V({I,3}) = {(x,y,z) E JR3: Z ~ 1}
V({l, 2, 3}) {(x,y,z)EJR3: X 2 +y2+z2$3}
Find the core of the game.

Solution: For our game here, we claim that Core(V) = {(I, 1, I)}. To establish
this, start by observing that (1,1,1) E V(N). Also, it should be obvious that no
coalition can improve upon (1,1,1), and so (1,1,1) E Core(V).
To see that (1,1,1) is the only vector in the core, let x =
(Xl, X2, X3) be in
Core(V). We claim that Xi ~ 1 for each i. Indeed, iffor some i we have Xi < 1,
then the vector y = (Yl, Y2, Y3) defined by Yi= l1ti and Yj =
1 for j i= i belongs
to V ({i}) and satisfies Yi > Xi. This shows that coalition {i} can improve upon
x, contradicting x E Core(V). So, Xi ~ 1 for each i and since x~ + x~ + x~ = 3,
= = = =
we infer that Xl X2 X3 1. Therefore, Core(V) {(I, 1, I)} as claimed .•
Problem 1.5.5. Consider the 2-person game V:.N -.. 2R~ defined by:
V({I}) = {(x,y) E lR?: X ~ 1}

V({2}) {(x,y) E R2: Y ~ H
V({1,2}) {(x,y) E R2: X <4 and Y ~ ::::!}
a. Show that V is a balanced game satisfying the hypotheses of Scarf's The-

orem ([3, Theorem 1.5.9, p. 44j)-and hence its core is non-empty.
b. Determine the core of the game.
Solution: (a) We verify the desired properties.

(i) Each V(S) is a closed set.
Clearly, V ({I}) and V ({2}) are closed subsets of R 2 • To see that V ( {I, 2}) is
closed, assume that a sequence {(Xn, Yn)} of V( {I, 2}) satisfies (xn, Yn) -.. (x, y)
in m? Then Xn < 4 for each n and so x =
limn _ oo Xn ~ 4. If X =
4, then
=
from Yn ~ :::::~, it follows that y liffin_oo Yn ~ liffin_oo :::::! =
-00, which
is impossible. Hence, x < 4 and Y ~ ::::~ and so (x, y) E V ({I, 2}). Thus, the
set V({1,2}) is closed.
(ii) Each V(S) is comprehensive from below, i.e., x ~ y and y E V(S) imply
x E V(S).
Clearly, V({I}) and V({2}) are comprehensive from below. Now let us verify
that the set V( {I, 2}) is also comprehensive from below. To see this, assume
(Xl, yt) ~ (X2' Y2) with (X2' Y2) E V ({I, 2}). This says that Xl ~ X2 < 4 and
=
Yl ~ Y2 ~ :~:::~. Since the function y ::::~ decreases in the interval (-00,4),
we get Yl ~ Y2 ~ :~:::: ~ :::::~, proving that (X1.Yt) E V({1,2}). Therefore,
V({1,2}) is comprehensive from below too.
(iii) [fx E V(S) and y E m.2 satisfies Xi = Yi for each i E S, then y E V(S).
This is obvious.
(iv) Each V(S) is bounded from above relative to JRs , i. e., for each S there is
some Ms satisfying Xi ~ Ms for all i E S and all x E V(S).
Indeed, note that if x E V(S), then Xi ~ 4 for each i E S.
(v) The game V is balanced.
Note that there is only one balanced family that does not contain the grand
coalition N = {I, 2}. It is the family of sets {{ I}, {2}} . Now we claim that
V({I}) n V({2}) ~ V({1,2}). Indeed, if (x,y) E V({I}) n V({2}), then x ~ 1
and y ~ ~. This implies Y ~ ~ = ~:::! < ~:::!, which shows that the vector (x, y)
belongs to V({1,2}).
Having now verified these five conditions, we may appeal to Scarf's Theorem
to guarantee the 2-person game V has a non-empty core.
Figure 12
(b) Figure 12 illustrates the geometry of the situation. Notice that every
vector (x, y) E V ({I, 2}) with x < 1 can be improved upon by the coalition {I}.
Also, every vector (x,y) E V({1,2}) with y < ~ can be improved upon by the
coalition {2}. Finally, every vector (x, y) E V ({I, 2}) satisfying 1 ~ x ~ 2 and
y < ~:::! can be improved upon by the coalition {1,2}. Thus, the only vectors
that cannot be improved upon by any coalition are the vectors of the form
=
(x, ~:::!) with 1 ~ x ~ 2. In other words, Core(V) {(x, ~:::!): 1 ~ x ~ 2} .•
Problem 1.5.6. Let V be an n-person game. If a E R n is a fixed vector, then

define the a-translate n-person game Va of V by
Va(S) = a + V(S) .
Establish the following properties of the translate games of V.
a. If V(S) is a closed set, then Va(S) is likewise a closed set.
b. If V(S) is comprehensive from below (i.e., if y ~ x and x E V(S) imply
y E V(S», then Va(S) is also comprehensive from below.
c. Assume that for some coalition S the set V(S) satisfies the following prop-
erty: x E V(S), y E R n and Xi =
Yi for each i E Simply y E V(S).
Then Va(S) satisfies the same property.
d. The n-person game V is balanced if and only if the n-person game Va is
balanced.
e. Core(Va ) =
a + Core(V) -and so, conclude that the n-person game Va
has a non-empty core if and only if the n-person game V has a non-empty
core.
Solution: (a) Observe that for each fixed a, the mapping x 1-+ a + x (from R n
to Rn) is a homeomorphism-in fact, it is an isometry. This readily implies that
the set Va(S) is closed if and only if V(S) is closed.
(b) Assume that V(S) is comprehensive from below. Let y ~ a + x, where
x E V(S). Then y - a ~ x and since V(S) is comprehensive from below, we see
that z = y-a E V(S). Therefore, y = a+z E Va(S) proving that Va(S) is also
comprehensive from below.
(c) Assume that V(S) enjoys the stated condition. We claim that Va(S)
enjoys the same property. To see this, assume y E R n and x E V(S) satisfy
Yi =ai + Xi for each i E S. So, Yi - ai =
Xi for each i E S and from our condition,
= =
we infer that z y - a E V(S). So, Y a + z E Va(S), proving our assertion.
(d) Recall that a game V is said to be balanced whenever every balanced
family 8 of subsets of N satisfies nSEB V(S) ~ V(N). And, of course, a family
B of subsets of N is said to be balanced whenever there exist non-negative
weights {ws: S E 8} satisfying LSEB wsXs XN· =
Now let 8 be a family of subsets of N. An easy set-theoretic argument shows
that
SEB
n
Va(S) = n
SEB
=
[a + V(S)] a + V(S).n
SEB
SO, nSeB V(S) ~ V(N) holds true if and only if
seB
n Va(S) = a+ n
SeB
V(S) ~ a+ V(N) = Va(N).
This shows that the game V is balanced if and only if the game Va is balanced.
(e) Let x E Core(Va ). We claim that x-a E Core(V). Indeed, ifx-a does
not belong to Core(V), then there exists a coalition S and some vector Y E V(S)
satisfying Yi > Xi - ai for each i E S. This implies Yi + ai > Xi for each i E S.
Now by observing that y + a E Va(S), we infer that the coalition S can improve
upon x, contrary to x E Core(Va ). Therefore, Z =
x - a E Core(V) and so
x = a + z E a + Core(V). In other words, we have proven the inclusion
Core(Va ) ~ a + Core(V).
For the reverse inclusion, let x E Core(V). If a + x fI. Core(Va ), then

there exists some coalition S and a vector y E Va(S) =
a + V(S) satisfying
Yi > ai + Xi for each i E S. But then z =
y - a E V(S) and Zi =
Yi - ai > Xi for
each i E S guarantees that x fI. Core(V), a contradiction. Thus, x E Core(V)
implies a + x E Core(Va ) and so a + Core(V) ~ Core(Va ). The latter inclusion
combined with (*) shows that Core(Va ) = a + Core(V) .•
Problem 1.5.7. Prove the following result regarding correspondences that was
invoked in the proof of [3, Theorem 1.5.9, p. 44J. Assume that:F is a non-empty
finite subset ofnn and that t/J:.6. -+ :F is a non-empty valued correspondence. If
t/J has a closed graph, then show that its convex hull correspondence s 1-+ co t/J( s)
likewise has a closed graph.
Solution: Assume that the correspondence t/J: .6. -+ :F is non-empty-valued and

has closed graph. Let Sm -+ S in .6., Ym -+ yin nn and Ym E cot/J(sm) for each
m. We must show that Y E cot/J(s).
Since :F is a finite set, there exists a subset of :F such that t/J(sm) =

holds for infinitely many m. Thus, by passing to a subsequence and relabelling,
we can assume that t/J(sm) = for each m. Now if a E <1>, then let Zm a =
for each m and note that the sequence {( Sm, zm)} in the graph of t/J satisfies
(sm, zm) -+ (s, a). Since t/J has closed graph, we infer that a E t/J(s). Thus,
=
 ~ t/J(s) and so co cot/J(sm) ~ cot/J(s). In particular, from Ym E cot/J(sm)
for each m and the closedness of cot/J(s), we get Y E cot/J(s), as desired .•
1.6 Optimality and decentralization
Problem 1.6.1. Assume that in an exchange economy every consumer has an

extremely desirable bundle_ Show that an allocation (Xl, ___ ,xm ) is a Walrasian
equilibrium with respect to some price P > 0 if and only if X >-i Xi implies
p-x>P-wi-
Solution: Let (Xl. ___ ,xm ) be an allocation and let P > 0 be a price_ Assume
first that (Xl. ___ ,xm ) is a Walrasian equilibrium with respect to the price p_
That is, assume that each Xi is a maximal element for ~i in the budget set
BWi(P)- So, X h Xi implies X ¢ Bw.(p), which means that P - X> P-Wi-
For the converse, assume x >-i Xi implies P - x > P-Wi _ First, let us prove that
Xi E Bw. (p) for each i_To establish this, for each consumer i fix an extremely
desirable bundle Vi > 0_ Then Xi + cVi >-i Xi for each c > 0, and so from our
condition, P-Xi + cP-Vi > P-Wi for each c > 0_ Hence, P-Xi ~ P-Wi for each i_
Now if P-Xi > P-Wi for some i, then
m m m m
poW = P-(LWi) = LP-Wi < LP-Xi = P(LXi) = p-W,

i=l i=l i=l i=l
=
which is impossible_ Hence, P-Xi P-Wi and so Xi E Bw.(p) for each i_
Now if X h Xi, then since P - X > P-Wi we see that X ¢ Bw.(p)- In other
words, x E Bw.(p) implies Xi b x_ This says that each Xi is a maximal element
for b in Bw.(p)- That is, the allocation (Xl, ___ ,xm ) is a Walrasian equilibrium
supported by the price p_ •
Problem 1.6.2. Consider the exchange economy with commodity space IR? and
two consumers having the following characteristics_
Consumer 1: Initial endowment W1 = (~,!) and utility function U1(X, y) = xy_
Consumer 2: Initial endowment Wli = (~,~) and utility function U2(X, y) = x 2 y_
Show that the allocation (Xl. X2), where Xl =
(1,1) and X2 = (2,1), is a
Walrasian equilibrium supported by the price P = (1,1)_
= = =
Solution: Note that P-X1 P-W1 2 and P-X2 P-W2 3, and consequently =
Xi E Bw.(p) for each i_ We shall establish that the allocation (X1,X2) is a Wal-
rasian equilibrium supported by the price P = (1,1) by invoking Problem 1.6_1.
=
That is, we shall show that (a, b) h Xi implies p-( a, b) a + b > P-Wi-
To see this, consider the function f(x) =
~, x > 0_ Clearly, f'(x) -~ =
and I"(x) = !s > 0 for each x > 0_ This means that f is strictly convex and,
= =
in particular, the graph of y f(x) must "lie" above the line y -x + 2 which
is tangent at the point (1,1). That is, -x + 2 :5 ~ or x + ~ ~ 2 for each x > o.
Now let (a,b) ~1 Xl = (1,1). This means that ab > 1, or b > ~. Consequently,
we have p·(a,b) = a+b > a+ ~ ~ 2 = P·W1.
Similarly, the graph of y = ~ lies above the line y = -x+3 which is tangent
at the point X2 = (2,1), i.e., -x + 3 :5 ~ or x + ~ ~ 3 for each x > o. Hence, if
(a,b) h (2,1), then a2 b > 4 or b > ~. So, p·(a,b) = a+b > a+ ~ ~ 3 = P·W2,
as required.
It is also interesting to observe that (Xl, X2) is the only Walrasian equilibrium
of the economy. To see this, introduce the parameter t = ~ for each p
=
(P1,P2) ~ O. Noting that W (3,2), we may refer to Problem 1.3.4 to find
~+tt (1 1) 1 ( 3
X1(P)=~ Pl'P. =4 3+t,,+1
)
and
X2(P)-
_ ~+~
3
(2 1) _ (
Pl'P. -
1 1)
1+t'2+21 .
Consequently, the excess demand function of the economy is given by
So, (p) = 0 if and only if t = 1, or P1 = P2. From (*) and (**), we get
X1(P) = (1,1) and X2(P) = (2,1) .•
Problem 1.6.3. Consider an exchange economy with lower semicontinuous

preferences. If an allocation is a quasiequilibrium relative to a price p with
p . W :f:. 0, then show that the allocation is weakly Pareto optimal.
Solution: Recall that an allocation (Xl, ... ,xm) is a quasiequilibrium when-
ever there exists a price p :f:. 0 such that
X b Xi implies p. X ~ P·Wi .
Now assume that an allocation (Xl, ... ,Xm) is a quasiequilibrium with re-
spect to a price p with p·w :f:. O. Also, assume by way of contradiction that there
exists another allocation (Yl, ... , Ym) satisfying Yi ~i Xi for each i. From our
condition, we get P·Yi ~ P·Wi, and from
m m m m
p·w = P·(2:Yi) = 2:P·Yi ~ 2:P·Wi = p.(2:Wi) = p·w,
i=l i=l i=l i=l
we infer that P·Yi =P·Wi for each i. Since p·w :f:. 0, there exists some 1 :5 k :5 m
such that P·Wk :f:. O. Next, from Yk ~k Xk and the lower semicontinuity of ?:k,
it follows that there exists some 0 < c < 1 such that 1 - c :::; A :::; 1 + c implies
An :--.\: x.\:. Using once more our condition, we get
Ap·w.\: = Ap'n = p·(Ay.\:) ~ P·W.\:
=
so that (A - l)p·w.\: ~ 0 for each A E (1 - c, 1 + c). By letting A 1 ± c, the
=
latter inequality yields ±cp,w.\: ~ 0, or P·W.\: O. This contradicts P·W.\: > 0 and
so the allocation (Xl, ... ,xm ) is weakly Pareto optimal.
The reader should notice that the same proof shows that if w ~ 0, then every
quasiequilibrium which is supported by a strictly positive price is automatically
Pareto optimal .•
Problem 1.6.4. Show that every preference with an extremely desirable bundle
defined on R~ is locally non-satiated. Also, give an example of a monotone
locally non-satiated preference on some R~ which is not strictly monotone.
Solution: Recall that a preference t on a topological space X is said to be
locally non-satiated if for each z E X and each neighborhood V of z there
exists some y E V such that y :-- z.
Now assume that a preference t on R~ has an extremely desirable bundle,
say v > O. This means that X + av :-- x for each x E R~ and each a > O. Since
for any neighborhood V of an arbitrary point x E R~ we have x + av E V for
all sufficiently small a > 0, it easily follows that t is locally non-satiated.
The preference t on R~ represented by the utility function u( z, y) = z is
continuous, monotone, locally non-satiated but fails to be strictly monotone .•
Problem 1.6.5. If in an exchange economy preferences are convex and the total
endowment is extremely desirable by each consumer, then show that every weakly
Pareto optimal allocation can be supported by a price.
Solution: Let (Xl, ... , xm) be a weakly Pareto optimal allocation in an exchange
economy with convex preferences in which the total endowment is extremely
desirable by each consumer.
=
Define the convex sets Fi {x E R~: x b Xi} and consider the convex set
F = Fl + F2 + ... + Fm - w.
We claim that -~w Ft F for each n.
To see this, assume by way of contradiction that - ~w E F for some n. Then,
= =
there exist Zi E Fi (i 1, ... , m) such that -~w Zl + ... +zm -w. Rewriting,
we get
(Zl + ';n w) + (Z2 + ';n w) + ... + (zm + ';nw) =w.
So, if Yi = Zi + n:n w (i = 1, ... , m), then (Y1, ... , Ym) is an allocation and since
w is extremely desirable by each consumer it satisfies Yi h Zi ~i Xi for each i.
But this shows that (Xl, ... , xm) is not weakly Pareto optimal, a contradiction.
Hence, -~w rt. F for each n.
Now, according to the Finite Dimensional Separation Theorem (see Prob-
lem 2.3.6), for each n there exists some price Pn E JRl with IIPnih = 1 satisfying
- ~Pn . w :os; Pn . Z for all Z E F.
Next, let P be a limit point of the sequence {Pn}. Then, P is a non-zero price
=
(in fact, IIplh 1) and clearly p. Z ~ 0 for each Z E F.
Finally, we claim that the price P supports the allocation (Xl, ... ,xm). To
see this, assume X ~i Xi. Then, from
X - Xi = Xl + ... + Xi-1 + X + Xi+! + ... + Xm - w E F,
it follows that p·(x - Xi) = p. X - P·Xi ~ 0 or P . X ~ p·Xi. That is, the price p
supports the allocation (Xl, ... , Xm ) . •
Problem 1.6.6. Consider the neoclassical exchange economy with commodity

space JR2 and two consumers with the following characteristics.
Consumer 1: Initial endowment W1 =(2,1) and utilityfunctionu1(x, y) =(y+ l)e x •
Consumer 2: Initial endowment W2 = (2,3) and utility function U2(X, y) = xy.
a. Find the individual demand functions.
b. Find the excess demand function.
c. Find the Walrasian equilibria.
d. Draw the Edgeworth box for this economy and find the equation of the
contract curve.
e. Find and draw the core allocations in the Edgeworth box.
£. Show that every allocation in the contract curve is supported by prices.
Solution: As usual, in order to simplify the algebra, we shall introduce the

parameter t = f.I.. for each p =(P1,P2) > O. The geometry of the situation is
illustrated in Fig~re 13.
(a) Clearly, U1 is continuous and strictly monotone. In addition, we claim
that U1 is strictly quasi-concave on JR!.
To see this, select (x,y), (Xbyt) in JR!
=
with (x, y) =1= (Xl, yt) and fix 0 < a < 1. If (3 1 - a and
m = min {U1(X, y), U1(X1, yd} = min {(y + l)e X , (Y1 + l)e X1 } > 0,
58 Chapter 1: The Arrow-Debreu ModeJ
then we must show that
To see that (*) is true, consider the real function /(8) =

me-' - 1. Then,
/,,(8) = me-' > 0 for each 8 E It and so (by Problem 1.1.3) / is strictly convex.
In particular, we have
(**)
with strict inequality if x :f; Xl. Now note that y ~ me-~ -1 and YI ~ me-~i -1
= =
with one of these inequalities strict in case x Xl (since X Xl implies y :f; yd.
So, in either case, it follows from (**) that me-(a~+p~i) - 1 < ay + {3YI. This
implies
UI (ax + {3xI' ay + {3yt) =
(ay + {3YI + 1)ea~+.B~l > m ,
which is the required inequality (*).
By [3, Theorems 1.1.12 and 1.3.2], the preference represented by the utility
function UI has a unique maximal element in the budget set. This maximal
=
element must lie on the budget line tx + y 2t + 1. The endpoints of this budget
t.
line are (0, 2t+ 1) and (2+ 0). If the maximizer of UI lies in the interior of IR!,
then the Lagrange Multiplier Method applies and tells us that the maximizer is
= =
the solution of the system ~ API and ~ >'P2. Hence (y+ l)e~ >'PI and =
e~ = = =
>'P2. SO, Y + 1 t or y t - 1. Substituting this value into the equation
of the budget line, we get X =
!:p. Clearly, the vector (!:P, t - 1) lies on the
budget line if and only if t ~ 1, in which case it is not difficult to see that it is the
maximizer of UI. That is, Xl(P) = (!.:p,t - 1). When 0 < t < 1 the maximizer
is an endpoint of the budget line, and since
we see that the maximizer is (2 + t. 0). In other words, we have shown that
ift~lj
ifO<t<1.
For the demand function of U2, we can invoke Problem 1.3.4 and get
x (p)
2
= ~(.1..
2
.1..) = (2tt3
Pi ' Pl
2tt3).
2t ' 2
(b) Using part (a), we see that
(1=.1! ~) ift~lj
«p) =XI(P) + X2(p) - w = { (5~t2t' 2t~5)' ifO<t<1.
2t ' 2 '
( c) According to part (b) the equilibrium prices must satisfy either "4t -7 = 0
=
and t ~ 1" or "2t - 5
Walrasian equilibrium-the one with t = *.
0 and 0 < t < 1." It follows that there is only one
Substituting this value into the
formulas expressing the demand functions in (a) yields
15 3) (13
(( 7'4' 13))
7'4 .
Using part (f) below, we can convince ourselves that the price p = (7,4) supports
the above allocation as a Walrasian equilibrium.
y Walrasian Eqwlibrium
s
(4-x)(4-y)=6
3
XO=2.J359
:ltJ =2.15\0
A x :lt2 = 2.1429
The Edgeworth Box
Figure 13
(d) The Edgeworth box of this economy is shown in Figure 13. In the
Edgeworth box the two preferences with respect to the zy-system are represented
by the utility functions Ul(X,y) = (1 + y)e~ and U2(Z,y) =
(4 - z)(4 - y).
The points on the contract curve must satisfy the condition V Ul AV U2 or =
~a~
= A~
a~
and ~a1/ =A~
a1/ . Substituting , we see that
(y + l)e~ = -A(4 - y) and e~ = -A(4 - x),

and by eliminating A we get y + 1 = ~. Solving for y yields
which is the equation of the contract curve.

(e) We shall invoke here the following simple property of the two-consumer
exchange economies.
• In a two-consumer exchange economy, the core and the set of all individ-
ually rational weakly Pareto optimal allocations coincide.
We already know that every core allocation is individually rational and
weakly Pareto optimal; see [3, Theorem 1.5.5, p. 42]. On the other hand, if
(Xl, X2) is an individually rational weakly Pareto optimal allocation, then it
must be a core allocation. The weak Pareto optimality says that the grand coali-
tion cannot block the allocation, and the individual rationality guarantees that
no individual consumer can block (Xl> X2).
In our case here, the above observation tells us that the core is the part of
the contract curve between the two indifference curves
(y+ 1)e~ = 2e 2 and (x - 4)(y - 4) = 6.
So, we need to solve two "simple" systems. The system of equations (y + 1)e~ =
2e 2 and y= 5:~ yields the equation 5e~ =
2e 2(5-x). Approximating its solution
Xo yields Xo ~ 2.1359. The system (x - 4)(y - 4) = 6 and y = 5:~ gives the
=
quadratic equation 5x 2 - 34x + 50 0 whose solution Xl in the interval [0,4] is
given by Xl =17-5,,(39 ~ 2.1510. Hence, an approximate description of the core
18
{(x, 5:~): 2.1359 Rl Xo ~ X ~ Xl Rl 2.1510}.
It is interesting to note that by (c), the Walrasian equilibrium of the econ-
omy corresponds to the point (1;,~) on the contract curve. For comparison
purposes note that 1; ~ 2.1429. The reader can find more information about
these numbers in Figure 13.
(f) Note that the contract curve specifies all allocations of the form
((x'5:~),(4-x,2~=!~)), 0~x~4.
As mentioned above, the two preferences in the Edgeworth box are represented
with respect to xy-system via the utility functions Ul(X, y) =
(y + 1)e~ and
U2(X, y) = (4 - x)(4 - y). At any point of the contract curve they satisfy 'VUl =
A'VU2' Since Ul is strictly quasi-concave and U2 is strictly quasi-convex, it follows
that the price vector
P='VUl = (y+l)e~,e~) =e~(y+l,l)= 5:~(5,5-x)
supports the allocation ((x, 5:~)' (4-x, 2~=!~)). Consequently, the price vector
(5,5 - x) also supports this allocation. •
Problem 1.6.7. Consider an exchange economy with m consumers each of

whom has a continuous, convex and strictly monotone preference. If {k n } is a
strictly increasing sequence of natural numbers, then show that an allocation is a
Walrasian equilibrium if and only if it belongs to the core of every k n -fold replica
economy.
Solution: Let E be an exchange economy with continuous, convex and strictly
monotone preferences. Also, let (Xl,." ,xm) be an allocation of E and fix a
strictly increasing sequence {k n } of natural numbers. If (Xl, .. " Xm) is a Wal-
rasian equilibrium, then it belongs to the core of every replica economy of E;
see the proof of the next problem. For the converse, assume that (Xl, ... , xm)
belongs to the core of every kn-fold replica economy of E. We must to show that
(Xl, ... , xm) is a Walrasian equilibrium.
For each i define the sets
Fi={xEIR~: x>-ixd and Gi=Fi-Wi.
The strict monotonicity of preferences implies that each Fi is non-empty. Each

Fi is also convex-if Y ti Z ?-i Xi and 0 < a < 1, then ay + (1 - a)z ti z ?-i Xi.
Therefore, each Gj is non-empty and convex. Now denote by G the convex hull
of U~l Gi , i.e.,
m m
G = co(U Gi) = {LAiYi: Yi E Gi, Ai ~0 for each i and
i=l i=l
We claim that 0 does not belong to the convex set G.
To see this, assume by way of contradiction that 0 E G. Then, there exist
Yi E G and Ai ~ 0 (i = 1, ... ,m) such that
m
and LAiYi = O. (1)
i=l
Put S = {i: Ai > O} and note that S::j:. 0. Next, for each i pick some Vi E IR~
such that Vi ?-i Xi and Yi = Vi - Wi. From (1), we get E~l AiVi = E~l AiWi
or
LAiVi = LAiWi. (2)
iES iES
Now if n is a positive integer, denote by ni the smallest integer greater than or
equal to knAi, that is, 0 ~ ni - knAi < I-and, of course, i E S implies ni ~ k n .
Since for each i E S we have limn_co k~:; = 1 and Vi >-i Xi, there exists (by the
continuity of preferences) some n large enough satisfying
z·, -- w... v · ?-. X·
ni I , , for each i E S. (3)
Taking into account (2), we see that
L niZi = L knAiVi = L knAiWi $ L niwi .

iES iES iES iES
The preceding inequality-in view of (3) and the monotonicity of the prefer-
ences--easily implies that the allocation (Xl, .. ' ,Xm) can be improved upon in
the kn-fold replica of the economy £, which is a contradiction. Hence, 0 ri. G.
Now by the Separation Theorem for finite dimensional vector spaces (see, for
example Exercise 6 of Section 2.3), there exists some non-zero price P E IR~ such
that p. g ~ 0 holds for all g E G. In particular, if X >-i Xi, then X-Wi E Gi ~ G,
and so p. X ~ p. Wi holds. Now a glance at statement (3) of [3, Theorem 1.6.5,
p. 55] reveals that indeed (Xl, ... , xm) is a Walrasian equilibrium, and the proof
is complete .•
Problem 1.6.8. Verify that every Walrasian equilibrium is an Edgeworth equi-

librium, i.e., that it belongs to the core of every replica economy.
Solution: Recall that an Edgeworth equilibrium is an allocation that belongs
to the core of every replica economy of the original economy.
Now let (Xl,'" ,Xm) be a Walrasian equilibrium. This means that there
exists some price p i= 0 such that P'Xi $ P'Wi for each i and
X h Xi implies p·x > P'Wi .
Next, consider (Xl, ... ,Xm) as an allocation in some r-fold replica economy.
If (Xl, ... ,xm) is not in the core of the r-fold replica economy, then there exist
a coalition S and an allocation (Yl1,'''' Ylr, Y2l, ... , Y2r, ... , Yml, ... ,Ymr) of
the r-fold replica economy such that:
a. Yij >-ij Xij = Xi for each (i,j) E S, and
b. E(i,j)ES Yij = E(i,j)ES Wij .
From (a) and (*), we see that P'Yij > P'Wij for each (i,j) E S. Therefore,
p.( L: Yij) = L: P'Yij> L: P'Wij = p.( L: Wi;)'

(i,j)ES (i,i)ES (i,j)ES (i,j)ES
which contradicts (b). Hence, (Xl, ... ,xm) is in the core of every r-fold replica
economy, i.e., it is an Edgeworth equilibrium.•
Problem 1.6.9. Consider an exchange economy with m consumers all having

the same initial endowment wand the same strictly convex preference t.
a. Show that (w, ... ,w) is the only individually rational allocation (and also
the only core allocation) of the economy.
b. If, in addition, ~ is neoclassical, then show that (w, ... ,w) is the only
Walrasian equilibrium of the economy.
Solution: For the solution to this problem, we need the following simple prop-
erty of strictly convex preferences:
• Let ~ be a strictly convex preference on a convex set C. If x, xl' X2, ... , Xi:
in C satisfy Xi ~ X for each i and Xi >- X for some i, then 2.:i=l a:iXi >- X
for every proper convex combination of Xl,.·., Xi:.
The proof is by induction. To see this recall first that a preference ~ on a
convex set is said to be strictly convex if y ~ X, Z ~ X and y i= z imply
ay + (1 - a)z >- x. So, let ~ be a strictly convex preference on a convex set
C. For k = 1 the claim is obvious. For k = 2 assume Xl >- X, X2 ~ X and let
0< a: < 1. If Xl =X2, then aX1 + (1- a)x2 = Xl >- X, and in case Xl i= X2 the
strict convexity of ~ implies aX1 + (1- a )X2 >- x. For the induction step assume
=
our claim to be true for some k and assume that Xi ~ X for all i 1, ... , k, k + 1,
Xl >- X and let ai > 0 (i = = =
1, ... , k + 1) satisfy 2.:7~11 ai 1. Put A 2.:7=1 ai
=
and note that 1 - A ak+1. If Pi = = =
T (i 1, ... , k), then 2.:7=1 Pi 1 and
our induction hypothesis yields y =2.:7=1 PiXi >- x. But then, from the case
= =
k 2, we obtain 2.:7~11 aiXi >.y + (1 - >')Xk+1 >- x, and the proof of our claim
is complete.
Now let (Xl, ... , xm) be an individually rational allocation in an exchange
economy where each consumer has the same initial endowment w and the same
strictly convex preference ~. Since (Xl> ... , xm) is an allocation, 2.:~1 Xi mw =
or E~l ~Xi = w. Next, notice that the individual rationality of (Xl, ... ,Xm )
implies Xi ~ w for each i. Now assume by way of contradiction that Xj i= w
holds for some j. Then the strict convexity of ~ implies ~Xj + ~w >-j w. Since
~Xi + ~w b w is true for all i, the above property yields
=
which is impossible. Hence, Xi w for each i, proving that (w,w, ... ,w) is the
only individually rational allocation in the economy.
For the parenthetical part, notice first that since every core allocation is
individually rational, the allocation (w,w, ... ,w) is the only possible candidate
for a core allocation. To see that (w, w, ... ,w) is indeed a core allocation, assume
by way of contradiction that there exist a coalition S consisting of k consumers
and an allocation (Y1, ... , Ym) with Yi >- w for each i E S and LiES Yi =
kw.
But then, by the property stated at the beginning of the proof, we see that
w = LiEs tYi >- w, which is impossible. Hence, (w,w, ... ,w) is also the only
core allocation of the economy.
(b) By the classical Arrow-Debreu Theorem (see [3, Theorem 1.6.6, p. 56])
the economy has a Walrasian equilibrium. But every Walrasian equilibrium is
individually rational. Hence, by the preceding part, (w,w, ... ,w) is the only
Walrasian equilibrium of the economy. _
Problem 1.6.10. If an allocation is a Pareto (resp. weakly Pareto) optimal in

an exchange economy with strictly convex preferences, then show that it is also
Pareto (resp. weakly Pareto) optimal in every replica economy.
Solution: Let (Xl,"" xm) be an allocation in an exchange economy £ with

strictly convex preferences. We shall prove only the "Pareto optimality" case
and leave the identical arguments for the "weak Pareto optimality" case for the
reader.
So, assume that (Xl, ... ,xm ) is Pareto optimal. To see that (Xl, ... ,Xm ) is
also Pareto optimal in every replica economy of £, assume by way of contradiction
that there exists an allocation
in some r-fold replica economy of £ satisfying
Yij ~ij Xij = Xi for all (i,j) and Yij >-ij Xij = Xi for some (i,j).
Let Zi = Ej=l ~Yij, i = 1,2, ... , m. From E~l Ej=l Yij = rw, it follows
that E~lZi = w, i.e., (Zl, ... ,Zm) is an allocation of £. Since ~ij=b for
each i and j, we see from Yij ~ij Xi and the convexity of each preference that
Zi b Xi for each i. Since Yij >-i Xi holds true for some (i,j), it follows from
the strict convexity of the preferences that Zi >-i Xi is also true for some i.
(See the beginning of the proof of Problem 1.6.9). However, this contradicts
the fact that the allocation (Xl, ... , xm) is Pareto optimal. Hence, in this case,
a Pareto optimal allocation must also be a Pareto optimal allocation in every
replica economy. _
1.7 Production economies
Problem 1.7.1. Consider the set
where a ~ °
is a fixed real number.
a. Show that Y is a production set and sketch it in the xy-plane.
b. Find the equation of the efficiency frontier and show that Y is strictly
convex.
c. Find the supply function for the production set Y.
Solution: (a) We shall show first that Y is closed. So, let a sequence {(xn, Yn)}
of Y satisfy (xn, Yn) -+ (x, Y), i.e., Xn -+ x and Yn -+ y. From Xn $ a and
Yn ~ 1 - eX .. for .each n, by taking limits, it easily follows that x $ a and
Y ~ 1- eX. That is, (x, y) E Y and so Y is a closed subset of R2.
Since f" (x) °

To establish that Y is convex, we consider the real function f(x) = 1 - eX.
= _ex < for each x, we see that f is a strictly concave function
on (-00, a] (and in fact on R). Now a glance at Problem 1.1.12 guarantees that
Y is a convex set.
°
means we have $ y $ 1 - eX $ ° °
To see that R! n Y = {O}, let (x,y) E Y satisfy x ~ and y ~ 0. This
and so y = 1 - eX = 0, from which it
follows that (x,y) = (0,0). On the other hand, since a ~ 0, it is easy to see that
(0,1- eO) = (0,0) E Y.
Finally, to complete the proof that Y is a production set, notice that (x, y) $
(a, 1) holds for each (x, y) E Y. A sketch of the set Y can be seen in Figure 14.
(b) We claim that
Eff(Y) = {(x,Y)ER2 : x$a and y=1-e X}. (**)

To see this, let first (x, y) E Eff(Y). This means that (x, y) E Y and whenever
=
another vector (Xl,yt) E Y satisfies Xl ~ x and Yl ~ y, then Xl x and Yl y. =
If y < 1 - eX, then the vector (x, Y±12- e"') E Y satisfies x ~ x and Y±12- e'" > y
=
contrary to (x,y) E Eff(Y). Hence, (x,y) E Eff(Y) implies x $ a and y 1-ex •
Now consider a vector of the form (x, 1- eX) for some x $ a and let a vector
(x·, y.) E Y satisfy x* ~ x and y* ~ 1 - eX. Since (x*, y*) E Y, we have
y* $ 1 - eX· and thus 1 - eX $ 1 - eX·. Therefore, eX· $ eX and so x* $ x $ x* .
This shows x* = x, which in turn implies y* ~ 1 - eX = 1 - eX· ~ y. or
y. = 1 - eX. In other words, we have shown that (x,1 - eX) E Eff(Y) and the
validity of (**) has been established.
Figure 14
To see that Eff(Y) does not contain any line segments, let (x, V), (Xl. yI) in
Eff(Y) (i.e., y =
I - e"' and Y1 =
I - e",l) satisfy z 1= Zl. Also, fix 0 < a < I
= =
and put /3 1 - a. From the strict convexity of f (z) 1 - eo;, we see that
ay + /3Y1 =a(I - eO;) + /3(1 - eo;l) < I - eQ",+Po;l ,

which shows that a(x, y)+.8(Xl, yt} = (ax+.8x l, ay+.8vt) ft Eff(Y). Therefore,
the production set is strictly convex.
( c) To simplify the algebra, for each price vector p = (PI. P2) ~ 0 we shall
introduce the parameter t = ;; > O. Finding the profit maximizer is a simple
Calculus problem here. Since the profit maximizer is in the efficient frontier, and
the efficient frontier is described by (**), we must solve, for each p =
(Pl,P2) ~ 0,
the following maximization problem:
Maximize p(x) = P1Z + P2(1- eO;) subject to x ~ a.
Clearly, p'(X) = P1-P2eo; and p"(z) = -P2e"' < 0 for all z E JR. This means that
p has an absolute maximum over JR that takes place at z = In(~) = Int. So, if
In t ::; a (or t ::; ea ), the unique profit maximizer is the vector (In t, 1 - t), and if
t > ea it is (a, 1- ea ). In other words, the demand function y: Int(IR!) -+ 1R2 is
given by
( ) _ { (In t, I - t), if t <
- e a ,.
Y P - (a, 1- ea ), if t > ea ,
where t = fl.
p~
.•
Problem 1.7.2. Consider the neoclassical private ownership production econ-

omy with commodity space m? having two consumers and two producers with the
following characteristics.
Consumer 1: Initial endowment WI = (1,3) and utility function = :z:y.
U1(:Z:, y)
Consumer 2: Initial endowment W2 = (2,3) and utility function U2(:Z:, y) = :z:y2.
Producer 1: Production set Y1 = {(:z:,y) E JR2: :z: < 1 and y::; X:'l}'
Producer 2: Production set Y2 = {(:z:,y) E JR2 : :z: <1 and y::; g(:z:)}, where
1- eX if x ::; 0 ;
{
g(:z:) = In(1-'x), ifO<x<1.
Shares: 011 =~, 012 =~, 021 = ~ and 022 = ~.
a. Find the supply functions of the producers.
b. Find the demand functions of the consumers.
c. Find the excess demand function.
d. Find the equilibrium prices for the production economy.
Solution: To simplify the algebra, for each price p = (P1,P2) ~ 0 we shall

introduce the parameter t = VPI
iii. The production sets are shown in Figure 15.
(a) We shall compute first the supply function of Producer 1. Arguing as in
the preceding, we can convince ourselves that Y1 is a strictly convex production
set whose efficiency frontier is precisely the set
Eff(Yt} = {(x, x:'l): :z: < 1} .

So, in terms of the variable x, the profit function of Producer 1 is given by
Cleariy, p~(x) = PI (1- (X:~l)2) and p~(x) = (;':::)3 < 0 for each:z: < 1. Moreover
P~ (x) = 0 implies x = 1 - t. So, PI attains an absolute maximum at x = 1 - t.
This yields y = x:'1 = 1 - t. In other words, the supply function of Producer 1
is given by
Y1 (p) = (1 - t, 1 - t) .
y y
i
····__······i·_··_·_··· -_··--··_·1···········-·
I I
1 x
Figure 15
We now proceed to compute the supply function of Producer 2. Again, it is

easy to verify that Y2 is a strictly convex production set. Its efficiency frontier
is given by
This implies that the profit function P2 in terms of :t is given by
if:t~O;
ifO<:t<l
ifz~O;
ifO<z<1.
Differentiating, we see that
if:t~O;
ifO<:t<l
and
if:t~O;
ifO<z<1.
Clearly, P~ (x) < 0 for each x < 1. Regarding the derivative P~ note that
1 - t 2 eX =0 and :t ~ 0 -<==> :t = -21n t and t ~ 1
and
1 - l~X =0 and 0 < x < 1 -<==> :t =1 - t 2 and 0 < t < 1 .

So, p~(x) = 0 implies x = -21nt ift ~ 1 and x = I-t 2 if 0 < t < 1. In

both cases P2 attains an absolute maximum at these points. Moreover, when
b
x = -21n t we have y = 1- and when x = I-t 2 we have y = 21n t. Therefore,
the supply function of Producer 2 is given by
( ) _{(-21nt,l-b), if t ~ 1 j
Y2 P - (1-t 2,21nt), if 0 < t < 1.
(b) Both utility functions are of Cobb-Douglas type. Arguing as in the

solution of Problem 1.3.4, we see that the desired demand functions are given by
( ) _ ~(l l) _ ~(1 l)
Xl P - 2 Pi ' Pl - 2Pi 'P
and
X2 ()
P = ~(l
3 p;, Pl2) = ~(1
3Pi
2)
'P ,
where Wi(p) denotes the income of consumer i at prices p. Next, we shall
compute these incomes. Note that
P·WI + OUp·YI(P) + Ol2p·Y2(P)

Pl+ 3P2 + ![PI (1 - t) + P2(1 - t)] + !p·Y2(p)
~ [3 + 9t 2 + 1- t + t 2 - t + (2, 2t2)·Y2(P)]
£1. { 12t2 - 2t - 41n t + 2, if t ~ 1 ,
3 8t 2 - 2t + 4t 2 1n t + 6, if 0 < t < 1.
Substituting this into (*) yields
_
( 6tl-t-21nttl
3'
6tl-t-21nttl)
3f) , ift~l,
{
Xl(P) - l l
(4t - tt2t lntt3 4tl-tt2tllntt3)
3 ' 3t~ , ifO<t<1.
For the income of the second consumer observe that
W2(P) = P·W2 + 02IP·Y2(P) + 022p·Y2(P)

2Pl + 3P2 + ![PI(l - t) + P2(1 - t)] + !p·Y2(p)
'it [6 + 9t 2 + 2 -
2t + 2t2 - 2t + (1, t 2)·Y2(P)]
£1.{12t 2 -4t-21nt+7, ift~l,
3 IOt 2 - 4t + 2t 2 1n t + 9, if 0 < t < 1.
Substituting this into (**), we get
( 12tl-4t-21ntt7 2(12tl-4t-21nt±7») ift~l,

X - { 9' 9t' ,
2(P) - (IOtl-4t±2tllnt±9 2(IOtl-4t±2tllntt9»)
9 ' 9t' , ifO<t<1.
(c) Using part (a) and (b) and performing the tedious algebra, we see that
if t ~ 1;
ifO<t<l.
(d) The equilibrium prices are the solutions of the equation (p) O. To =
find the solutions of this equation, we consider the two functions /: (0, 00) -+ R
and g: (0, 1) -+ R defined by
/(t) = 30t 2 + 2t + lOlnt - 26 and g(t) = 31t 2 + 2t + 8t 2 lnt - 27.
The function / satisfies /,(t) = 60t + 2 + ltD> 0 for each t > O. This means
that / is strictly increasing in the interval (0,00). In view of /(1) 6, we see =
that /(t) > 0 for each t ~ 1. This means that (p) # 0 when t ~ 1.
The function 9 satisfies g'(t) =70t + 16t In t + 2, g"(t) =
86 + 16ln t, and
glll(t) = lt6 > 0 for each 0 < t < 1. Since g"(t) =
0 if and only if t e-¥, =
we see that g' attains an absolute minimum over the interval (0,1) at t = e-¥.
From g'(e-¥) =2 - 16e-¥ > 2 - 16.2- 4 =
1 > 0, we see that g'(t) > 0 for
each 0 < t < 1. In turn, the latter implies that 9 is strictly increasing in the
interval (0,1) and so 9 can have at most one zero in (0,1). Taking into account
that limt!o g(t) =-27 and g(l) =
6, we see that the equation g(t) 0 has =
exactly one solution in (0,1). This solution is approximately equal to 0.91208,
i.e., t = Iii RJ 0.91208. (Maple gives the more accurate approximation value of
VPl
=
t 0.912075454!) Therefore, P2 RJ (0.91208)2 Pl RJ 0.8319Pl·
Substituting this value of t into the demand and supply functions, we get
Xl = (1.754110230,2.108605550), X2 = (1.501932682,3.610928815)
and
Yl = (0.0879245460, -0.0964005180), Y2 = (0.1681183662, -0.1840651154) .
The prices p RJ PI (1,0.8319), PI > 0, are approximate equilibrium prices for this
production economy. _
Problem 1.7.3. Is the efficiency frontier of an arbitrary production set closed?

Solution: No. The following elegant example is due to Mike Maxwell.
Consider the two convex subsets C l and C2 of IRa defined by
Put
Y=CO(Cl UC2)={O'X: xECl and 0$0'$1}.
Clearly Y is closed (in fact, compact), convex, bounded from above by 0, and
satisfies Y n IRt = {(O, 0, O)}. Thus, Y is a production set; see Figure 16. Next,
fix 0 < t < t and let x = (cost -1,sint,-I) E Cl. We claim that x E Eff(Y).
(0,0,0)
The production set Y
z
~ ~::;':;"'<---,,4-.-I-..L1/1
( -2,0,-1) x
Figure 16
To see this, assume z E Y and z ~ x. We must show that z = x. By the

definition of Y, we can write
z = O'(xo, Yo, zo) = (O'xo, O'Yo, O'zo) ,

where (xo + 1)2 + Y5 $ 1, Zo = -1 and 0 $ 0' $ 1. Now z ~ x implies
O'xo + 1 ~ cost> 0, O'Yo ~ sint >0 and O'Zo = -0' ~ -1. (*)
In particular,
Next, we claim that 0' = 1. If not, then 0 $ 0' < 1. Note that by (*) we have
o< 0' < 1 and Yo > 0 and so
(O'xo + I? + 0'2Y5 0'2x5 + 20':1:0 + 1 + 0'2Y5
< O':I:~ + 20':1:0 + 1 + O'Y5
O'[x~ + 2xo + 1 + y~]
O'[(xo + 1)2 + y~] $ 1,
contrary to (**). Thus, 0' = 1 and so (*) reduces to
Xo + 1 ~ cos t > 0, Yo ~ sin t > 0 and Zo ~ -1 .

But since (xo + 1)2 + Y5 ~ 1 and Zo = -1 by definition, this forces
Xo = cos t - 1, Yo = sin t and Zo = -1 .

=
°
Thus, Z x, as desired.
So by the claim, Xt =
(cost - l,sint,-I) E Eff(Y) for each < t < j.
Now limt--+o+xt =
(0,0,-1) but (0,0,-1) ft Eff(Y) since (0,0,0) E Yand
(0,0,0) > (0,0,-1) .•
Problem 1. 7.4. This exercise presents another proof of the Arrow-Debreu The-
orem for production economies in a more general context. Consider a private
ownership production economy with m consumers and Ie producers such that:
1. The total endowment is strictly positive, i.e., w ;» 0.
2. Each consumer has a continuous and convex preference which is either
strictly monotone or else is strictly monotone in the interior of R~ and
anything in the interior is preferred to everything on the boundary.
3. Each producer is characterized by a production set.
For each P ~ ° we put
Yj (p) = {z E Y;: p. Y ~ P . z for all Y E Y; }
and
Xi(p) = {z E Bi(p): Z ~i x for all x E B;(p)} ,
where as usual
I:
Bi(P) = {XE1Rt: p.x~p.wi+LOijP'Zj and ZjEYj(P)},
j=l
and then define the excess demand correspondence (: Int(1R~) _1Rl by
m I:
«p) = LXi(P) - L:Yj(p) - w.
;=1 j=l
a. Show that for each P ;» 0 the sets Yj (p) and Xi(p) are all non-empty,
convex and compact.
b. Show that the excess demand correspondence has non-empty, convex, and
compact values.
c. Show that for each Z E (p) we have p. Z = O.

d. If {Pn} ~ Int(1R~) satisfies Pn - P E 81R~ \ {O} and Zn E (Pn) holds
for each n, then show that liII1n_oo IIzn lit = 00.
e. Show that if Pn - P holds in Int(1R~) and Zn E (Pn) for each n, then

there exists a subsequence {yn} of the sequence {zn} and some Y E (p)
such that Yn - y.
f. For each 0 < c < 1 there exists a closed ball BE such that (p) ~ BE holds
for each P ~ 0 satisfying c ~ Pi ~ 1 for all i.
g. For each 0 < c ~ t,let SE =

{p E S: Pi ? c for all i}. Show that there
exists some P E SE such that Z E (p) implies .
q .Z ~ 0 for all q E S, .
h. Show that ( has an equilibrium price, i.e., show that there exists some
P ~ 0 such that 0 E (p).
Solution: Fix some a E 1R~ such that Y ~ a holds for each Y E UJ=1 Y;.
(a) Let 0 ~ P = =
(PI, ... ,Pt) E JR.l and put 6 min{pl. ... ,Pl} > O. First,
we shall show that each Yj (p) is a non-empty, convex and compact subset of Y; .
Clearly, each Yj(p) is a closed and convex subset of Y; (and hence of 1R~).
Now let Mj(p) = {y E Y;: p. Y ? O}. Obviously, Yj(p) ~ Mj(p), We
claim that Mj(p) (besides being bounded from above by a) is also bounded
from below. To see this, let Y E Mj(p), Put I = =
{i: Yi ? O}, J {j: Yj < O}
and note that p. Y ? 0 implies EjEJ PjYj ? - EiEl PiYi· So, if r E J, then
m
oYr ? PrYr ? LPiYi ? - LPiYi ? - LPiai = -p. a,

jEJ tEl .=1
and so Yr ? -pt. for each r. This shows that Mj(p) (and hence Yj(p» is
bounded. In particular, both Mj(p) and Yj(p) are compact convex sets. Since
the function Z 1-+ p' Z is continuous, it attains a maximum value over Mj(p),
say at Zo E Mj(p), But then p. z ~ P'zo for each z E Yj. This shows that
Zo E Yi(P) and thus Yj(p) is also non-empty.
Now for each x E B.(p) let P x =
{y E Bi(p): Y b x}. Then each P x is a
non-empty, convex and closed subset of Bi(p). Also, an easy argument shows that
the family of closed sets {Px : x E B. (p)} has the finite intersection property.
Since Bi(p) is compact, it follows that the set Xi(p) =
n{p x : x E Bi(P)} is a
non-empty, convex and compact set.
(b) This follows immediately from the fact that a sum of convex and compact
sets is likewise a convex and compact set. For a proof of this claim see the
statement at the beginning of the proof of Problem 1.4.5. In addition, since every
preference is strictly monotone in the interior of R~, it should be immediate that
=
every x E Xi(p) satisfies p. x P'Wi + E7=1 (JijP'Zj, where the Zj E Yj(p) are
arbitrary. (Of course, ify,z E Yj(p), then p. Y == p. z.)
(c) Let Z E (p). This means that there exist Xi E Xi(p) (i == 1, ... , m) and
Yj E Yj(p) (j = 1, ... , Ie) satisfying Z = E~l Xi + E7=1 Yj - w. From part (b),
we know that P'Xi == P'Wi + E7=1 (JijP·Yj. So,
m k m k
P .z == L: P'Xi - L: P'Yj - p·w == L: [P'Xi - L: (JijP'Yj - P'Wi] = O.
i=l j=1 i=1 j=1
(d) Assume that {Pn} £ Int(R~) satisfies Pn -+ P E aIR~ \ {OJ and let
Zn E (Pn) for each n. If IIznlh f+ 00, then (by passing to a subsequence
if necessary), we can suppose that {zn} is a bounded sequence. Write Zn =
~m xn
L..Ji=1 i - ~k j - W, WI'th Xn
L..Jj=1 Yn Pn) ~lor,. -- 1, ... , man d Yjn E Yj (
i E Xi ( Pn) ~lor
each j = 1, ... , k.
Since the sequences {x~} (i = 1, ... , m) and {y~} (j = 1, ... , Ie) are all
bounded from below, it follows that all these sequences must also be bounded
from above. Therefore, by passing to a subsequence again and relabelling, we
can assume without loss of generality that
for all i = 1, ... ,m and each j = 1, ... , k. From Pn .x~ == Pn 'Wi + E7=1 (JijPn'Y~
and the joint continuity of the dot product, we obtain
k
P 'Xi = P 'Wi + LOijP 'Yj
;=1
for each i == 1,2, ... , m. Since P > 0 and W == E~1 Wi ~ 0, there exists some
i such that p. wi > O. Now put Wi == p. Wi + E7=1 (JijP . Yj and note that
Wi ~ P . Wi > O. (For this we have to observe that Pn .y~ ~ 0 implies P . Yj ~ 0.)
Next, consider the set
We claim that b does not have any maximal elements in B. To see this, notice
first that since Wi > 0 holds, it follows that B contains strictly positive vectors.
So, if b has a maximal element in B, say s = (Sl,"" St), then s must be strictly
positive. From PEaRt \ {OJ, we know that Pr = 0 for some r. But then the
vector t = (Sl, ... ,Sr-1,Sr + 1,Sr+1, ... ,Sl) E B is in the interior of Rt and
satisfies t > s. Since b is strictly monotone in the interior of Rt, it follows that
t h s, proving that s cannot be a maximal element for b in B. This establishes
that b has no maximal elements in B.
Clearly, Xi E B. To obtain a contradiction, we shall establish that the
element Xi is a maximal element for ~i in B. To this end, let Z E B, i.e.,
p. Z ~ Wi. From Wi > 0, we see that p·(>.z) < Wi holds for all 0 < >. < 1. Now
fix>' E (0,1). By the continuity ofthe dot product, we see that there exists some
no satisfying
Ie
Pn'(>'z) < Pn'Wi + LeijPn'Y~
j=l
for all n ~ no. Consequently, >.z E Bi(Pn) holds for all n ~ no, and so x~ b >.z
for each n ~ no. From the continuity of ~i, it follows that Xi b >.z for all
o < >. < 1. Letting>. i 1 and using the continuity of b once more, we see that
Xi b z for all z E B. That is, Xi is a maximal element in B, which contradicts
our previous result. Hence, IIzn Ih -+ 00.
(e) Assume Pn -+ P holds in Int(Rt) and Zn E (Pn) for each n. Write
Zn = E~l x~ - E:=l y~ - W for each n. It suffices to show that the sequences
{x~} and {y~} are all bounded.
We shall show first that the sequences {y~} are bounded. To see this, start
by choosing two real numbers c > 0 and 6 > 0 satisfying ce ~ Pn ~ 6e for all n,
where e = (1,1, ... ,1). (Keep in mind that e· X = IIxlh for each X E Rt.) Now
fix some j and consider the sequence {y~} and write y~ = (y~, ... , 1/n). Also,
put In = {s: y! ~ O} and I n = {t: y~ < OJ. Then for each r E J, we have
m
cy~ ~ P~Y~ ~ L ~~ ~ - L P~Y~ ~ - LP~ai = -Pn·a ~ -6I1alh·

iEJ" iEI.. i=1
Hence, y~ ~ -~lIalh for all rand n. This easily implies that each sequence {YO
is bounded. . Ie .
Next, notice that from Pn ·x~ = Pn . Wi + E i =l eijPn .y~, we see that
Ie
IIx~lh = e.x~~~Pn.x~=~(pn·wi+EeiiPn'Y~)
j=l
Ie
< He.w+ Eeije.a) = ~lIw+kalh,
i=l
from which it easily follows that each sequence {x~} is also bounded.
(f) Assume that our claim is false. This means that there exists some c > 0
=
such that for each n there exist a price Pn with ce ~ Pn ~ e (1,1, ... ,1) and
Zn E «Pn) satisfying IIznlh ~ n. By passing to a subsequence, we can suppose
that Pn -+ P ~ O. But then, by part (e), there exists a subsequence {yn} of
{zn} satisfying Yn -+ Y E «p). Consequently, IIYnl1t -+ lIyllt = 00, which is
impossible, and our assertion follows.
(g) The proof mimics the proof of part (f) of Problem 1.4.5. As usual, let
= = = t
S {p ~ 0: IIplh P1 + ... + Pl I}. Fix 0 < € ~ and then use part (f) to
select a closed ball Be containing «p) whenever P ESe. Clearly, the set Se is a
non-empty, convex and compact subset of S.
Next, we claim that for each Z E Rl the set
tPe(z) = {p ESe: p. Z =qe
max q. z}
5•
is non-empty, convex and compact. Since Se is compact, closedness and non-

emptiness follow from the continuity of the dot product. Convexity of tPe(z) is
obvious.
Now define the correspondence 'Pe: Se x Be -+ 2 5 • xB. by
'Pe(P,Z) = 1/Je(Z) X «p).
We claim that the correspondence 'Pe has closed graph. To see this, assume
that an arbitrary sequence {(Pn, zn), (qn, Yn»)} ~ G<pe satisfies Pn -+ P E Se,
Zn -+ Z E Be, qn -+ q and Yn -+ y. From qn E 1/Je(zn), we see that qn ·Zn ~ S·Zn
for each 8 E Se, and so by taking limits q . Z ~ S • z for each sESe. This implies
q E 1/Je(Z). Now from Yn E «Pn), Pn -+ P ~ 0, Yn -+ Y and part (e), we infer
that Y E «p). Therefore, (p,z),(q,y» E G<p., and so G<p. is a closed set.
Now it should be clear that the correspondence !.pc satisfies the hypotheses
of Kakutani's Fixed Point Theorem [3, Theorem 1.4.7]. So, 'Pc has a fixed point,
say (p,z) E !.pe(P,z). This means Z E «p) and P E 1/Je(z). But then by part (c)
=
P . Z 0 and so q . Z ~ 0 for all q E Se.
(h) Again, the proof of this part mimics the proof of part (g) of Problem 1.4.5.
For each n there exist, by part (g), a price Pn E S and some vector Zn E «Pn)
satisfying
By passing to a subsequence (and relabelling), we can assume without loss of

=
generality that Pn -+ pEa {s E 1R~: 81 + 82 + ... + 8l I}. =
Next, we claim that {zn} is bounded. To see this, write
m I:
Zn = L x~ - LY~ - W = Xn - Yn - W,
i=1 j=1
",m' ",k'
where Xn = wi=l x~ and Yn = wj=l y~. It suffices to show that both sequences
{xn} and {yn} are bounded. We know that there exists some b E lR~ satisfying
Yn :$ b for each n. Since (t, j, ... , .l) = t e E Snh' it follows from (*) that
t1i Xnlll = t e . Xn :$ t e . Yn + te. W :$ He· b + e· w) = t1i b + wlh . (**)

So, IIxnlh :$ lib + will for each n, i.e., {xn} is a bounded sequence. For the
=
sequence {yn} write Yn (y~, ... , lin) and note that (**) implies
-lIwlh :$ y~ + y~ + ... + y~
for each n. Since each sequence of real numbers {1/n} is bounded from above,
the above inequality guarantees that each sequence {1/n} is also bounded from
below. This implies that {yn} is also a bounded sequence. So, {zn} is likewise
a bounded sequence.
Now by passing to a subsequence again, we can assume that Zn -+ z. The
latter, in connection with part (d), implies that p ~ O. From part (e), we obtain
that z E «(p).
In addition, condition (*) shows that q . z :$ 0 for all q E S. Since S is dense
in d, it follows that q . z :$ 0 for all qEd. Therefore Z :$ 0, and in view of
p. z = 0, we infer that Z = O. That is, 0 = Z E «(p), and the proof is finished .•
Problem 1.7.5. Consider a neoclassical private ownership production economy

whose aggregate production set Y = Yl + ... + YA: is a cone. If {Yn} ~ y
satisfies Y;; -+ 0, then show that y;t -+ O.
Solution: Recall that a subset C of a vector space is said to be a cone if Z E C
implies az E C for all a ;::: O.
Now assume that the aggregate production set Y for a neoclassical private
ownership production economy is a cone. Since each Y; is bounded from above,
it follows that Y is likewise bounded from above. This implies that Y; ~ -lR~
for each j. Indeed, if some Y E Y has a positive component, then the condition
that ay be in Y for each a ;::: 0 guarantees that Y is not bounded from above,
a contradiction. Hence, Y ~ -lR~. But then Y E Y implies y+ =0, and the
assertion is trivially true. Perhaps, a more meaningful statement is the following.
• Assume that C ~ lRl is a cone and for some p ~ 0 the function x 1-+ p . x
attains a maximum over C. Then p. x :$ 0 for each x E C (i.e., the
maximum value is zero) and if {xn} ~ C satisfies x;; -+ 0, then x;t -+ O.
To see this, note first that if p . y > 0 for some y E C, then from the relation
np . y = p·ny,.. 00, we see that the function x 1-+ p' x does not attain its
=
maximum over C, a contradiction. So, p. x :$ 0 p . 0 for each x E C.
Now writing x =
x+ - x- and letting 0 = min{Pb ... ,pt} > 0, the above
inequality implies p·x+ $ p'x- and so
for each x E C. So, if a sequence {xn } of C satisfies x; --+ 0, then IIx;tlh --+ 0,
i.e., x;t --+ O.•
Problem 1.7.6. This exercise presents another proof-due to C. D. Aliprantis

and D. J. Brown [2J-of the Arrow-Debreu Theorem. Let
and 8={PEd: p~O},
and consider a function (: 8 --+ JRt such that:

1. ( is continuous;
2. p. «p) = 0 holds for each p E 8; and
3. if a net {Pet} of 8 satisfies Pet --+ p E d \ 8, then there exists a price
q E 8 with limsuPet q'«Pet) > O.
Establish the following.
a. Show that the excess demand function ( of a neoclassical private ownership
production economy satisfies the above three properties.
b. Define the revealed preference relation 1l on S by saying that
p1lq if p.« q) > o.
Show that the revealed preference relation satisfies the following proper-
ties.
1. 1l is irreflexive, i.e., p~p for each pES; and
11. 1l is convex, i.e., for each p E 8 the set {q E 8: q1lp} is a convex
set.
c. If C is the convex hull of a finite subset of 8, then show that there exists
a price p E C such that q-«p) $ 0 holds for each q E C.
d. Show that there exists a price p E 8 satisfying «p) =O.
Solution: (a) Let (0 = (10, ... ,(to) be the excess demand function for
a neoclassical private ownership production economy. The continuity of ( is
property 3 of [3, Theorem 1.7.14, p. 79] and condition (2) is simply Walras' Law
of the same theorem.
Now assume that a net {PO'} ~ S satisfies PO' -+ P E ~ \ S. First, we claim

that 1I«pO')lh"7 00. If this were not the case, then lim infO' 1I«pO')lIl < 00 and
so (by passing to a subnet if necessary), we can suppose that the net {11«pO')lId
is bounded. Since PO' -+ p, there exists a sequence {an} of indices such that
PO' .. -+ p. But then, from property 6 of [3, Theorem 1.7.14, p. 79], it follows
that 1I«pO' .. )lh -+ 00, contradicting that the net {1I«pO')lId is bounded. Hence,
1I«Pa)lh -+ 00.
Next, notice that property 2 of [3, Theorem 1.7.14, p. 79] guarantees that (
=
is bounded from below. Thus, te'«Pa) t 2::=1 (i(Pa) -+ 00, In other words,
if q= U, ... , = =
!) t e E S, then limsuPa q-(Pa) lima q'(Pa) 00 > 0. =
(b) We verify the stated properties.
1. Since p.«p) =0, we see that P llP for each pES. That is, 'R is an
irreflexive binary relation.
11.
°
Assume qb q2 and P in S satisfy q 1 'Rp and q 2'Rp, i.e., ql .(p) >
q2 . «p) > 0. If < >. < 1, then >'ql + (1- >.)q2 E S and clearly
° and
[>.ql + (1 - >')q2] . (p) = >.[ql . «p)] + (1- >.)[q2 . (p)] > 0,

from which it follows that [>.ql + (1- >')q2]'Rp. So, the set {q E S: q'Rp}
is convex for each pES.
(c) Let C be the convex hull of a finite subset of S. Clearly, C is a compact

subset of S. Now consider the correspondence F: C -+ 2 c defined by
F(q) = {p E C: q-(p) :5 o} .
Since the function p ....... (p) is continuous on S (and hence on C) and x ....... q. x
is also continuous, it follows that their composition function f: C -+ R, defined
by f(p) = q.«p), is also continuous. In view of F(q) =r1 (-00, 0]), we
see that each F( q) is a closed subset of C and hence a compact subset of R t ,

In addition, from q.(q) =
0, we see that q E F(q) and so each F(q) is also
non-empty.
Next, we claim that F is a KKM-correspondence. That is, we claim that if
ql, ... , qr E C, then CO{ql, ... , qr} ~ U~=l F(qi)'
=
To see this let ql,' .. ,qr E C. If p
°
2:~=1 >'iqi is a convex combination
and p ¢ U~=l F(qi), then p ¢ F(qi) for each i, i.e., qi .(p) > for each i. This
means that qi'RP for each i. But then, from part (ii), we get p'Rp, contradicting
(i). Hence, F is a KKM-correspondence. Now by K. Fan's [12] generalization
°
of the classical Knaster-Kuratowski-Mazurkiewicz Theorem [15], it follows that
nqec F(q) # 0. Ifp E nqec F(q), then q.«p) :5 holds for all q E C. (For a
discussion and more details about KKM-correspondences see [1, Section 14.8].)
(d) Let :F denote the collection of all finite subsets of S. For each a E :F
let CO' denote the convex hull of a. Clearly, CO' is a compact subset of Sand
Uae.:F CO' = S. By part (c) there exists for each a some price PO' E CO' satisfying
q'(Pa) :s 0 for all q E Ca·
Now consider the net {Po': a E :F} and note that by passing to a subnet, we
can assume that Po' -+ P holds in ~. If P E ~ \ S, then by our assumption (3),
there exists some q E S satisfying limsuPa q. (PO') > O. However, if q E CfJ,
then q E Co' for all a 2: /3 (which means here a 2 /3) and so q'(Pa) :s 0 for all
a 2: /3, which is a contradiction. So, pES.
Finally, to see that (p) = 0, fix q E S. In view of the continuity of the
function (, infer that q-(p) = lima q'(Pa) :s O. Since q E S is arbitrary and
S is dense in ~, we infer that q.(p) :s 0 for all q E ~. This easily implies
(p) :s O. In view of p-(p) = 0, we conclude that indeed (p) = O. (For the
last conclusion see also Problem 1.4.4.) •
Chapter 2
Riesz Spaces of Commodities

and Prices
Before discussing the problems in this chapter, we mention briefly some basic
structural features of Riesz spaces. Recall that a partially ordered vector space
E which is also a lattice is referred to as a Riesz space or a vector lattice.
That is, a partially ordered vector space is a Riesz space whenever each pair
of vectors has a supremum (least upper bound) and an infimum (greatest lower
bound). Following the standard lattice notation, we denote the supremum and
infimum of a pair of vectors u and v in a Riesz space by u Vv and uA v respectively.
That is,
uVv=sup{u,v} and uAv=inf{u,v}.
The reader should check that the symbols V and A satisfy the associative law.
That is, for every u, v, w in a Riesz space,
( u V v) V w = u V ( v V w) and (u A v) A w = u A (v A w) .
For an element u its positive part u+, negative part u-, and absolute
value lui are defined by
u+ = u V 0, u- = (-u) V 0, and lui = u V (-u).
Clearly, in a Riesz space lui = 1- ul for every vector u.
The first important relationship between vectors in a Riesz space is the
triangle inequality, which states that for any two vectors u and v we have
lu + vi ~ lui + Ivl and Ilul-ivil ~ lu - vi·
To verify this, note first that ±u ~ lui and ±v ~ Ivl imply ±(u + v) ~ lui + lvi,
and so lu + vi = (u + v) V [-(u + v)] ~ lui + Ivl. For the other inequality, notice
that lui = I(u - v) + vi ~ lu - vi + Ivl implies lul-Ivl ~ lu - vI, and similarly
-(Iul-Ivl) = lvi-lui ~ lu - vi. So, Ilul-Ivil = (Iul-Ivl) V (lvi-luI) ;:; lu - vi.
We now state some fundamental lattice identities in Riesz spaces. These
identities will be employed frequently in the sequel.
82 Chapter 2: Riesz Spaces of Commodities and Prices
If u, v, and w are arbitrary vectors in a ltiesz space, then we have the

following lattice identities.
1. u V v + u/\ v = u + Vi
2. w+uVv=(w+u)V(w+v) and w+u/\v=(w+u)/\(W+V)i
3. (-u)V(-v)=-(u/\v) and (-u)/\(-v)=-(UVV)i
4. (u-v)+=uVv-v=u-u/\v and (u-v)-=uVv-u=V-U/\Vi
5. a(u V v) = (au) V (av) and a(u /\ v) = (au) /\ (av) if a ~ Oi
6. lu - vi = u V v - u /\ v and lui = u+ + u- i
7. uVv= !(u+v+lu-vl) and u/\v= !(u+v-Iu-vl).
We indicate below how one can prove these identities.

(1) Let a = u V v + u /\ v and b = u + v. From b - v = u $ u V v we get
b - u V v $ v and, similarly, b - u V v $ u. Hence, b - u V v $ u /\ v and so
b $ uVv+u/\v = a. On the other hand, b = u+v ~ u+u/\v implies b-u/\v ~ u
and, similarly, b-u/\v ~ v. Therefore, b-u/\v ~ uVv or b ~ uVv+u/\v = a.
Thus a = b, or in other words, u V v + u /\ v = u + v.
(2) We prove only the first identity. Let a = w+uVv and b = (w+u)V(w+v).
Then a - W = U V v ~ u and so a ~ W + u. Analogously a ~ W + v. So,
a ~ (w+u)V(w+v) = b. On the other hand, b ~ w+u implies b-w ~ u and,
similarly, b - w ~ v. So, b - w ~ u V v and thus b ~ w + u V v=a. That is, a = b
or w + u V v = (w + u) V (w + v).
(3) We prove the first identity here too. Applying (2) with w = -(u + v)
and using (1), we see that
(-u) V (-v) = (w + v) V (w + u) = u V v + w = u /\ v - u - v = -(u /\ v).
(4) Note that (u - v)+ = (u - v) V 0 = (u - v) V (v - v) = u V v-v.

(5) Let a> 0 and put a = a(uVv) and b = (au)V(av). From ia
= uVv ~ u,
we see that a ~ au and similarly a ~ av. So, a ~ (au) V (av) = b. On the other
b
hand, ~ au implies ib
~ u and similarly ib
~ V. Hence, ib
~ u V v and so
b ~ a(u V v) = a. That is, a = b or a(u V v) = (au) V (av).
(6) Using (I), (2) and (5), we see that
u V v - u /\ v = u V v + [u V v - (u + v)] = 2( u V v) - (u + v)
= (2u)V(2v)-(u+v)=(u-v)V(v-u)
= lu-vl·
For the second part, note that lui = lu - 01 = u V 0 - u /\ 0 = u+ + U-.
Chapter 2: Riesz Spaces of Commodities and Prices 83
(7) Using (1) and (6), we get

u + v + lu - vi = (u V v + u!\ v) + (u V v - u!\ v) = 2(u V v),
and similarly
u + v -Iu - vi = u V v + u!\ v - (u V v - u!\ v) = 2(u!\ v).
Remarkably, Riesz spaces inherit every lattice identity (or inequality) that
holds for real numbers. That is, if an identity (or inequality) is true for real
numbers, then it is true in any Riesz space! For instance, U V v + U !\ v = U + v
is obviously true for real numbers. Therefore, it is valid in any Riesz space.
The reason why this remarkable property is true is that Archimedean Riesz
spaces can be "represented" as functions spaces. A function space E is a vector
subspace of some lR,o (the Riesz space of all real-valued functions on the set 0)
with the property that for each pair of functions I and 9 in E the functions
max{/, g} and min{/, g} defined by
max{/,g}(w) = max{J(w),g(w)} and min{/,g}(w) = min{J(w),g(w)}
both belong to E. In this case, E is a Riesz space under the pointwise ordering
= =
and pointwise lattice operations, i.e., I V 9 max{/, g} and I !\ 9 min{f, g}.
Thus, the validity of some identity (or inequality) in E is equivalent to the va-
lidity of the same identity (or inequality) for real numbers. Therefore, since
every Archimedean Riesz space is lattice isomorphic l to a function space, every
identity (or inequality) valid for real numbers is automatically valid in any Ar-
chimedean Riesz space. With some extra work we can convince ourselves that
the same conclusion holds true for any Riesz space. For a detailed discussion of
the representation theory for Riesz spaces we refer the reader to [16, Chapter 7].
We close by mentioning that Riesz spaces belong to the special class of
lattices that satisfy the distributive laws-which have been already used above.
You can check the validity of these laws for real numbers or you can repeat the
solution of Problem 2.1.8.
• (The Distributive Laws) II u, v and w are arbitrary elements in a
Riesz space, then we have the identities
(u V v) !\ w = (u !\ w) V (v !\ w) and (u !\ v) V w = (u V w) !\ (v V w) .
A norm 11·11 on a Riesz space is said to be a lattice norm if Ixl ::; IYI implies
IIxll ::; lIylI. Since Ixl = Ilxll holds true for any element x in a Riesz space, it is
easy to see that a norm 11·11 on a Riesz space E is a lattice norm if and only if
lTwo Riesz spaces E and F are said to be lattice isomorphic if there exists an onto
linear operator T:E -- F satisfying T(xvy) = T(x)VT(y) and T(xAy) =
T(x) AT(y) for all
x,y E E.
84 Cbapter 2: Hiesz Spaces of Commodities and Prices
a. IIxll = Illxlil for each x E E, and

b. 0 ~ x ~ y in E implies IIxll ~ lIyll.
Keep in mind that a normed Riesz space is a Riesz space equipped with a
lattice norm. A complete normed Riesz space is referred to as a Banach lattice.
Now let E be a normed Riesz space. Then the norm dual E' of E is a Banach
space. Its norm is given by the familiar formula
IIx'll = sup{lx'(x)l: IIxll ~ I}.
The Banach space E' is a partially ordered vector space via the standard ordering
x' ~ y' whenever x'(x) ~ y'(x) for each x E E+. As usual, a linear functional
I: E - R is said to be positive (resp. strictly positive) if I(x) ~ 0 (resp.
I(x) > 0) for each x > o.
We are now ready to state prove some basic properties of normed Riesz
spaces.
1. Every positive linear functional on a Banach lattice is continuous.
To see this, let I: E - R be a positive linear functional on a Banach lattice
E. If I is not norm continuous, there exists a sequence {x n } of E satisfying
IIxnll ~ 1 and I/(xn)l ~ n 3 for each n. Since Illxnl" = IIxnll and 1(lxnl) ~ I/(xn)1
for each n, replacing each Xn by Ixnl, we can assume that Xn ~ 0 for each n.
Since E is a Banach space, the element x = L:~=1 ~ exists in E and the norm
closedness of E+ guarantees that 0 ~ ~ ~ x for each n. But then, the positivity
of f implies n:5 f(~) :5 f(x) < 00 for each n, which is impossible. Hence, f is
norm continuous, i.e, lEE'.
2. For a normed Riesz space E its norm dual E' is:
a. an ideal in the order dual E .... ,
b. a Banach lattice under the norm (*), and
c. il E is a Banach lattice, then E' and E .... coincide, i.e., E' =EN.
Since every order bounded set is automatically norm bounded, we see that
every continuous linear functional on E carries order bounded subsets of E onto
order bounded subsets of JR. This shows that the norm dual E' is a vector
subspace of the order dual EN.
To see that E' is an ideal of EN, assume III ~ Ix'i in EN with f E EN and
x' E E'. Also, let IIxnll - O. Now recall that from the formula defining the
absolute value of an arbitrary element x' E E' we have
Ix'l(lxl) = sup{lx'(Y)I: Y E E and Iyl ~ Ix\} (**)

Cbapter 2: Riesz Spaces of Commodities and Prices 85
for each x E E. So, for each n there exists some Yn with IYnl ~ Ixnl and
Ix'l(/xnl) < Ix'(Yn)1 + ~ for each n. Since II . II is a lattice norm, we see that
IIYnll ~ IIx nll for each n and so IIYnll - O. Consequently, the continuity of x'
implies x'(Yn) - O. Now use the inequalities
to infer that I(x n } - O. This shows that lEE' and so E' is an ideal of E"'.
To establish that E' is a Banach lattice, it remains to be shown that the
norm defined by (*) is a lattice norm. To see this, let Ix'i ~ lui in E'. Fix x E E
with IIxll ~ 1 and let e > o. From (**), we see that there exists some Y E E with
lyl ~ Ixl such that ly'IOx/) < IY'(Y)I- e. Since, II ·11 is a lattice norm, we know
that lIylI ~ IIxll and so ly'I(lxl) ~ lIy'lI- e. This implies
Ix'(x)1 ~ Ix'I(lxl) ~ IY'I(lxl) ~ \ly'\I- e
for all x E E with \lx\l ~ 1. From (*), we get IIx'lI ::; lIy'lI- e for each e > O.
Hence, IIx'lI ::;lIy'lI, and so the norm given by (*) is a lattice norm.
One more thing to be observed is the following. Let 0 ::; x' E E'. Since
Ix'(x)1 ::; x'(lx/) and IIxll = IIlxlll, it follows that for positive linear functionals
the norm of x' given by (*) can be also obtained by the formula
IIx'lI = sup{x'(x): x ~ 0 and IIxll ~ 1}.

Dually, if x ~ 0, then
IIxll = sup{x'(x): x' ~ 0 and IIx'lI ~ I}.
Finally, let E be a Banach lattice. Then from property (1) we know that
every positive linear functional on E is continuous. Since every order bounded
linear functional is the difference of two positive linear functionals, we see that
every order bounded linear functional is continuous. In other words, if E is a
Banach lattice, then E' = E- .
3. II a ·net {x a } in a normed Riesz space has a weakly convergent subnet and
satisfies Xa ! 0, then Xa ~ o.
To see this, assume that a net {Xa}aEA in a normed Riesz space E satisfies
Xa ! 0 and has a weakly convergent subnet, say V>. ~ Y in E. This means that
there exists a function t.p: A - A satisfying v>. = x lP >. for each A E A and for each
00 E A there exists some Ao E A such that t.p>. ~ 00 for all A ~ Ao.
Note that since the positive cone E+ is weakly closed (E+ is norm closed
and since it is convex it must be also weakly closed), we get y E E+, i.e., y ~ o.
Now, in the above setting, if 00 E A, then t.p>. ~ 00 for each A ~ Ao and 80
ZO'o - YA = ZO'o - Z"'A ~ O. Therefore, from zO'o - YA ~~w~o I ZO'o - Y and the weak
closedness of E+ , we get xao - Y ~ 0, or xao ~ Y ~ 0 for all no E A. Thus Y O. =
Next, let 0 ~ z' E E' and fix e > O. From YA ~ 0, there exists some index
AO such that z'(YAo) < e. Now if n ~ !(JAO' then 0 ~ Za ~ x"'~o YAo and so=
o ~ z'(x a ) ~ x'(YAo) < e, which shows that x'(x a ) -+ O. Since every Y' E E'
is the difference of two positive linear functionals of E', the latter shows that
y'(xa) -+ 0 for each y' E E', i.e., Xa ~O.
2.1 Partially ordered vector spaces
Problem 2.1.1. If x is an element in a Riesz space, then show that Z = z+-z-.

Solution: Using the general lattice identity u + v u V v + = U" v, we convince
= = =
ourselves that x x + 0 x V 0 + x " 0 x V 0 - [( -x) V 0] = x+ - X- . •
Problem 2.1.2. If in a Riesz space we have z =Y - z, x ~ 0, Y ~ 0 and

y" = =
z 0, then show that Y x+ and z = z- .
Solution: Note that
x+ = z V 0 = (y - z) V 0 = (y - z) V (z - z) =Y V z - z = (y + z - y" z) - z = y.
Similarly, z- = z .•
Problem 2.1.3. For three elements x, Y and z in a Riesz space establish that
Iz V Y - z V YI ~ Iz - zl and Iz" Y - z "yl ~ Iz - zl·

Solution: Using some lattice identities and the triangle inequality, we see that
Ix Vy - z V YI I~(x + y + Ix - yl) - ~(z + y + Iz - yl)l

= !1(x-z)+(lx-yl-lz-yDI
< Hlx - zl + Ilx - Yl-Iz - yll)
~ Hlx - zl + I(x - y) - (z - y)1) = Ix - zl·
Similarly, Ix" y - z "yl ~ Ix - zl· •
Problem 2.1.4. Show that in a Riesz space Ixl " Iyl =; 0 if and only if
Ix - yl = Iz + yl·
2.1 Partially ordered vector spaces 87
Solution: This follows immediately from the lattice identity
which will be established in the next problem.•
Problem 2.1.5. If x and y are elements of a Riesz space, then show that
Ixl V Iyl = ! (Ix + yl + Ix - YO and Ixl/\ Iyl = ! Ilx + YI- Ix - yll·

Solution: We shall prove the desired identities by first establishing the following:
• If u and v are arbitrary elements in a Riesz space, then
a. lu + vi V lu - vi = lui + Ivl; and
b. lu + vl/\ lu - vi = Ilul-Ivll·
For (a) note that
lu+vlvlu-vl = [(u+v)V(-u-v)]V[(u-v)V(-u+v)]
[( u + v) V (-u + v)] V [( u - v) V (-u - v)]
[u V (-u) + v] V [u V (-u) - v]
=
[u V (-u)] + [v V (-v)] lui + Ivl.
For (b), we must use the distributive law as follows:
= [(
lu + vl/\ lu - vi u+ v) V (-u - v)] /\ [(u - v) V (-u + v)]
[(u + v) /\ (u - v)] V [(-u - v) /\ (-u + v)]
V[(u + v) /\ (-u + v)] V [(-u - v) /\ (u - v)]
[u+ v/\ (-v)] V [v /\ (-v) - u] V [u/\ (-u) + v] V [(-u) /\u - v]
(u -Ivl) V (-u -Ivl) V (v -luI) V (-v -luI)
[u V (-u) -Ivl] V [v V (-v) -luI] = (Iul-Ivl) V (lvi-luI)
lIul- Ivll
Now the desired lattice identities follow from the above identities by letting
u = Hx + y) and v = !(x - y) .•
Problem 2.1.6. Consider the plane R2 with the lexicographic ordering,

i.e., with the ordering (Xl, yt) ~ (X2' Y2) whenever either Xl > X2 or else both
Xl = X2 and Yl ~ Y2. Show that
a. The plane R2 with the lexicographic ordering is a linearly ordered vector

space-and hence, it is a Riesz space; and
b. The lexicographic plane is not an Archimedean Riesz space.
Solution: (a) Let (XI,yt) and (X2,Y2) be two arbitrary vectors in R2. If Xl > X2
then (XI,yt) ~ (X2,Y2), and if X2 > Xl then (X2,Y2) ~ (XI,yt). In case Xl X2, =
YI ~ Y2 implies (Xl. yt) ~ (X2' Y2) while Y2 > YI guarantees (X2, Y2) ~ (Xl, yd.
In other words, every two vectors of R 2 are comparable with respect to
this ordering, and so the lexicographic ordering is a linear ordering. The reader
should stop and verify that R2 under the lexicographic ordering is indeed an
ordered vector space.
(b) Note that 0 < n(O, 1) ::; (1,1) for each n but (0,1) "I O.•
Problem 2.1.7. Let E denote the vector space of all differentiable functions
defined on (0,1). Show that under the pointwise ordering E is a partially ordered
vector space that fails to be a Riesz space.
Solution: We leave to the reader the easy verification that E under the pointwise
ordering ~ (i.e., f ~ 9 in E means f(x) ~ g(x) for each X E (0,1)) is indeed a
partially ordered vector space.
Next, we shall establish that E with this ordering is not a Riesz space. To
this end, consider the functions f, gEE defined by f(x) = x-! and g(x) = !-x.
We claim that f V 9 does not exist in E.
So assume by way of contradiction that h = f V 9 exists in E. It should be
obvious that h(x) ~ e(x) = Ix - !I for each x. Since e fI. E, h(xo) > e(xo) for
some Xo. Continuity then ensures that there exist some t: > 0 and an interval
(a, b) S; (0,1) containing Xo such that h(x) - e(x) > t: for each X E (a, b).
Now select a nonzero differentiable function I{' E E satisfying 0 ::; I{'(x) < t:
for each X and I{'(x) = =
0 for X fI. (a, b). If hI h -I{', then hl E E, hI ~ e (so
that hl ~ f and hl ~ g) and h > hI' This shows h cannot be the supremum of
f and 9 in E. This contradiction proves that E is not a Riesz space .•
Problem 2.1.8. Let A be a non-empty subset of a Riesz space E. If sup A

exists, then show that sup(x 1\ A) =X 1\ sup A for each x in E. Similarly, if
inf A exists, then show that inf(x V A) = x Vinf A for each x E E. (These lattice
identities are referred to as the infinite distributive laws.)
Solution: We shall prove the first identity only and leave the identical argument
for the second to the reader. Let A be a non-empty subset of a Riesz space E.
Assume that the least upper bound sup A of the set A exists in E and fix some
=
x E E. As usual, we write x 1\ A {x 1\ a: a E A}.
Clearly, x 1\ a ::; x 1\ sup A for each a E A. That is, x 1\ sup A is an upper
2.1 Partiany ordered vector spaces 89
bound of the set z A A. To see that it is the least upper bound assume that
some vector y E E satisfies z A a $ y for each a E A. Now the lattice identity
= =
a + z z V a + z A a implies a z V a + z A a - z $ z V sup A + y - z for each
a E A. Hence, sup A $ z V sup A + y - z and so
z A sup A = z + sup A - z V sup A $ y.
Consequently, the vector z A sup A is the least upper bound of the set z A A.
That is, sup(z A A) = z A supA .•
Problem 2.1.9. Describe the principal ideal in Roo, t~e Riesz space 01 all real-
valued sequences, generated by the sequence (1,1, 1, ... ).
Solution: Let e = (1,1, ... ), the constant sequence one. By the definition ofthe
principal ideal generated by a vector, we see that
Ae = {z E Roo: \z \ $ Ae for some A ~ O}

= {z E Roo: z = (':&11 ':&2, •••) is a bounded sequence}
loo .
That is, too is the ideal generated by e in 1Roo .•
Problem 2.1.10. Give an example 01 a convex subset of the Riesz space R2

whose solid hull is not convex.
Solution: The solid hull of the line segment joining the points (-1,3) and (2,1)
is not a convex set. See Figure 17a.•
Problem 2.1.11. Show that the Riesz space C[O,I] is not Dedekind complete.
Solution: Recall that a Riesz space E is said to be Dedekind (or order)
complete if every non-empty subset of E which is bounded from above has a
supremum.
For each n > I consider the function In E C[O, I] defined by
The graph of In can been seen in Figure 17b. Clearly, 0 $ In $ 1. We shall

show that SUP{/n} does not exist in C[O, I], and this will establish that C[O,I]
is not a Dedekind complete Riesz space.
Fig.17a Fig.17b
Figure 17
To see this, assume by way of contradiction that / = sup{ln} exists in

C[0,1]. Since /(x) ~ /n(x) for each n and x, it follows that /(x) ~ 0 for all
i
x and /(x) ~ 1 for < x ~ 1. To obtain a contradiction, we shall show that
/ (x) = 0 for all 0 < x < ~.
Assume that /(xo) > 0 for some 0 < Xo < !.
Then, by the continuity of
/, there exist 0 < g < 1 and an interval (a, b) S; (0,1) containing Xo such that
/(x) > g for each x E (a,b). We can assume b - a < g. Consider the function
9 E e[O, 1] defined by g(x) = [(x - a)(b - x)]+. Clearly, 0 ~ g(x) ~ g for each
x and g(x) = 0 for x r/. (a, b). Now notice that the function h = / - 9 E e[O, 1]
satisfies /n ~ h < / for all n, proving that / cannot be the supremum of the
!,
sequence {In} in e[O, 1]. Thus, /(x) = 0 for all 0 < x < leading to the desired
contradiction. •
Problem 2.1.12. Show that the Riesz spaces Lp[O,I] (0 < p ~ 00) are all
Dedekind complete.
Solution: Let 8 a non-empty subset of Lp[O, 1] bounded from above. Keep in
mind that in Lp(II)-spaces u ~ v means u(x) ~ v(x) for II-almost all x. Observe
that the set consisting of all finite suprema of the elements of 8 (i.e., the collection
of all elements of the form Sl V S2 V ... V Bn with Bj E S) is also bounded from
above and has the same upper bounds as 8. This means that we can assume
that 8 is closed under finite suprema. Also, if we fix some u E S and consider
the set 8 1 = {g - u: 9 E Sand 9 ~ u}, then 8 1 is bounded from above and
2.1 PartiaHy ordered vector spaces 91
is closed under finite suprema. If sup Sl exists in Lp[O, 1] then sup S also exists
=
and is given by sup S 1.1 + sup Sl. In other words, we have established that we
may assume that S is a subset of Lt[O, 1] which is closed under finite suprema.
°
Assume for now that < p < 00. Put s =
°
sup{fo1[/(z)]P dz: / E S}
and note that since S is bounded from above, we have ~ s < 00. Since S
is closed under finite suprema, we may pick a sequence {In} of S satisfying
f; [/n (z)]P dz l sand /n ~ /n+1 for each n.
Now by the classical theorem of B. Levi from the theory of integration (see for
instance [6, Theorem 18.8, p. 134]), we know that there exists some 9 E Lt[O, 1]
such that [/n(z)]P l g(z) for almost all z. But then /n l / = g; and 80
/ E Lt[O, 1].
We shall finish the proof by showing that / =
sup S. To see this, we shall
establish first that / is an upper bound of the set S. Fix 9 E S. Then gV /n E S
for each n and 9 V /n l 9 V f. But since /n ~ 9 V In, we see that
s = 10r 1
fez) dz lim r Inez) dz
= n_oo 10
i
< limr\g V In)(z)

n-oolo
dx
l\gV ~
f)(z)dz s,
and so f;(g V f)(z) dz = fo1 fez) dx = 8. This fact, coupled with / ~ 9 V /,

asserts that I = 9 V /. Hence, / =
g V / ~ 9 for all 9 E S, establishing that /
is an upper bound of S. On the other hand, if 9 ~ h holds for all 9 E S, then
/n ~ h for each n and consequently I ~ h. In other words, we can conclude that
/ is the least upper bound of S.
The case p = 00 is a corollary. If S has an upper bound h in Loo[O, 1], then
since Loo[O, 1] ~ L 1 [O, 1] the function h is also an upper bound for S in LdO, 1].
By the result obtained above, S has a supremum I in Ltf0, I), and so necessarily
=
/ ~ h. But then / E Loo[O, 1], and so / supS holds true in Loo[O, 1] .•
Problem 2.1.13. Establish the lollowing stronger version 01 the Riesz De-
composition Property lor a Riesz space E. Illxl $ IYi + ... + Ynl, then there
=
are elements Xl. ... ,Zn E E satisfying z Xl + ... + Xn and IXi I $ IYi I lor each i.
Moreover, il z is positive, then the Zi can be chosen to be all positive too.
=
Solution: We proceed by induction. For n 1 the result is obvious. Next, we
=
shall verify the assertion for n 2. So, let Ixl $ IYl + Y21 in E. Define
Zl = [x V (-IY1D] A Iyd and X2 =x - Xl.
92 Cbapter 2: Riesz Spaces of Commodities and Prices
=
Clearly, x Xl + X2. Now we claim that IXil ~ IYil for each i. To see this, note
first that from -Iyd = (-IYlD 1\ Iyd ~ [x V(-IY1D] 1\ Iyd = Xl ~ IYll, it follows
that IXll ~ Iyd· Next, using the lattice identities, observe that
X2 = Xl
X -
= X - [X V(-IYll)] 1\ Iyd
= x + {- [x V(-IY1D]) V(-Iyd)
x + [(-x) 1\ IYll] V(-IYll)
= [01\ (x + IYll)] V(x -IYll).
On the other hand, the triangle inequality yields Ixl ~ IYl + Y21 ~ IYll + IY21 or
-IYll-IY21 ~ x ~ IYll + IY21·
Thus, -IY21 ~ X + Iyd and x -IYll ~ IY21. Consequently,
-IY21 = 01\ (-IY21)

~ 01\ (x + IYlD
< X2
+ IYll)] V(x -Iyd)

[01\ (x
< OV(X-IYll)
< OV IY21
= IY21,
which implies that IX21 ~ IY21. It should be also clear from the formulas defining
Xl and X2 that if x is positive, then Xl and X2 are positive too.
Now for the induction step, assume that the claim is true for some n and let
Ixl ~ =
IYl + ... + Yn + Yn+1l· From the case n 2 proven above, we can write
x = Z + x n+1 with Iz I ~ IYl + ... + Yn I and IXn+11 ~ IYn+1l· The induction
=
hypothesis informs that we can also write z E?=l Xi with IXi I ~ IYi I for each
= =
i 1, ... ,n. Therefore, we can write x E?~ll Xi with IXil ~ IYil for each i. To
finish note that if x is positive, then z and Xn+l can be chosen to be positive by
the case n = 2 proven above. The induction hypothesis shows we may assume
Xl, ... , Xn to be positive as well .•
Problem 2.1.14; A nonzero positive element x of a Riesz space E is called an

atom whenever 0 ~ Y ~ x, 0 ~ z ~ x and Y 1\ z = 0 imply either Y = 0 or
=
z O. Show that the commodity space C[O, 1] contains no atoms. Also, describe
the atoms of the Riesz spaces ip (0 O} is non-empty and
open, it contains two disjoint intervals (a, h) and (c, d). Define y, z E C[O, 1] via
y(t) = x(t)[(t - a)(h - t)]+ and z(t) = x(t)[(t - c)(d - t)]+ .

The° < y :$ x, 0< z :$ x and y A. z = 0. This proves that C[O, 1] has no atoms.
a> °
The atoms of the lp-spaces are precisely the sequences of the form ae n , where
and en denotes the sequence whose nth coordinate is one and every other
is zero.•
2.2 Positive linear functionals
Problem 2.2.1. Use the Riesz Decomposition Property to show that for any pair
of positive elements x and y in a Riesz space we have [0, x] + [0, y] = [0, x + y].
Solution: Recall that if a and h are vectors in a partially ordered vector space
E with a :$ h, then the order interval [a, h] is the convex set
[a, h] = {u E E: a:$ u :$ b} .
Fix two positive elements x and y in a Riesz space and let z E [0, x] + [0, y].
This means that there exist Z1 E [0, x] and Z2 E [0, y] such that z = Z1 + Z2. In
°
particular, :$ z :$ x + y and so z E [0, x + y]. That is, [0, x] + [0, y] ~ [0, x + y].
°
For the reverse inequality, let z E [0, x + y], i.e., :$ z :$ x + y. Then by
the Riesz Decomposition Property (see Problem 2.1.13) we can write z = Z1 + Z2
° °
with :$ Z1 $ x and :$ Z2 $ y, and so z E [0, z] + [0, y]. This implies
[0, x + y] ~ [0, x] + [0, y] and hence [0, x] + [0, y] = [0, x + y] .•
Problem 2.2.2. Show that the algebraic and lattice operations of a Riesz space
are all order continuous /unctions.
Solution: Before discussing the problem, let us recall the notion of order conver-
gence. A net {zo} in a partially ordered vector space is said to be increasing,
r,
written Xo (resp. decreasing, written Xo !) if a ~ {J implies Xo ~ x{j (resp.
Xa :$ x{j). The expression Xa l :c means that :Co l and x = sup{:c a }. The
meaning of :COl ! x is analogous.
A net {:Co} in a Riesz space is said to be order convergent to some element
x, written :COt -=-. x, ifthere exists another net {Ya}, with the same directed set,
satisfying l:c o - xl :$ Yo for each a and Yo ! 0; we express this situation as
IXa - xl ~ Ya ! O. It is important to keep in mind that a net cannot have more

than one order limit. Indeed, if IXa - xl ~ Ya ! 0 and IXa - x'i ~ Za ! 0, then
from
Ix - x'i ~ I(x - x a ) + (xa - x')1 ~ IXa - xl + IXa - x'i ~ Ya + Za ! 0,
=
it follows that Ix - :I!'I 0 or :I! :I!'. =
A function f: E -+ F between two Riesz spaces E and F is said to be
order continuous if :l!a~X in E implies f(xa)~f(x) in F. Consider now
the algebraic and lattice operations of E defined by
1. (x, y) 1-+ :I! + y, from E x E to E;
2. (a,:I!) 1-+ a:l!, from R. x E to E;
3. (:I!, y) 1-+ X V y, from E x E to E;
4. (:I!,y) 1-+ X" y, from E x E to E;
5. x 1-+ x+, from E to E;
6. x 1-+ x-, from E to E; and
7. x 1-+ I:I!I, from E to E.
The functions (1) and (2) are the algebraic operations and the functions (3)
through (7) are referred to as the lattice operations. The claim of the problem
is that all these functions are order continuous. To indicate how one proves this
claim, we shall prove the order continuity for two functions and leave the rest
for the reader.
We verify the first one. To this end, let Xa ~ x and y>.. ~ y. This means
that there exist two other nets {u a } and {v>.} such that l:I!a -:I!I ~ U a ! 0 and
Iy>. - yl ~ v>.. ! O. Observe that
I(xa + Y>.) - (x + y)1 ~ l:I!a - xl + Iy>. - yl ~ U a + v>.
for each a and A. We shall prove that Xa + Y>. "':~ I x + Y by establishing that
U a + v>. !ca,>.) O. Clearly, U a + v>. !(a,>.). Now assume that some vector Z E E
satisfies z ~ U a + v>. for each a and each A. Thus, for each fixed a we have
Z - U a ~ v>. for all A. In view of v>. ! 0, we infer that Z - U a ~ 0 or Z ::; U a for
each a. Taking into account that U a ! 0, we see that Z ::; o. From this and the
fact that 0 ~ U a + v>. for each a and A, we conclude that U a + v>. !(a,>.) O.
Next, we shall show that the function (:I!, y) 1-+ X Vy is also order continuous.
So, as above, let IXa - xl ::; U a ! 0 and Iy>. - yl ::; v>. ! O. Now from the triangle
inequality and Problem 2.1.3., we see that
IXa V Y>. - x Vyi = V Y>. - x V y>.) + (x VY>. - x V y)1
I(Xa
< IXa V Y>. - x V y>.1 + Ix V Y>. - x V yl
< Ix~ - xl + Iy>. - yl ::; U a + V>. .
Since (as above) Ua + v>. !(a,>.) 0, we get Xa V Y>. ":A I x V y, as desired .•
Problem 2.2.3. Show that ioo(O} is an order dense Riesz subspace afRo. Also,
show that C[O, 1] is a Riesz subspace of R[O.lj which is not order dense.
Solution: Recall that a Riesz subspace F of a Riesz space E is said to be order
dense if for each 0 < x E E there exists some y E F such that 0 < y ~ x.
Clearly, ioo(O} is a Riesz subspace ofRo. Now let 0 < x E RO. This means
that there exists some Wo E 0 such that x(wo} > O. But then, the function
=
y:O -+ R defined by yew} = 0 if w # Wo and y(wo} x(wo} belongs to ioo(O}
and satisfies 0 < y ~ x. That is, ioo(O} is order dense in RO.
Again, notice that C[O, 1] is a Riesz subspace of R[O,ll. (In fact both are
function spaces.) Now notice that the function x: [0, 1] -+ R defined by x(O} = 1
and x(t} = 0 for 0 < t ~ 1 satisfies 0 < x E R[O,ll. However, there is no function
y E C[O, 1] satisfying 0 < y ~ x. This shows that C[O,l] is not order dense in
R[O,l] .•
Problem 2.2.4. Show that the disjoint complement of a non-empty set is a

band.
Solution: Recall that if D is a non-empty subset of a Riesz space E, then its
disjoint complement is defined by
Dd = {x E E: Ixl t\ Iyl for all y ED} .

We shall verify that Dd is a band, i.e., an order closed ideal of E.
First, we shall show that Dd is a vector subspace. To this end, let Xl, X2 E Dd
and fix y ED. From the inequalities
o~ IXl + x21 t\ Iyl ~ (ixli + IX 21) t\ Iyl ~ Ixli t\ Iyl + IX21 t\ Iyl = 0,
we infer that IX1 + x21 t\ Iyl = 0 for all y E D. This shows that Xl + X2 E Dd.
(Here, we used that if x, y and z are three positive elements in a Riesz space,
then (y + z) t\ X ~ Y t\ x + z t\ x; see [3, Theorem 2.1.2, p. 89].)
Similarly, if a E R, x E Dd and y ED, then the inequality
o~ laxl t\ Iyl = lallxl t\ Iyl ~ (1 + laDlxl t\ (1 + laDlyl = (1 + lal)[lxl t\ Iyl] = 0

implies ax E Dd. Thus, Dd is a vector subspace.
Next, notice that if z E Dd and Ixl ~ Izl, then x E Dd is trivially true. This
shows that Dd is an ideal (a solid vector subspace). Finally, it remains to be
shown that Dd is also order closed. So, let a net {x a } of Dd satisfy Xa ~x and
let y E Dd. By Problem 2.2.2, we know that the mapping (z,y) 1-+ Izl/\ IYI is
order continuous. (The reader should verify that the composition of two order
continuous functions is order continuous.) So, from 0 = Ixal/\ Iyl ~ Ixl/\ Iyl and
=
the uniqueness of the order limits, we get Ixl/\ Iyl 0 for all y E D. That is,
x E Dd, and this completes the proof that Dd is a band .•
Problem 2.2.5. Show that an ideal A of a Riesz space is order dense if and
only if Ad = {a}.
Solution: Recall that a subset S of a Riesz space is said to be solid if z E S
implies yES whenever Iyl :::; Ixl. A vector subspace of a Riesz space which is
also solid is called an ideal. Keep in mind that since Ilxli = Ixl for each x, it
follows that if S is a solid set, then Ixl E S for each xES.
Now let A be an ideal of a Riesz space E. Assume first that A is order dense
in E, i.e., for each x > 0 there exists some YEA with 0 < y :::; x. Suppose by
way of contradiction that Ad =F {OJ. Since (by Problem 2.2.4) Ad is solid, there
exists some 0 < x E Ad. Now, by the order denseness of A, there exists some
yEA with 0 < y :::; x. But then y = =
y /\ x 0, a contradiction. Consequently,
Ad = {OJ.
For the converse, assume that Ad = {OJ and let x > O. Note that x /\ IYI E A
=
and 0:::; x/\Iyl ~ x for each YEA. If x/\Iyl 0 for all yEA, then x E Ad = {O},
a contradiction. Hence, x /\ IYI > 0 for some yEA and consequently the element
z /\ Iyl E A satisfies 0 < x /\ Iyl :::; x. This shows that A is order dense in E .•
Problem 2.2.6. Show that a Riesz subspace F of an Archimedean Riesz space

E is order dense if and only if for each x E E+ there exists a net {x a } of F+
satisfying Xa 1x in E.
Solution: Let F be a Riesz subspace of an Archimedean Riesz space E. Assume
first that for each z E E+ there exists a net {x a } of F+ satisfying Xa 1 x in
E. This easily implies that if x > 0, then there exists some y E F such that
0< y ~ x, i.e., F is order dense in E.
For the converse, assume that F is order dense in E and fix 0 < x E E. Let
D = {y E F: 0 ~ y ~ x}
and consider D equipped with ~, the induced ordering from E. Since F is a
Riesz subspace, it follows that D is closed under finite suprema, and hence D
is a directed set under~. Now consider D as a net by letting Xa =
a for each
a ED. To complete the proof, it suffices to show that sup D = z.
To this end, assume by way of contradiction that sup D =I x. Then, since x

is already an upper bound of D, there exists some z E E satisfying y :::; z for all
y E D and z < x. Since 0 < x - z and F is order dense in E, there exists some
a E F such that 0 < a :::; x - z. We claim that na :::; x for all n.
The proof is by induction. For n =
1 the inequality is trivial since by
definition a :::; x - z :::; x. For the induction step assume that na :::; x for some n.
Since na E D, we see that na :::; z. But then
(n + l)a = na + a:::; z + (x - z) = x,
and the claim has been established. That is, we have na :::; x for all n, violating
=
the Archimedean property. Thus, sup D x and the proof is finished .•
Problem 2.2.7. Let E be a Riesz space. If the order dual E.... separates the
points of E, then show that E is an Archimedean Riesz space.
Solution: Assume that the order dual E .... of a Riesz space E separates the points
of E and let x, y E E+ satisfy nx :::; y for each n. Then for each 0 :::; 1 E E .... ,
we have 0 :::; n/(x) = I(nx) :::; f(y) for each n. Therefore, I(x) =
0 for each
o :::; 1 E E..... Since every linear functional of E .... is a difference of two positive
linear functionals, it follows that I(x) = 0 for all 1 E E ..... Consequently, since
E .... separates the points of E, we infer that x = O. This verifies that E is an
Archimedean Riesz space. _
Problem 2.2.8. Consider the commodity space C[O,l] and the two positive
prices cp and t/J in E- defined by cpU) = 1(0) and t/J(g) = f;
g(t) dt. Show that
the linear functionals satisfy cp.l t/J.
Solution: Clearly, both prices cp and t/J are positive. Since every function of
C[O, 1] is dominated by a multiple of the constant function one (i.e., 1 is an
order unit), to show that cp .1 t/J (i.e., Icpl t\ It/JI = cp t\ t/J = 0) it suffices to establish
that <p 1\ t/J(l) = O. From the definition of the infimum of two order bounded
linear functionals we have
<pl\tjJ(l) = inf{<p(f) + tjJ(g): 0:::; I,g E C[O, 1] and I+g=l}. (*)
Now for each n consider the continuous functions fn and gn defined by
nt ifO<t<l. 1- nt ifO<t<l.
In(t) = { 1 - - n'
if ~<t:::;l
and gn(t) ={ 0 - - n'
if~<t:::;l.
Then 0 :5: in,Un E C[O,l] and in + Un = 1 for each n. Moreover, notice that
tpUn) = in(O) =
0 and t/J(Un) = =
fol Un(t) dt 2~. Consequently, from (*), we
see that
0$ tp /\ t/J(1) $ tpUn) + t/J(Un) 2~ =
for each n. This implies tp /\ t/J(1) = 0 and so Itpl/\ It/JI = tp /\ t/J = o.•
Problem 2.2.9. Let E be a Riesz space and consider two positive prices f, 9 in
E'" such that 0 $ f $ g. Show that their carriers satisfy CJ ~ Cg •
Solution: Recall that if E is a Riesz space and h E E'" , then the null ideal N h
of h is defined by
=
Nh {z E E: Ihl(lzl) o}. =
(Notice that Nh is indeed an ideal of E.) The disjoint complement of Nh is called
the carrier of h and is denoted by Ch, i.e.,
Now if 0 :5: f $ gEE'" holds, then it should be obvious that Ng ~ NJ.

=
From this it easily follows that CJ (NJ)d ~ (Ng)d = Cg.•
In order to solve the next problem, we shall invoke the famous Hahn-Banach
Extension Theorem. We shall state this theorem next for future reference. Recall
that a function p: X -+ E, from a vector space X into a Riesz space E, is said
to be sublinear if p is
1. subadditive, i.e., p(z + y) :5: p(z) + p(y) for all z, y E X, and
2. positively homogeneous, i.e., p(AZ) = oXp(z) for all z E X and all
oX 2: o.
The Hahn-Banach Extension Theorem can be formulated as follows. (For a
proof see [1, Theorem 4.38, p. 138].)
(The Hahn-Banach Extension Theorem) Let X be a vector space and let
p: X -+ R be a sublinear function. If M is a vector subspace of X and f: M -+ R
is a linear functional satisfying f(z) $ p(z) for each z E M, then there exists a
linear extension j of f to all of X satisfying j( z) $ p( z) for all z EX.
Problem 2.2.10. Consider a Riesz space E and a positive price 0 $ fEE"'.

Show that
f(z V y) = max{g(z) + h(y): 0:5: g, hE E'" and g + h = f}
and
I(x" y) = rnin{g(x) + h(y): 05, g, hE E"" and 9 + h = I}
hold lor all z, y E E.
Solution: We shall verify the first identity and leave the analogous arguments
for the second to the reader. Let E be a lliesz space and fix 0 5, lEE"".
We shall verify first that
I(x+) = max{g(z): gEE"" and 0 5, 9 5, I}
for each x E E. To this end, fix x E E. If 0 5, gEE"" satisfies 0 5, 9 5, I, then

from z 5, z+, we see that g(x) 5, g(x+) 5, I(z+) and so
sup{g(z): gEE"" and 0 5, 9 5, I} 5, I(z+).
Next, we shall prove the reverse inequality of (**). Define p: E -+ R via

the formula p(z) =
I(z+) and note that p is a sublinear function. (Here we
must use the lattice inequality (y + z)+ 5, y+ + z+.) Now consider the vector
subspace M = {Ax: A E R} and define the linear functional g: M -+ 1R via
g(AZ) = Ap(Z) = A/(z+). Clearly, g(z) 5, p(z) for all z E M. So, by the Hahn-
Banach Extension Theorem, there exists a linear extension of 9 (which we shall
denote by 9 again) satisfying g(z) 5, p(z) for all z E E. In particular, if z ~ 0,
=
then g(z) 5, p(z) = I(z+) I(z), and from
-g(z) = g( -z) 5, p( -z) = 1( -z)+) = 1(0) = 0,
we see that g(z) ~ O. In other words 0 5, 9 5, I. Now note that g(x) = I(z+),
so that the validity of (*) follows.
For the general case, the lattice identity z V y = (z - y)+ + Y coupled with
(*) yields
I(z V y) I(z - y)+ + y) = I(z - y)+) + I(y)

max{g(z - y): gEE"" and 0 5, 9 5, t} + I(y)
max{g(x) - g(y): gEE"" and 0 5, 9 5, I} + I(y)
max{g(x) + (f - g)(y): gEE"" and 0 5, 9 5, I}
max{g(z) + h(y): 05, g, hE E"" and 9 + h = I} ,
as desired .•
2.3 Topological Riesz spaces
Problem 2.3.1. If (E, E') is a Riesz dual system, then show that the positive
cone E+ is weakly closed.
Solution: We shall use the following fact:
• The lattice operations of a Riesz space E (see Problem 2.2.2) are contin-
uous for any locally solid topology on E.
For instance, the continuity of the function z 1-+ z- follows immediately from
the lattice inequality Iz- - y-I $ Iz - yl.
Recall that a Riesz dual system (E, E') is a pair of Riesz spaces E and
E' such that E' is an ideal of the order dual EN separating the points of E and
=
whose duality function (z, z') 1-+ (z, z') is given by (z, z') z' (z) for each x E E
and each z' E E'.
Now let (E, E') be a Riesz dual system. Then the absolute weak topology
IO'I(E, E') on E is the locally convex topology generated by the family of lattice
= =
seminorms {Px': x' E E+}, where Px'(z) (Izl,z') z'(lzl) for all z E E. The
absolute weak topology is a Hausdorff locally convex-solid topology on E which
is consistent with the Riesz dual system (E, E'). In other words, any absolute
weakly continuous functional on E can be identified with an element of E'; for
details see [1, pp. 234-235].
Now suppose a net {zo'} of E+ satisfies Zo' I.. I(B,B') J Z in E. From the
IO'I(E, E')-continuity of the function y 1-+ Y-, we see that 0 =
z;; ,.. ,(B,B') J Z-.
Since IO'I(E, E') is also Hausdorff, we get z- = = =
0 or z z+ - z- z+ ~ O. In
other words, E+ is IO'I(E, E')-closed. Since E+ is also convex, it must be closed
for all consistent locally convex topologies on E (see [3, Theorem 2.3.4, p. 101]).
In particular, E+ must be 0'( E, E')-closed .•
=
Problem 2.3.2. Consider the Riesz dual system (loo, l~). If w (at, a2, ... )
in lt, satisfies liIlln_oo an =
0, then show that the order interval [O,w] is norm
compact-and hence, [O,w] is also weakly compact.
Solution: Consider a sequence w = (at, a2, ... ) E lt, satisfying an - 4 O. It
should be clear that the box [0, w] is a norm closed subset of loo. Let U denote
=
the open unit ball of loo, i.e., U {z E loo: IIzlloo < I}.
Now let € > O. Choose some k such that 0 $ an < ~ for all n > Ie, and
consider the set
Then A is compact and [O,w] ~ A+e:U. In other words, we have shown that for
each e: > 0 there exists a compact set A such that [O,w] ~ A + e:U.
The latter conclusion easily implies that [0, w] is norm totally bounded. Since
[O,w] is also norm closed, we infer that [O,w] is a norm compact subset of loo.
(Here we use the fact that a subset of a complete metric space is compact if and
only if it is closed and totally bounded; see [1, Theorem 3.20, p. 84].) Of course,
then [O,w] is also weakly compact. _
Problem 2.3.3. Consider a Riesz dual system (E, E') and let 0 :5 1 E E'. For
=
each x E E show that I(x+) max{g(x): gEE' and 0:5 9 :5 I}.
Solution: Let (E, E') be a Riesz dual system. Fix 0:5 1 E E' and x E E. Since
E' is an ideal of E-, it follows that gEE' whenever 9 E E- and 0 :5 9 :5 I. SO,
from Problem 2.2.10, we see that
I(x+) I(x V 0) = max{g(x): 9 E E- and 0 :5 9 :5 I}

= max{g(x): gEE' and 0:5 9 :5 I} ,
as desired. _
Problem 2.3.4. Let (E, E') be a Riesz dual system and let x be an element of
E. Show that x ~ 0 if and only if I(x) ~ 0 holds for all 0:5 1 E E'.
Solution: Let (E, E') be a Riesz dual system and let x be an element of E. If
x ~ 0, then clearly I(x) ~ 0 for each 0 :5 1 E E'.
For the converse, assume that f ( x) ~ 0 holds for all 0 :5 fEE'. So if
0:5 fEE' is fixed, then from Problem 2.3.3, we have
0:5 1( -x)+) = max{g( -x) = -g(x): gEE' and 0 :5 9 :5 I} :5 0,
and so I(-x)+) = 0 for all 0 :5 fEE'. Since every member of E' is a

difference of two positive elements of E', we get 1( -x)+) =
0 for all 1 E E'.
Since E' separates the points of E, the latter shows that (-x)+ =
O. But then
=
-x (-x)+ - (-x)- = -(-x)- :5 0, or x ~ 0._
y=~
Figure 18
Problem 2.3.5. The two non-empty convex subsets
A={(x,Y)EIR?: x>O and Y>~} and B={(x,Y)Em?: Y$O}
of m,2 are disjoint. Find a hyperplane that separates them.

Solution: The hyperplane separating A and B is given by the solution set
= =
{z E R2: p. z O} where p (0, 1). In other words, the separating hyperplane
is the x-axis; see Figure 18 .•
Problem 2.3.6. This exercise presents a direct proof of the Separation Theorem
in finite dimensional vector spaces. The theorem is stated as follows.
(The Finite Dimensional Separation Theorem) Every pair A and B of
non-empty disjoint convex subsets of some m,t can be separated by a hyperplane,
i.e., there exist some non-zero vector p E m,t and some constant c such that
holds for all a E A and all b E B. (The geometrical interpretation of the

separation is shown in Figure 19a.)
Establish the validity of the Separation Theorem by proving the following
statements. For our discussion here the Euclidean norm of an arbitrary vector
v E m,t will be denoted by IIvll, i.e., IIvll = (2::=1 vl)! = VV7V.
a. If C is a non-empty closed convex subset of some R t , then there exists
exactly one vector pEe which is closest to the origin, i. e., there exists
exactly one vector P E C satisfying
IIpll ~ IIxll for all x E C.
b. If C is a non-empty closed convex subset of some JR.t and 0 does not

belong to C, then there exist a non-zero vector P E Itt and some constant
c > 0 satisfying
P . x ~ c for all x E C .
c. If C is a convex subset of some Itt and 0 ¢ C, then there exists a non-zero

vector P E JR.t such that p. x ~ 0 holds for all x E C.
d. Using part (c) complete the proof of the Separation Theorem.
=
Solution: (a) Let d inf{lIxll: x E C} and then select a sequence {xn} of C
such that limn_oo IIx n II = d. From
IIXm;X.II 2 = IIx;lIl + "xi"l _ II~II2

< IIx .. lI l +.lIx",lI l _ d2 -+ al + al _ d2 - 0
2 2 2 2 -,
=
we see that {xn} is a Cauchy sequence. If limn_oo Xn P E C, then IIpll d. =
To see that p is uniquely determined, assume that another vector z E C
satisfies IIpll = IIzll = d. Define the sequence {xn} of C by X2n = P and
=
X2n+l z and note that by the above discussion limn_oo Xn exists in JR.t . This
=
implies z p. The geometrical meaning of the vector p is shown in Figure 19b.
Fig.19a Fig.19b
Figure 19
=
(b) Let p '# 0 be the unique element satisfying IIpll min{lIxlI: x E C} and
let c = p. p = IIpW > O. We claim that p. x ~ c for all x E C. To see this, let
x E G and assume by way of contradiction that p . x < c, or p.(p - x) > O. Now

for each 0 < a < 1, we have ax+ (1- a)p E G and
IIpll2 -llax + (1- a)plI2 = IIpII2 -lIa(x _ p) + pII2

a[2p. (p - x) - allx _ p1l2] .
In view of Xo . (xo - x) > 0, there is some 0 < a < 1 so that
a[2xo . (p - x) - allx - pll21 > O.
This implies lIax + (1 - a)plI < IIplI, a contradiction.

( c) In order to establish this claim we need the following property.
• I/xEG\G, thenxEaG.
The proof of this property below is due to Mike Maxwell. Suppose first that
=
Int(G) 0. We may suppose without loss of generality that 0 E G (why?). In
this case we claim there do not exist .e linearly independent vectors in G. So
assume by way of contradiction that {Xl, ... , Xl} ~ G is linearly independent.
Then each z E Rl can be written uniquely as z = alXI + ... + atXl for a. E R.
So the function I: Rl --+ Rt defined by
is well-defined and linear (and hence continuous). Since a. 0 for each i in

a.
~
conjuction with the condition 2::=1 ~ 1 implies
alXI + ... + atXt = alXI + ... + alxl + (1 - 2::=1 a.)O E G,

we see that G contains the non-empty open set l-l(U), where
U = {(aba2, ... ,at) E (0, l)l: 0< 2::=1 a. < 1},

contradicting Int( G) = 0.
Thus, if we let {Zl, ... , zd be a maximal linearly independent subset of G,
then k < .e and G ~ span{zl. ... ,Zk}, i.e., G is contained in a (closed) proper
linear subspace. Hence, Int( G) = (2) and the desired property follows from
=
G Int(G) U aG aG. =
Now assume that Int(G) :f. 0. This means there exist Z E G and c > 0 so
that the open ball B(z, c) is contained in G. Now fix x E G \ G and assume by
way of contradiction that x r;. aG. Then fix an open set V such that x EVe G.
=
But then we can fix y E V so that x ay + (1 - a)z for some 0 < a < 1. (For
= =
example, if we let y x - c5(z - x) for c5 > 0 small, then x ay + (1 - a)z for
the value a = li6.)
Since Y E C, we can find a sequence {yn} S; C such that Yn - y. Clearly,

B(O:Yn + (1- o:)z,(l- o:)c) = O:Yn + (1- o:)B(z, c) S; C
for each n. Since O:Yn +(1- o:)z - x, we get x E B(O:Yn +(l-o:)z, (l-o:)e) S; C
for all n sufficiently large, contradicting x rt C. This contradiction establishes
the property.
And now we return to our problem. Assume that 0 rt C. If 0 rt C, then the
conclusion follows immediately from the previous part. If 0 E C, then by the
above claim 0 E aG. Pick a sequence {Yn} of Ri with Yn rt G for each n and
limn_oo Yn = O. By the previous part, for each n there exists some Pn E Ri
=
with IIPn II 1 satisfying Pn·Y n $ Pn· X for each x E C. If P is a limit point of
=
{Pn}, then clearly IIpli 1 and p. x ~ 0 holds for each x E C.
(d) Put C = B - A and note that G is a convex subset of Ri. From
An B = 0, we see that 0 rt C. So, by part (c), there exists some vector P :f:. 0
such that p·(b - a) ~ 0, or p. b ~ p. a for all a E A and b E B. Now if we
choose c so that sUPaeA P . a $ c $ infbeB P . b, then
p·a$c$p·b
for all a E A and b E B .•
Problem 2.3.7. For the Riesz dual system (i1,ioo) show that the absolute weak
topology and the norm topology on i1 coincide.
Solution: Let T =
lul(t'1,ioo ), the absolute weak topology on i 1 • We must
establish that the identity operator I: (t1' II . lid - (t1, T) is a homeomorphism.
=
To this end, let e (1,1, ... ) E ioo and note that for each Z = (Zb Z2, .•. ) E too
we have 00
IIZlh = ~)zil = (lzl,e).

i=l
Now select an arbitrary sequence {zn} of t1 satisfying IIznlh - 0, where
Zn = (z~, z~, .. .). If 0 $
y E ioo, then from
00 00
0$ (Iznl, y) = LYilzil $ IIYlloo [L Izil] = IIYlloollznlh,

i=l i=l
we see that (Izn\,y) - O. Thus, IZnl~O and so I:(t1.II·lId - (i1,T) is

continuous.
Next, suppose that a net {xa} of i1 satisfies Xa ~O. Then, from (*), we see
that IIxall1 = (Ixal, e) - 0 and so I: (t1' 1I·lId - (t1' T) is indeed a homeomor-
phism. Therefore, T coincides with the norm topology.•
For the next few problems we will need to invoke the Infinite Dimensional
Separation Theorem. For future reference, we state this important theorem
below.
(The Infinite Dimensional Separation Theorem) Suppose (X,T) is a (not

necessarily Hausdorff) locally convex space and fix two non-empty disjoint convex
subsets A and B of X. If one of them is closed and the other is compact, then
there exist a continuous linear functional f, some a E 1ft and some € > 0 such
that
f(a) ~ a +€ for all a E A and feb) $ a for all bE B.
For a proof of this theorem see [1, Theorem 4.54, p. 147].
Problem 2.3.8. Let (X, X') be a dual system and let Y be a vector subspace of
X. If Z f/. Y (the (T(X, X')-closure of Y in X), then show there exists a linear
=
functional z, E X' such that z'(z) :/: 0 and z'(y) 0 for all y E Y.
Solution: Let (X, X'} be a dual system, let Y be a vector subspace of X
and assume z f/. Y, i.e., {z} n Y = 0. Since Y is a closed vector subspace,
Y is also a closed convex set. So, by the Separation Theorem, there exist a
(T(X,X')-continuous linear functional (i.e., z' E X'), a E lR and € > 0 satisfying
z'(z) ~ a + € and z'(y) $ a for all y E Y. Since Y is a vector subspace, we
have ±ny E Y for all y E Y and all n. Consequently, ±nz'(y) =z'(±ny) $ a,
or Iz'(y)1 $ ;; for all y E Y and all n. This implies z'(y) = 0 for all y E Y. _
Problem 2.3.9. Show that every non-zero linear functional on a topological

vector space is an open mapping, i.e., it maps open sets onto open sets in R.
Solution: Let (X, T) be a topological vector space and let f: X -. R be nonzero
and linear. Fix z E X with fez) = 1. let V be an open subset of X and suppose
Y E f(V). Choose Z E V so that y =
fez). Fix 6 > 0 so that lal < 6 implies
Z + az E V. But then fez + az) =
y + a E f(V) for all a E (-6,6), i.e.,
(y - 6, Y + 6) ~ f(V). This proves f(V} open. _
Problem 2.3.10. Let (X, X') be a dual system and let C be a non-empty closed
convex subset of X. If x f/. C, then show that there exists some x' E X, satisfying
x'(x) f/. x'(C).
2.4 Banach lattices 107
Solution: Since {z} n C = 0, the Separation Theorem guarantees the existence

of some x' E X', some a E R and some c > 0 such that x'(x) ~ a+c and z'(c) ~
a for all c E C. Thus, z'(C) C (-oo,a] and z'(z) f/. (-oo,a]. Consequently,
x'(C) £ (-00, a] and so x'(x) f/. z'(C)._
Problem 2.3.11. Show that every convex preference on R~ with an extremely

desirable bundle can be supported by non-zero prices at every point.
Solution: Let ~ be a convex preference on R~ having an extremely desirable
commodity v > O. Fix Xo = (z!, Z2, .•. ,Xi) E Ri. We must show that there
exists a non-zero price p E 1R~ such that x ~ Xo implies p . x ~ p . Xo.
=
If Xo E o1R~, then Zi 0 for some i. If p =
ej (the ith coordinate unit
vector), then p . x ~ 0 = p . Xo for all x E 1R~, and so the non-zero price p
supports ~ at Xo.
Now suppose that Xo lies in the interior of 1R~. Then there exists some k
such that Xo - ~v E Int(1R~) for each n ~ k. Since Xo =
(xo - ~v) + ~v and
v is extremely desirable, we see that Xo >- Xo - ~v for n ~ k. This means that
for n ~ k, Xo - ~v f/. PXo = {x E R~: x ~ xo}. Since P Xo is a convex set,
it follows from the Finite Dimensional Separation Theorem (see Problem 2.3.6)
that for each n ~ k there exists a price Pn E R~ satisfying IIPn II = 1 and
Pn . X ~ Pn . (xo - ~v)
for all x E PXo ' Now if P is a limit point of the sequence {Pn}, then IIpll = 1
(and so P =1= 0) and from (*) we see that
P . x ~ P . Xo for all x E PXo .
This means that the non-zero price P supports ~ at Xo, as desired .•
2.4 Banach lattices
Problem 2.4.1. Show that IIz+ - Y+II ~ liz - yll holds for any pair of vectors
z and y in a normed Riesz space.
Solution: Recall that a norm 11·11 on a Riesz space is said to be a lattice norm
if Izl ~ Iyl implies IIzll ~ lIylI. A normed Riesz space is a Riesz space equipped
with a lattice norm.
From Problem 2.1.3 we know that Ix V z - y V zl ::; Ix - yl holds in a Riesz

space for all x, y and z. Letting z = 0, we get Ix+ - y+ I ::; Ix - yl and the desired
norm inequality follows .•
Problem 2.4.2. II A is an ideal in a normed Riesz space E, then show that the
norm closure 01 A is also an ideal.
Solution: Let A be an ideal in a normed Riesz space E, i.e., let A be a solid
vector subspace of E. Clearly, A, the norm closure of A, is also a vector subspace.
What needs verification is the solidness of A.
To this end, let Iyl ::; Ixl in E with x E A. Choose a sequence {xn} of A
such that IIx n - xII ~ 0. Since the lattice operations of E are norm continuous
(see the beginning of the proof of Problem 2.3.1), it follows that the function
I:E ~ E, defined by I(z) = [(-Izl) vY] I'Ilzl, is norm continuous and satisfies
-izi ::; I(z) ::; Izi for all z E E. In particular, from I/(xn}l ::; IXnl. we infer that
{j(x n )} ~ A. Now notice that
This implies y E A and so A is an ideal. •
Problem 2.4.3. Consider the Riesz space C[O, 1] equipped with the L1-norm
=
11/11 Jo11/(t)1 cit. Show that C[O, 1] under this norm is a normed Riesz space
but not a Banach lattice, i.e., a complete normed Riesz space.
Solution: From the monotonicity of the integral it should be clear that III ::; Igi
implies 11/11 ::; IIgll so that II . II is a lattice norm.
To see that C[O, 1] is not complete for this norm consider the sequence of
continuous functions {In} defined in Problem 2.1.11. That is, for each n > 1 the
function In is defined by
See Figure 17b. Now notice that for n > m we have
II/n - Imll
1
= ll/n(x) - Im(x)1 dx = hi
1+.J.
m lin (x) - Im(x)1 dx ::; ~
and so {In} is a II·II-Cauchy sequence. To see that C[O, 1] is not II'II-complete,

88Bume by way of contradiction that there exists some I E C[O, 1] satisfying
IIln - III = J: I/n(x) - l(x)1 dx -+ O. Next, fix 0 < Xo < ~. If I(xo) =1= 0, then
there exist some c > 0 and a subinterval [a, b] ~ (O,~) satisfying I/(x)1 ~ c for
all x E [a, b]. This implies
IIln - III = 11 I/n(x) - l(x)1 dx ~ lb lIn (x) - l(x)1 dx ~ c(b - a) > 0
for all n, contrary to IIln - III -+ O. Hence, I(x) = 0 for all 0 < x < ~.
Similarly, we can show that I(x) = 1 for all ~ < x < 1. But then I ¢ C[O, 1], a
contradiction. Therefore, Un} is not II·II-convergent in C[O, 1].
It is also interesting to note that C[O, 1] is dense in LdO,I] relative to the
L 1-norm 11·11. As a matter offact, if 0 is an open subset of some Euclidean space
ntt , then the vector subspace of all Coo -functions on 0 with compact support is
II'II-dense in L1(0); see [6, Problem 5, p. 160] and [7, Problem 21.5, p. 155] .•
Problem 2.4.4. Show that every reflexive Banach lattice has order continuous
norm. Also, give an example 01 a Banach lattice with order continuous norm
which is not reflexive.
Solution: We need the definitions of the concepts involved. If X is a normed
space, then every x E X gives rise to a continuous linear functional x on the
norm dual X, via the formula x(x') = x'(x). The mapping x 1-+ X is a linear
isometry from X into the double dual X" of X. If this mapping is onto, then
X is referred to as a reflexive Banach space. It is well known that a Banach
space is reflexive if and only if its closed unit ball is weakly compact; see [1,
Theorem 5.29, p. 196].
A Banach lattice E is said to have order continuous norm if its norm
function x 1-+ IIxll, from E into nt, is order continuous. It is easy to see that this
equivalent to saying that Xa ! 0 in E implies IIxall ! 0 in nt. It is well known
that a Banach lattice has order continuous norm if and only if its order intervals
are weakly compact; see [5, Theorem 12.9, p. 179] or [1, Theorem 7.19, p. 252].
Now let E be a reflexive Banach lattice and assume Xa ! 0 in E. We must
establish that IIxall ! 0 in JR. Let U' denote the closed unit ball of the norm
dual E' , i.e., U' =
{x' E E': IIx'll ~ 1}. By Alaoglu's Compactness Theorem,
we know that U' is w· -compact [1, Theorem 5.25, p. 194].
Now let 0 = {x' E U': x' ~ O}. Then an easy argument shows that 0 is
a w· -closed subset of U' and hence 0 is itself w· -compact. Moreover, from the
inequality Ix'(x)1 ~ Ix'I(lxl), we see that
IIxll = sup{lx'(x)l: x' E U'} =sup{x'(lxl): x' EO}. (1)
Next, observe that we can assume that the net {x a } is norm bounded (since
IIxall ~ IIxaoll for all a ~ aD and any fixed aD). Since E is reflexive, we know
that the net {x Q} has a weakly convergent subnet. But then, by property (3)
on page 85, XQ ....:... O.
In particular, if each x Q is considered as a real function on 0 (via the formula
»,
xQ(x') = x'(xQ then xQ(x') = x'(xQ) ! 0 holds for each x' E O. By Dini's
classical Theorem (see, for instance [1, Theorem 2.63, p. 55]), the net {x Q}
converges uniformly to zero on O. In view of (1), this means
IIXQII =sup{ x'(xQ): x' EO} ! 0,

which is the desired conclusion.
For the second part of the problem, notice that i1 is a non-reflexive Banach
lattice with order continuous norm .•
Problem 2.4.5. Assume that a sequence {xn} in a Banach lattice E satisfies

Xn $ X n +1 for all n. If limn_oo Xn =
x holds in E, then show that the vector x
is the least upper bound of the set {x n }.
Solution: We shall prove the following general result .
• Let (X, r) be a partially ordered vector space such that X+ is r-closed. If
=
a net {xQ} of X satisfies XQ t and xQ....:.. x, then x sUpQ XQ' i.e, XQ t x.
To see this, assume XQ 1 and XQ ~ x. From XQ - xp ~ 0 for all <:t ~ {3,
xQ-xfJ -;",x-xfJ and the r-closedness of X+, we get x-xp E X+ (i.e., x ~ xfJ)
for all {3. That is, x is an upper bound ofthe net {x Q}.
To verify that x is the least upper bound, assume that y ~ XQ for each <:t.
Since y - XQ -;.. Y - x, the r-closedness of X+ yields once more y - x E X+, or
y ~ x. In other words, x = sUPQ XQ.•
Problem 2.4.6. Consider the function cp: 1Roo --+ [0,00] defined by cp(x) =
E::1 2- i lxil for = =
each x (X1,X2,"') E Roo. If E {x E Roo: cp(x) < oo},
then show that E is a Riesz space, and cp is a lattice norm on E.
Solution: Recall that a positive operator T: E --+ F between two ordered vector
spaces is said to be strictly positive if x > 0 implies Tx > O. We shall establish
first the following general result .
• If f: E --+ R is a strictly positive linear functional, then the formula
defines a lattice norm on E.

We verify the properties of the lattice norm.

(1) Clearly IIxll ~ 0 for each x and (by the strict positivity of f), we see that
IIxll = I(lxl) =0 <==> Ixl = 0 <==> x = o.

(2) For each scalar Aand each vector x we have IAxl = IAlixl. So,
(3) The lattice form of the triangle inequality, Ix + yl $ Ixl + Iyl, and the
positivity of I imply
IIx + yll = 1(lx + yl) $ 1(lxl + lyl) =1{lxl) + 1(lyl) = IIxll + lIyll·
= =
(4) Now if Ixl $ Iyl, then IIxll 1(lxl) $ 1(lyl) lIyll· So, 11·11 is a lattice
norm.
Now let rp and E be defined as in the Problem. From IXi + Yil $ IXil + IYil
=
and IAxil IAllxil for each i, it follows that E is closed under addition and scalar
multiplication, i.e., E is a vector subspace of Roo. Since x E E trivially implies
Ixl E E, it follows that E is also a Riesz subspace of Roo. Next, note that the
linear functional I:E -+ JR, defined by I(x) =
E:12-ixi, is strictly positive.
By the above, the function rp: E -+ JR, defined by
rp(x) = 1(lxl) ,
is a lattice norm on E .•
Problem 2.4.7. II a sequence {x n } in a Banach lattice E is norm convergent

to the bundle x, then show there exists a subsequence {yn} 01 {x n } and a bundle
v E E+ such that IYn - xl $ ~v holds lor all n.
Solution: Let E be a Banach lattice and assume IIxn - xII -+ O. An inductive
argument shows that there exists a subsequence {yn} of {x n } such that llYn -xII $
n~" for each n.
Now consider the sequence {v n } of E defined by
n
Vn = L ilYi - xl·
i=1
Then Vn r. Moreover, from
n+k n+k n+k
IIvnH - vnll = II L ilYi - xiii $ L illYi - xII $ L ~$ 21.. ,
i=n+l i=n+l i=n+l
we see that {vn} is a norm Cauchy sequence. If Vn v in E, then from

-+
Problem 2.4.5 we get Vn t v E E+. In particular we have nlYn - xl ~ v, or

IYn - xl ~ ~v, for all n, as desired. _
Problem 2.4.8. II E is a normed Riesz space and 0 < Zo E E, then show that
there exists a positive linear functional I in E' 01 norm one such that I(zo) =
II x oll·
Solution: Let E be a normed Riesz space and fix Xo > O. Define the function
p:E -+ R by
p(x) IIz+lI. =
A routine verification shows that p is a sublinear mapping. Now consider the
vector subspace M = {AXo: A E R}, and define the linear functional I: M -+ R
via the formula
I(Axo) = Allxoll·
Clearly, I(Axo) ~ p(AXo) for each A. So, by the Hahn-Banach Extension The-
orem (see the statement of this theorem before Problem 2.2.10), there exists a
linear extension of I to all of E (which we shall denote by I again) satisfying
I(z) ~ p(x) for each x E E.
=
Now note that I(zo) IIxoll. On the other hand, if x E E+, then from
-/(x) = I(-z) ~ pc-x) = 11(-x)+11 = 11011 = 0,

we see that I(x) ~ 0, i.e., I is also a positive linear functional. Now to see that
=
11/11 1, note that
±/(x) = I(±x) ~ p(±x) = 11(±x)+11 ~ Illxlil = II x ll

implies I/(x)1 ~ IIxll, and so 11/11 ~ 1. Since I(xo) = IIxoll, we conclude that
11/11 = 1._
Problem 2.4.9. II x is a positive vector in a normed Riesz space E, show that

IIxll = sup{t(x): 0 ~ lEE' and 11/11 = I} .
Solution: Fix z ~ O. If 0 ~ lEE' satisfies 11/11 = 1, then I(z) ~ 1I/11'lIx ll = IIzll

and so
sup{t(z): 0 ~ lEE' and 11/11 =
I} ~ IIzll.
Problem 2.4.8 easily implies sup {t(z): 0 ~ lEE' and 11/11 = I} = IIzll. _
Problem 2.4.10. Consider a Riesz space E and let 0 ~ lEE"'. Let F

be a Riesz subspace, and suppose that a linear functional g: F -+ R satisfies
o ~ g( z) ~ I( z) lor all Z E F+. Then show that 9 can be extended to a positive
linear functional on E such that 0 ~ 9 ~ I holds.
Solution: Let F be a Riesz subspace of a Riesz space E and assume that a
linear functional g: F -+ R satisfies 0 ~ g(z) $ I(z) for each z E F+, where
o $ lEE'" is fixed.
If we define the function p: E -+ R via the formula
p(z) = I(z+) ,
then p is a sub linear function. Moreover, since F is a Riesz subspace (in particular
z E F implies .x+ E F) and g is positive on F, we see that
for all z E F. By the Hahn-Banach Extension Theorem, there exists a linear

extension of 9 to E (which we shall denote by 9 again) satisfying g(z) $ p(.x) for
all z E E. So, if .x E E+, then g(z) $ p(z) = I(z+) = /(z). On the other hand,
if z E E+ , then from
-g(z) = g(-z) ~ p(-z)+) = 1( -z)+) = 1(0) = 0,

we see that g(z) ~ O. That is, 0 ~ 9 ~ I, as desired .•
Problem 2.4.11. Show that every Dedekind complete Riesz space is unilormly
complete. Also, present an example of a unilormly complete Riesz space which
is not Dedekind complete.
Solution: Recall that a sequence {zn} in a Riesz space E is said to be:
1. e-uniformly Cauchy (where e E E+) whenever for each e > 0 there
exists some k such that IZn - Zm 1 ~ ee for all n, m ~ kj and
2. e-uniformly convergent to some z if for every e > 0 there exists some
k such that IZn - zl $ ce for all n ~ k.
Note that every e-uniformly convergent sequence is automatically e-uniformly
Cauchy. A Riesz space is said to be uniformly complete if every e-uniformly
Cauchy sequence is e-uniformly convergent in E.
Now let E be a Dedekind complete Riesz space, and let {zn} be an e-
uniformly Cauchy sequence. Using induction, we can construct a subsequence
{yn} of {zn} satisfying IYn+1 - Ynl::; 21.. e for each·n. Put

n n
Un = yt + L:(Yi+1 - Yi)+ and Vn = Yl + L:(Yi+1 - Yi)- .
i=1 i=1
From Un ::; Un+l> un::; yt

+(L~=1 ~)e ::; yt
+e and the Dedekind completeness
of E, we see that Un 1 u. Similarly, Vn 1 v. Now
n+m
0::; Un+m - Un = L: (Yi+1 - Yi)+ ::; 21.. e
i=n+1
implies Un+m ::; Un + 21.. e for each m and so U ::; Un + 21.. e for each n. Therefor<l,
o ::; U -
Un ::; 21.. e. Similarly, 0 ::; V - Vn ::; 2~ e for each n. But then
for all n. Now let Z = U - v and observe that Un - Vn = Yn+1 for each n. (Keep
in mind that z+ - z- = z for each vector z.) Thus, (*) can be written as
IYn+1- zl::; 2,Lle, n = 1,2, ....
Now let c > o. Choose some k satisfying 2l.1 < ~ and IZn - zml ::; ~e for all
n, m ~ k. Choose some m > k such that YA:+1 = Zm and note that n ~ k implies
IZn - zi = I(Zn - YA:+d + (YA:+1 - z)1

< IZn - Yj,+11 + IYA:+1 - zi
IZn - zml + IYA:+1 - xl
< ~e + ~e =
ce.
This shows that {Zn} is e-uniformly convergent to Z and so E is a uniformly
complete Riesz space.
For the second part, notice that the Riesz space C[O, 1] is uniformly complete
(why?) but fails to be Dedekind complete; see Problem 2.1.11 .•
Chapter 3
Markets With Infinitely Many

Commodities
3.1 The economic models
Two very important characteristics of the economic models in this chapter are
the following.
1. The commodity-price duality is described by a Riesz dual system (E, E').
The Riesz space E is the commodity space, and the Riesz space E' is the
price space. As usual, the evaluation (x,p) is denoted by p. x, i.e.,
(x,p) =p. x
for all x E E and all pEE'.
2. There are m consumers indexed by i such that:
a. Each consumer i has E+ as her consumption set.
b. Each consumer i has some initial endowment Wi > O. The total
endowment is denoted by w, i.e.,
m
w= LWi.
i=1
c. The preference of each consumer i is represented by a monotone

quasi-concave utility function Uj: E+ -- JR. Monotonicity means, of
course, that x ~ Y in E+ implies Ui(X) ~ Ui(Y)·
d. There is a locally convex-solid topology r on E consistent with
the dual system {E, E'} under which every utility function U t is
116 Chapter 3: MarJcets With Infinitely Many Commodities
r-continuous. (Equivalently, the utility functions are continuous for

the absolute Mackey topology Irl(E, E'), the finest locally convex-
solid topology on E consistent with the dual system (E, E') .) In
particular, note that each utility function Ui is Mackey continuous.
The above properties characterize our exchange economies in this chapter.

Formally, we have the following definition.
Definition: An exchange economy £ is a 2-tuple
£ = ({E, E'), {(Wi, Ui): i = 1, ... , m}) ,

where the components of £ satisfy properties (1) and (2) above.
A pure exchange economy is an exchange economy £ with the
additional property that each Ui is strictly monotone.
3.2 Proper and myopic preferences
Problem 3.2.1. If a monotone preference relation is v-uniformly r-proper, then

show that it is also w-uniformly r-proper for each w ~ v.
Solution: Let E be a Riesz space and r a linear topology on E. Recall that
a preference relation ~ on E+ is said to be v-uniformly r-proper whenever
there exists some r-neighborhood V of zero such that for any arbitrary z E E+
satisfying z - av + z ~ z in E+ with a > 0 we have z f/. aVo
Now let ~ be a monotone v-uniformly r-proper preference, and fix a r-
neighborhood V of zero as above. Assume w ~ v and let z - aw + z ~ z in E+ ,
where a > O. Since z - av + z ~ z - aw + z, the monotonicity of ~ implies
z-av+z ~ z-aw+z, and so z-av+z ~ Z. SO, by the v-uniform r-properness
of~, we infer that z f/. aVo This shows that ~ is w-uniformly r-proper .•
Problem 3.2.2. Let (Zl, ... , zm) be an allocation supported by a non-zero price
p. Show that each preference relation ~i is r-proper at Xi.
Solution: Let E be a Riesz space and T a linear topology on E. Recall that

a preference relation ~ is said to be T-proper at some point Z E E+ whenever
there are some v> 0 and some r-neighborhood V of zero such that z-av+z ~ z
in E+ with a > 0 implies z ri aVo
Now let p be a non-zero price supporting the allocation (Z1' ... ,zm). Since
the price p is r-continuous, there exists a T-neighborhood V of zero such that
Ip· yl < 1 for each y E V. Also, since p > 0, there exists some v E E+ satisfying
p. v = 1. Using V and v, we shall now show that each ~, is r-proper at z,.
To this end, suppose z, - av + z b z,for some a > o. The supportability
from p implies p . x, ,- z"
ap . v + P . z ~ p. = =
or p . z ~ ap . v a. If z aw with
w E V, then p. z = =
ap· w < a· 1 a, a contradiction. Hence z ri aVo This
shows that each preference ~, is T-proper at the point z, .•
Problem 3.2.3. Let T be a linear topology on a Riesz space E. Show that a
preference ~ on E+ is T-proper at some point z E E+ if and only if there exists
some non-empty T-open cone r (depending on z) such that
a. r n (- E+) ::f 0; and
b. (x+r)n{YEE+: y~x}=0.
Use this conclusion to present an alternate proof of Problem 3.2.2.
Solution: Recall that a non-empty open subset C of a topological vector space
is said to be an open cone if x E C implies ax E C for each a > O.
Now let E be a Riesz space, T a linear topology on E and ~ a preference
on E+. Assume that ~ is T-proper at some x E E+. Then there exist some
v > 0 and a T-open neighborhood W of zero such that z - av + z ~ z in E+
with a > 0 implies z ri aW; see the definition at the beginning of the solution
to Problem 3.2.2. Now consider the set
r = {A(-v + w): A> 0 and wE W} = UA(-V + W).

>'>0
Clearly, r is a T-open set where r E r implies ar E r for each a > 0, i.e., r is a
T-open cone. We claim that r satisfies the desired properties (a) and (b).
Indeed, note that (a) holds since -v Ern (-E+). On the other hand, if
for some r E r we have z + r ~ z, then write r = A( -v + w) with ~ > 0
and w E W. This implies z - ~v + ~w ~ z, and in view of the T-properness
of ~ at z, we see that ~w ri ~W, or w ri W, which is impossible. Hence,
(z + r) n {y E E+: y ~ x} = 0 as well.
For the converse, assume that there exists some non-empty T-open cone r
satisfying properties (a) and (b). Fix some r Ern (- E+) and then select some
=
T-open neighborhood W of zero such that r + W ~ r. Put v -r and assume
118 Cbapter 3: Markets Witb Infinitely Many Commodities
Z - av + z !:: Z in E+ with a > O. To complete the proof, we shall show that

Z ft aW.
To see this, suppose by way of contradiction that z E a W. Write z = aw for
=
some w E W. But then z-av+z!:: z implies z+a(w-v) z+a('Y+w)!:: z.
Since 'Y + wE 'Y + W ~ rand r is a cone, we get a('Y + w) E r and so
contrary to (b). This contradiction establishes that!:: is r-proper at z.

Now let us present an alternate proof of Problem 3.2.2 using the above
conclusion. We assume that (Zl, ... ,zm) is an allocation such that for some
non-zero positive price z !::i Zi implies p . z ~ P . Zi. (We must assume that p is
positive!)
Let r = h E E: p. 'Y < OJ. Clearly, r is a r-open cone. Moreover, since
p > 0 there exists some z E E+ with p. z > O. Therefore -z Ern (-E+),
and so r n (- E+) =f 0. Now if some 'Y E r satisfies Zi + 'Y !::i Zi, then, by
our condition, p . Zi + P . 'Y ~ P . Zi, or P . 'Y ~ 0, a contradiction. Hence,
(Zi + r) n {y E E+: y !::i Zi} = 0 for each i. By the above, this proves!:: is
r-proper at each Zi .•
Problem 3.2.4. For a uniformly r-proper preference !:: show that the (non-
empty) set U of all vectors of uniform r-properness satisfies the following.
a. If t is also monotone, then U + E+ =U;
b. If!:: is also monotone, then v, wE U implies v + wE U and .xv E U for
each .x > OJ and
c. U is r-open relative to E+.
Solution: (a) This is an immediate consequence of Problem 3.2.1.

(b) Let v,w E U. By part (a), v + wE U. For the second part define the
=
r-neighborhood V as in part (a). If .x > 0 and z-a(Av)+z z-(aA)v+z t z
=
holds in E+ for some a > 0, then z ft (aA)V a(AV), proving that AV is also a
vector of uniform r-properness for t.
(c) To show that U is r-open relative to E+, let v E U. We must establish
the existence of a r-neighborhood W of zero such that (v + W) n E+ ~ U.
Start by observing that since v E U there exists some r-neighborhood V of
zero such that z - av + z t Z in E+ with a > 0 implies z ft a V. In particular,
v ft V. Pick a symmetric r-neighborhood W of zero such that W + W ~ V.
We claim that (v + W) n E+ ~ U. To this end, fix w E W such that
v + w ~ O. If v + w = 0, then v = -w E W ~ V, a contradiction. Hence,
v + W > O. Now assume that x - a(v + w) + z t x holds in E+ for some a > O.

=
From x - a( v + w) + z x - av + (z - aw) t x, we see that z - aw rI. a V. This
=
guarantees z rI. a W. Indeed, if z E a W, say z aWl, then from
z - aw = aWl - aw = a(Wl - w) E a(W + W) ~ aV,
we get z-aw E aV, a contradiction. Thus, v+w E U and so (v+ W)nE+ ~ u.

This shows that U is T-open relative to E+ .•
*
Problem 3.2.5. Consider the Riesz dual system (lp, lq), where 1 ::; p, q ::; 00
satisfy + ~ = 1, and let T be a consistent locally convex-solid topology on lp.
If t is a uniformly T-proper preference on It and v =(Vb V2,' .• ) is a vector
of uniform T-properness for t, then show that there exists some n such that the
vector (Vb V2,"" Vn, 0, 0, 0, ... ) is also a vector of uniform T-properness for t.
Solution: From Problem 3.2.4(c) the following conclusion should be immediate.
• Let E be a Riesz space, T a linear topology on E, t a uniformly T-proper

preference on E+ and v > 0 a vector of uniform T-properness for t. If a
net {v>.} of E+ satisfies v>. ....:.. v, then eventually all the v>. are vectors of
uniform T-properness for t.
*
We know that the Riesz dual systems (loo,ll), (lbloo) and (lp,lq) (1 <
p, q < 00 and + ~ = 1) are all symmetric; see [3, p. 102]. This guarantees that
every consistent locally convex-solid topology on any lp-space is automatically
order continuous. (Recall that a linear topology T on a Riesz space is said to be
order continuous if Xa ~O implies Xa ....:..0.)
Now let T be a consistent locally convex-solid topology on some lp-space and
let v = (Vl' V2, .•. ) > 0 be a vector of uniform T-properness for t. By the above
discussion T is order continuous. Put v n = (Vl' V2, •.• , Vn , 0, 0, ... ) and note that
0::; Vn 1 v in lp. So, by the order continuity of T, we see that Vn ....:.. v. But then,
by the statement at the beginning, we are guaranteed that the v n are eventually
vectors of uniform T-properness for t .•
Problem 3.2.6. The preference relation we consider in this problem was intro-
duced by A. Mas-Colell [17}. For each n ~ 1 let un:R -+ R be the continuous
function defined by
if t::; ~
if t> ~
120 Chapter 3: Markets With Infinitely Many Commodities
and consider the utility function U: it -+ 1R defined by
=L
00
U(Z1,Z2"") un(zn).
n=1
a. Show that U is strictly monotone, concave and norm continuous.
b. Show that the preference t represented by the utility function U is not

uniformly II . lit -norm proper.
Solution: (a) Notice that un(t) ~ l"
+ t for each t ~ O. This implies that U is
indeed a real-valued function. Also, invoking Problem 1.1.15, we see that each
Un is automatically a concave function.
First, we shall show that U is strictly monotone. To see this, let 0 ~ Z < Y
in it. This means 0 ~ Zi ~ Yi for each i and Zi < Yi for some i. Since each
function Ui is strictly increasing on [0,00) (why?), we see that ui(zd ~ ui(yd
for each i and Ui(Zi) < Ui(Yi) for some i. This easily implies
=L L Ui(Yi) =U(y).
00 00
U(z) Ui(Zi) <

i=1 i=1
The concavity of U follows immediately from the concavity of each Un.

In order to establish the II . Ill-norm continuity of U, we need to show that
for each z, Y ~ 0 and each n we have
(1)
For 0 ~ Z ~ Y ~ ~, we have Iun(z) - un(Y)1 = 2n lz - yl ~ 2n~ =

Similarly, if 21" < Z ~ y, then
Iun(z) - un(Y)1= 1(2~ - ~ + z) - (2~ - ~ + y)1 = Iz - YI·
On the other hand, if 0 ~ z ~ ak < y, then
Now assume that a sequence {xn } of it,

where Xn =
(z~, z~, ... ), satisfies
IIxn - xiII -+ 0, and let e > O. Fix some m such that E:m ~ + IIxn - xiII < e
for all n ~ m. From Izf - Zi I ~ IIx n - xlh -+ 0, we get zf -;+ Zi for each i, and
from the continuity of each Ui, we get Ui (zf) -;+ Ui (z;) for each i. In particular,
there exists some "0 > m such that E~11Iui(zr) - Ui(Zi)1 < £ for all " ~ "0.
But then for "~ "0, it follows from (1) that
00 00
IU(x,,) - U(x)1 = 1I:[Ui(Zn - Ui(Zi)]1 $ I : IUi(Zr) - Ui(Zi)1

i=l i=l
m-1
E E
00
$ IUi(Zr) - Ui(Zi)1 + IUi(zf) - Ui(Zi)1

i=l i=m
00
$ £ +E ;. + IIx" - xlh < £ + £ = 2£ ,

i=m
which shows that U(x,,) -+ U(x), i.e., U is 1I·1I1-norm continuous.
(b) Assume by way of contradiction that ~ is uniformly II ·Ih -norm proper.
The strictly positive vector1 v = ,~, (is, is, ... ... )
must be a vector of
uniform norm properness for ~; see [3, Theorem 3.2.7, p. 120]. This means that
there exists some £ > 0 such that Z - av + z ~ Z in it with a > 0 implies
IIzlh ~ a£.
Next, we claim that
(2)
holds for each Ie, where eA: denotes the sequence having its leth component equal
to one and every other equal to zero. We shall compute the utilities of the
involved bundles. From 0 $ ~ $ ~, we get
00 00 00
U(v) = EUn(~)= E 2n vhr = E 2"\1 = i· (3)

n=1 ,,=1 n=1
=
Now put w v-2-A:v +2- 2A:e A: =
(1-2-A:)v+2-2A:eA:. Next, we shall compute
the value U(w). For" 1= Ie, we have w" = (1 - 2-A:)~ and so 0 $ Wn $ ~.
Therefore, u,,(w,,) = 2n(l- 2-A:)~ = 1i..ft. This implies
Now note that
1If (E, E') is a Riesz dual system, then a vector 0 < :r: e E is said to be strictly positive
whenever for each 0 < :r:' e E' we have (:r:, :r:') = :r:'(x) > o.
122 Chapter 3: MarJcets With InIinitely Many Commodities
This guarantees wElt and Uk(Wk) = ~ + 122f:t:: . Consequently,

00
U() '" ( ) I 2_2- k
W =L..JUn Wn =2+~>2'
I
n=l
which when combined with (3) shows U(w) > U(v). This establishes (2).
= t
Finally, from (2), we see that 2- 2k 112-2keklh ~ 2- kc, or 2k ~ for each
k, a contradiction. This shows that t is not uniformly 1I·III-norm proper .•
Problem 3.2.7. Consider the Riesz space C[O, 1] and define u: (C[O,1])+ ...... It
by
J
I
u(z) = ';z(t) dt.

o
Show that the utility function U is II . 1100 -continuous, strictly monotone, strictly
concave, and that it fails to be myopic.
Solution: The strict monotonicity and the strict concavity of u are inherited
from the strict monotonicity and strict concavity of the square root function.
For the norm continuity of u assume IIzn - ziloo ...... 0 in (C[O,l])+. Then
zn(t) ...... z(t) for each t E [0,1] and there is some M > 0 satisfyin IIznlloo ~ M
or 0 ~ zn(t) ~ M for all n and all t E [0,1]. This implies Zn(t) ...... ';z(t) for
each t E [0,1] and 0 ~ ';Zn(t) ~ ,fM for all t E [0,1] and each n. But then, by
the Lebesgue Dominated Convergence Theorem, we see that
Therefore, u is II . lloo-continuous.
To show that u is not myopic, we'll need to recall the construction of the
=
€-Cantor set. Let 0 < € < 1 and put 0 1 - € > O. Start with Co =[0,1]
and delete from the center of Co an open interval of length ~o. Let C I denote
the remaining set after this removal. That is, C I =
[0, ~ - ~] U [~ + ~, 1].
The set C1 is a union of 21 = 2 disjoint closed intervals of equal length, and
its Lebesgue measure is A(CI ) = 1 - !o. To construct C2 , we delete from the
center of each of the disjoint closed intervals of CI an open interval of length
/so. Thus, the total length removed from C I is -boo
Then C2 is the union
of the remaining 22 pairwise disjoint closed intervals of equal length. Clearly,
=
A(C2) A(Ct} - -bo = U -b)o.
1- + See Figure 20a.
The inductive step of the construction is as follows. Assume that Cn is
a union of 2n pairwise disjoint closed intervals of the same length such that
A( Cn ) = 1 - (~ + ~ + ... + l,,) 6. Now from the center of each of these 2n closed

intervals remove an open interval oflength ~6. Let Cn +1 be the union of the
remaining 2n +1 pairwise disjoint closed intervals of equal length. Since the total
length of the removed intervals from Cn is 2"\1 6, we see that
A(Cn+d = 1- (! + ~ + ... + 21" + 2,,\r) 6 .

By construction Cn +1 ~ Cn for each n, and the c:-Cantor set is now defined by
Ce = n:=1 Cn. Notice that Ce is closed (and hence compact) and nowhere dense
in [0,1]. Its Lebesgue measure is precisely
00
A(Ce) =nl!.~ A(Cn) = 1 - (L: 21.. )6 = 1 - 6 = c:.

n=1
1 t y=xo(t)
,
·1·
I
Co 0• 1
• 0
i
1
..
• . ..
C
20
_ . -.•."."•...•. _ " -
1
..
Fig. 20a Fig. 20b
Figure 20
124 Chapter 3: Markets With InJinitely Many Commodities
Now we shall construct a sequence {xn} of continuous functions using the

e-Cantor set as follows. We start with Xo = 1, the constant function one. The
function Xl will be constructed using the set C 1 . Let us say C1 [0, a] U [b, 1]; =
see Figure 20b. Pick two arbitrary numbers c and d such that a < c < d < b
and then define Xl as shown in Figure 20b. The construction of X2 is done in a
similar fashion. Over a deleted subinterval (from Ct) its graph is constructed the
same way the graph of Xl was constructed over [a, b]. However, over the already
deleted intervals (here [a, b] only) we keep the same piecewice linear shape of the
graph but with C1 = ~ and d1 = 4¥.
Now the construction of the functions
{xn} can be completed formally by induction by using the above procedure.
Clearly, 0 :::; Xn ! and moreover xn(t) ! 0 holds for each t in anyone of the
removed subintervals. Since the union of all these subintervals is dense in [0,1]'
we infer that Xn ! 0 in C[O, 1]. (Indeed, if:z: :::; :Z:n for all n and some :z: E qo, 1],
then x(t) :::; 0 for all t in a dense subset of [0, 1] and so :z:(t) :::; 0 for all t E [0,1].)
Thus, Xn ~ 0 holds in C[O, IV
Next, notice that :Z:n ~ Xc,. ~ Xc.' and so Fn ~ Xc. for each n. Hence,
by the monotonicity of the Lebesgue integral, we have
U(Xn) = 10 1
vxn(t)dt = 10 1
V:Z:n(t)dA(t)
> 10 1 Xc.(t) dA(t) = A(Ce ) =e > 0

for all n. This shows that u(:Z:n) -1+ o. Therefore, U is not a myopic (i.e., order
continuous) utility function. _
Problem 3.2.8. If Xn ~:z: holds in a Frechet lattice, then show that there exists
a subsequence {:eA.,.} of {:en} such that :eA. .. ~:e. Use this result to conclude that
every myopic utility function defined on the positive cone of a Prechet lattice is
topologically continuous.
Solution: First recall that a Frechet lattice is a complete metrizable locally
solid Riesz space. The solution below is similar to that of Problem 2.4.7.
2Here is Mike Maxwell's way for proving the existence of a sequence {Xn} with the above
properties. Pick asequence {Vn } of open sets satisfying VI ~ V2 ~ ... ~ Ct and >'(Vn ,Ct) .t. o.
By Urysohn's Lemma, for each n there exists some function 0 $ Xn E G[O,l] with Xn = 1
on C. and Xn = 0 on [0, 1]' Vn. Replacing each Xn with min{x}, ... ,Xn}, we can assume
Xn !. Clearly 0 is a lower bound. Assume by way of contradiction that 0 < v E G[O, I] is
also a lower bound for {Xn}. Then Xn(t) ~ v(t) > 0 for all tel for some open interval 1.
Since C. is nowhere dense, can shrink 1 so that 1 n C. = 0. But then since 1 ~ Vn , we have
>.(1) = >'(1 \ Cr ) $ >'(Vn ,Cr ) .t. 0, a contradiction. Hence Xn .t. 0 in C[O, 1] and so Xn ...!.. O. In
addition, Xn(t) ~ xc.(t) for all t E [0,1] and all n.
Let Xn -.:.. x in a Frechet lattice (E, r). Pick a sequence {Vn} of r-neighbor-
hoods of zero satisfying Vn+l + Vn+l ~ Vn for each n. In particular, notice that
for any k ~ 1 we have
Since E is locally solid there exists a subsequence {zn} of {xn} satisfying

IZn -xl E ~ Vn for each n. (Keep in mind that aVn is a r-neighborhood of zero for
each a.) Thus, we have nlzn - xl E Vn for each n. Next, let Yn = E~=l ilzi - xl
for each n. From
n+k
IYn+k - Ynl = L: ilzi - xl E Vn+k + Vn+k-l + ... + Vn+ 1 ~ Vn ,
i=n+l
we see that {yn} is a r-Cauchy sequence. Let Yn -.:.. y. Since Yn f and E+ is
r-closed 3 , it follows (see the solution to Problem 2.4.5) that Yn f Y holds in E.
This implies nlzn - xl ~ Yn ~ y, or IZn - xl ~ ~Y for all n. Thus Zn ~ x.
Now let 'II: E+ - 1R be a myopic utility function, and let Xn -.:.. x in E+.
If u(xn) f+ u(x), then, by passing to a subsequence, we can assume that there
exists some c > 0 such that Iu(x n ) - u(x)1 ~ c for each n. But then by the
above, there exists a subsequence {zn} of {x n } satisfying Zn ~ x in E+. Since
'II is myopic, it follows that
0< c ~ lu(zn) - u(x)l-- 0,
which is impossible. Hence, Xn -':"x in E+ implies u(xn) - u(x). This proves

that every myopic utility function on E+ is topologically continuous .•
Problem 3.2.9. Let (E, E') be a symmetric Riesz dual system. If a utility
function'll: E+ - 1R is weakly continuous on the order bounded subsets of E+,
then show that'll is a myopic utility function.
Solution: Let (E, E') be a symmetric Riesz dual system, and let 'II: E+ - 1R
be a utility function which is weakly continuous on the order bounded subsets
of E+.
To see that 'II is myopic, let Xa ~ x in E+. This means that there exists a
net {ya} of E+ satisfying IXa - xl ~ Ya ! o. From Xa - x ~ IXa - xl ~ Va, we
see that 0 ~ Xa ~ X + Ya for each a. Hence, 0 ~ Xa ~ X + Yao for all a ~ ao.
This implies that we can assume that the net {xa} is order bounded.
3 The positive cone is always closed for any Hausdorff locally solid topology T on E. Indeed,
the lattice inequality Ix- - y-I ~ Ix - yl implies that the mapping x ...... x- is (uniformly)
=
continuous and so E+ :::: {x E E: x- o} must be T-closed.
Next, notice that since {E, E'} is symmetric, the weak topology u(E, E') is
order continuous (see [3, Definition 2.3.7, p. 102]) and so Xa ~x. Since {xa}
can be viewed as an order bounded net, our hypothesis implies u(xa) -+ u(x).
That is, we have shown that xa..!.t. x in E+ implies u(x a ) -+ u(x), which means
that U is a myopic utility function .•
3.3 Edgeworth equilibria and the core
Problem 3.3.1. Show that the notion of Edgeworth equilibrium is a "price free"
concept. That is, if {F, F'} is a dual system (not necessarily a Riesz dual system)
such that F is a Riesz subspace of E containing the order interval [0, w], then
show that an allocation is an Edgeworth equilibrium with respect to {E, E'} if and
only if it is an Edgeworth equilibrium with respect to {F, F'}. (For the economy
with dual system {F, F'} we consider each preference restricted to F+.)
Solution: Observe that since the order interval [O,w] is a subset of F, the set of
all allocations with respect to the Riesz dual system (E, E') coincides with the set
of all allocations with respect to the dual system {F, F'}. Since the preferences
are also the same on [O,w] with respect to both dual systems, it follows that
the core allocations coincide for both exchange economies. This implies that the
Edgeworth equilbria are the same for the exchange economies with dual systems
{E,E'} and (F,F') .•
Problem 3.3.2. If an exchange economy has a single consumer with a strictly

convex preference and initial endowment w, then show that the allocation (w) is
an Edgeworth equilibrium.
Solution: We must show that (w) belongs to the core of every r-fold replica
economy. To see this, assume by way of contradiction that there exists some
allocation (Xl, ... , x r ) in an r-fold replica economy and a coalition S (i.e., a
non-empty subset of {I, 2, ... , r}) of k consumers such that
a. Ei€S Xi =Ei€S w =kw, and

b. Xi >- w for each i E S.
Since t is strictly convex, it follows from the statement at the beginning of the
solution to Problem 1.6.9 that W = t EiES Xi >- w, which is impossible. Hence

(w) is an Edgeworth equilibrium. _
Problem 3.3.3. Prove the following statements.

1. Every core allocation is individually rational and weakly Pareto optimal.
2. Every Walrasian equilibrium is a core allocation.
3. If in a pure exchange economy the order interval [0, w] is weakly compact,
then the economy has an Edgeworth equilibrium.
Solution: (1) Before proceeding with the proof, let us remind the reader of the
definitions of the concepts involved. An allocation (Xl> ... , xm) in an exchange
economy is said to be:
a. individually rational, if Xi b Wi holds for each consumer ij
b. weakly Pareto optimal, if there is no allocation (Yl, ... , Ym) such that
Yi h Xi holds for each consumer ij
c. Pareto optimal, if there is no allocation (Yl> ... , Ym) such that Yi t i Zi

holds for each consumer i and Yi >-i Zi holds for at least one consumer ij
and
d. a core allocation, if it cannot be improved upon by any coalition. That
is, if there is no coalition S and allocation (Yl, ... , Ym) such that
• EiES Yi = EiES Wi, and

• Yi h Xi holds for each i E S.
Now let (Xl, ... , Xm) be a core allocation. To see that (Zl, ... , Zm) is individually
rational, note that if WII: >-k XII: holds for some k, then the coalition S consisting of
=
the kth consumer alone (i.e., S {k}) can improve upon the allocation. Hence,
Zi b Wi must hold for each consumer i.
To see that (Xl, ... , xm) is also weakly Pareto optimal, let (Yl, ... , Ym) be
another allocation satisfying Yi h Xi for each i. This means that the grand
=
coalition.N {I, ... , m} can improve upon the allocation, which is impossible.
Hence, the allocation (Xl> ... , xm) is also weakly Pareto optimal.
(2) Again, before proceeding with the proof, let us recall the definition of
a Walrasian equilibrium. An allocation (Xl, ... , xm) in an exchange economy is
said to be a Walrasian (or competitive) equilibrium whenever there exists
some price p 1= 0 such that Xi E Bi(P) = {X E E+: p. X ~ p. Wi} and
X h Xi implies p .X > p . Wi ,
or equivalently, whenever Zi is a maximal element in the budget set Bi(p) for

each i.
Now let (Z1. ... , Zm) be a Walrasian equilibrium with respect to a price
p 1= O. We shall establish that (ZI,"" zm) is a core allocation. To this end,
assume by way of contradiction that there exist an allocation (Yl, ... , Ym) and a
coalition S such that
i. EiES Yi = EiES Wi; and
ii. Yi ~i Zi for each i E S.
Then, p. Yi > p. Wi must hold for each i E S, and consequently
which contradicts (i). Therefore, (Z1"'" zm) is a core allocation.

(3) Let £ be a pure exchange economy with m consumers. This means that
the commodity-price duality is described by a Riesz dual system (E, E') and
consumer preferences are represented by quasi-concave, strictly monotone and
Irl-continuous utility functions.
Before discussing the proof of the statement, we shall state two results of
some independent interest that will be employed in our proof.
1. Let t be a continuous, convex and strictly monotone preference defined
on E+. If ZI, ... , Zn are vectors in E+ such that Zi t Y holds for each
i and Zi ~ Y holds for at least one i, then E?=1 (XiZi ~ Y holds for each
proper convex combination.
2. Assume that t is continuous and strictly monotone. Then a coalition S
improves upon an allocation (Z1, ... , zm) if and only if there exists a set
of positive vectors {Yi E E+: i E S} such that
a. EiES Yi ~ EiES Wi; and

b. Yi b Zi for each i E Sand Yi ~i Xi holds for at least one i E S.
The proof of (1) goes as follows. Let Z1. ... , Zn be vectors in E+ satisfying
Xi t Y for each i and z" ~ y. Fix 0 < ai < 1 (i = 1, ... ,n) such that
E?=1 ai = 1. Since limef1 EZ" = z", it follows from the continuity of t that
there exists some 0 < E < 1 such that EX" ~ y. Now by the convexity of t, we
see that a,,(EX1:) + Ei# aixi t: y. On the other hand, note that
n
L: aiZi = a1: Z 1: + L: aixi > a,,(Ex,,) + L: aiXi .

i=1 i~1: i#
3.3 Edgewortb equilibria and tbe core 129
Therefore, from the strict monotonicity of t, we infer that

n
L aiXi >- ak(gXk) +L aixi t y.
i=l i¢k
To see (2), suppose that a coalition S and a collection of positive vectors

{Yi E E+: i E S} satisfies properties (a) and (b). We can assume S = {I, ... ,r}.
If r = =
1, then Y1 h Xl and the coalition S {I} improves upon (Xl, ... , xm)
with the allocation (WI. ... ,wm ). Now assume that r ? 2. Fix k E S with
Yk >-k Xk and then pick some 0 < g < 1 such that gYk >-k Xk. Now consider the
allocation (ZI. ... ,zm) defined by
if i fI. Sj
if i kj=
if i E Sand i =f; k .
Then the allocation (Zl' ... , zm) satisfies
L Zi = L Wi and Zi h Xi for each i E S .

iES iES
The above show that if the coalition S satisfies properties (a) and (b), then S
improves upon the allocation (Xl, •.. , xm). The converse is immediate.
Now we shall establish the existence of an Edgeworth equilibrium. That is,
we shall show that there exists an allocation of E that belongs to the core of
every r-fold replica economy of E. For each n, let
where A denotes the set of all allocations of the economy E. Keep in mind that
(in view of [3, Theorem 3.3.1, p. 126]) the set A is in this case weakly compact.
The sets Cn have the following properties.
• Each Cn is non-empty.
Note first that in the n-fold replica economy En the consumers' characteristics
satisfy all assumptions of an exchange economy and hence Core(En ) =f; 0 by [3,
Theorem 3.3.6, p. 127]. Let
be a core allocation for En. Then we claim that
Xi; "'i Xik for j, k = 1, ... , nand i = 1, ... ,m,

Le., no consumer prefers his bundle to that of another consumer of the same
type.
To see this, note first that (by rearranging the consumers of each type), we
can suppose that Xi; b Xi1 holds for all i and j. Put
n
Yil = ~ LXi;, i = 1, ... , m.
;:::1
Then E;:l Yi1 = E;:l Wi = w, and by the convexity of preferences, we have

Yi1 b for each i. Now assume by way of contradiction that there exists
Xi1
some 1 :::; Ie :::; m and some 1 :::; r :::; n with Xl.:r >-1.: Xu. The latter, in view
of property (1) above, implies YI.:1 >-1.: Xu. Now if each consumer (i, 1) gets Yil,
then by property (2) above, the coalition {(i, 1): i = 1, ... , m} can improve upon
the original allocation of En, which is impossible. This contradiction establishes
the validity of our claim.
Consider the allocation (Yll, ... , Ymd defined above. By the convexity of
the preferences we have Yil b Xi; for each i and j, and an easy argument shows
that (Yll, Y21, ... , Ym1) E en. Thus, en is non-empty.
• Each en is a weakly compact set.
By [3, Theorem 3.3.6, p. 127], Core(En ) is a weakly compact set and since
en is also weakly closed, it easily follows that en is a weakly compact set.
• For each n we have en+! ~ en.

This inclusion follows immediately by observing that if an allocation of E cannot
be improved upon in the (n+ 1)-fold replica economy, then it cannot be improved
upon in the n-fold replica economy.
Now note that since the set of all allocations A of E is a weakly compact
set and the sequence {Cn } has the finite intersection property, it follows that
n~=l Cn i= 0. To complete the proof, note that the set of all allocations of E
that belong to the core of every replica economy is precisely the set n:=l
en .•
Problem 3.3.4. Show that the assumption of monotonicity of preferences in

Theorem 3.3.6 is superfluous. That is, show that if in an exchange economy the
order interval [O,w] is weakly compact and each utility function Uj: E+ - R is
quasi-concave and Mackey-continuous, then the core of the economy is a non-
empty weakly compact subset of Em.
Solution: The proof of [3, Theorem 3.3.6, p. 127] follows the arguments of the
proof of [3, Theorem 1.5.10, p. 48] line by line. In the proof of Theorem 3.3.6, we
use the monotonicity of the utility functions to conclude that they are bounded
on the order interval [O,w]. However, in order to apply Scarf's Theorem [3, p. 44],
we need only to verify that each utility function is bounded from above. This
conclusion can be derived for quasi-concave Mackey-continuous utility functions
as follows.
Let 1.1: [O,w] --+ R be a quasi-concave Mackey-continuous utility function. If
1.1 is not bounded from above in R, then there exists a sequence {xn} of [O,w]
satisfying 1.I(xn) ~ n for each n. Since the order interval [O,w] is weakly compact,
there exist a subnet {Y.d of the sequence {xn} and some y E [O,w] such that
y>. ~ y. But then, from Problem 1.2.8, we see that
00 =lim>.sup 1.I(Y>.) ~ 1.I(y) < 00,

which is impossible. So, 1.1 is bounded from above on [O,w] .•
Problem 3.3.5. Show that the order interval [0,1] of C[O, 1] is not weakly
compact, i.e., show that [0,1] is not u(C[O, l],ca[O, 1])-compact.
Solution: Consider the sequence Un} of C[O, 1] defined by
nx
fn(x) = { 1
°
if <- x < 1. n'
if ~ :::; x <:::; 1.
We claim that the sequence Un} has no weakly convergent subnet in C[O, 1]. To
see this, assume by way of contradiction that there exists a subnet {gal of {In}
such that ga ~ gin C[O, 1]. In particular, we have
for each x E [0,1]. However, since the sequence {In} converges pointwise to a
discontinuous function, say h, every subnet of {In} must also converge pointwise
=
to h. But then, 9 h, a contradiction. Hence, {In} has no weakly convergent
sub net in C[O, 1] and so the order interval [0,1] is not weakly compact.
We also take this opportunity here to state and prove the following important
characterization of sequential weak convergence in C(O)-spaces .
• Let Un} be a sequence of continuous real valued functions defined on a
compact HausdorfJtopological space O. Then fn ~ fin C(O) if and only
if {fn} is uniformly bounded and In(w) --+ I(w) for each wE O.
To see this, we must use the fact that the norm dual of C(O) coincides with
the Banach lattice of all regular Borel signed measures on 0; see [6, Section 28].
Assume first fn ~ fin C(O). Then Un} must be norm bounded, i.e., uniformly
bounded. (See [1, Corollary 5.20, p. 191].) Since ow· (the Dirac measure supported
at w) is a continuous linear functional on C(O) we must have
On the other hand, if the two conditions are satisfied, then the Lebesgue Domi-
nated Convergence Theorem guarantees
for all regular Borel finite signed measures on 0, proving that In ~ I holds true
in C(O).
It is also interesting to observe that the property stated at the beginning of
the solution implies that in C(O)-spaces the lattice operations are sequentially
weakly continuous. For instance, if In ~ I in C(O), then it should be clear that
lin I ~ III in C(O). In contrast, it should be noted that the lattice operations
in an arbitrary Banach lattice need not be sequentially weakly continuous; see,
for instance, the last part of the solution to Problem 3.6.2.•
3.4 Walrasian equilibria and quasiequilibria
Problem 3.4.1. Show that a non-empty subset X 01 a partially ordered vector

space E is comprehensive lrom above il and only il its complement E \ X is
comprehensive from below.
Solution: Recall that a subset X of a partially ordered vector space is said to
be comprehensive from above (resp. from below) if z ~ y and z E X imply
y E X (resp. z ~ y and y E X imply z EX).
Now let X be a non-empty subset of a partially ordered vector space E.
Assume first that X is comprehensive from above. Also, assume z ~ y in E with
y E E \ X. Then z must belong to E \ X. Otherwise, if x EX, then X being
comprehensive from above forces y EX, a contradiction. Hence z E E \ X, and
so E \ X is comprehensive from below.
For the converse, suppose that E \ X is comprehensive from below and let
x ~ y with z E X If y tI. X, then y E E \ X and so x E E \ X, a contradiction.
Thus y EX, and this shows that X is comprehensive from above .•
Problem 3.4.2. Show that in an exchange economy every quasiequilibrium

which is supported by a price p with p·w I: 0 is an approximate quasiequilibrium.
Solution: Recall that an allocation (Xl, ... , xm) in an exchange economy is said
to be an approximate quasiequilibrium whenever for each g > 0 there exists
some price pEE' (depending on g) such that:
a. p·w = 1j and
b. x b Xi implies p. x ~ p. Wi - g.
Now let (Xl, ... , Xm) be a quasiequilibrium supported by a price p satisfying

p .W I: O. Since preferences are monotone, we have p ~ O. (If x ~ 0, then
x + Xl ~1 Xl implies p . x + p . Xl ~ p' W1 = P . Xl, or p. X ~ OJ see part (i)
of Problem 3.4.3(1).) So, p . W > O. Now if q =
f,w, then the price q satisfies
=
q . W 1 and if X ~i Xi, then q . X ~ q . Wi > q . Wi - g for each g > O.•
Problem 3.4.3. For an exchange economy establish the two statements below.
1. For a non-zero price p supporting a quasiequilibrium (Xl, . .. ,xm ) we have:
1. p. Xi = P . Wi for each i; and

ii. p> O.
2. For an allocation (Xl, ... , xm) and a non-zero price pEE' in a pure
exchange economy with W ~ 0 the following statements are equivalent.
a. The allocation (Xl, ... , xm) is a Walmsian equilibrium supported by
p. That is, each Xi is a maximal element in the budget set
Bi(p) = {x E E+: p. X ~ p. Wi}.
b. X >-i Xi implies p. X> p. Wi, and p ~ O.

c. X >-i Xi implies p . X ~ P . Wi.
d. The allocation (x!, ... , xm) is a quasiequilibrium with supporting
price p. That is, X b Xi implies p . X ~ P . Wi·
Solution: (1) Let (Xl, ... , xm) be a quasiequilibrium in an exchange economy

supported by a price p.
(i) By definition, Xi b Xi implies p. Xi ~ p. Wi for each i. From
m m
EXi=
i=l
EWi=W,
i=l
134 Ch.apter 3: Markets With. InfiniteJy Many Commodities
we see that E~l P . Zi = E~l P . Wi, and so P . Zi = P . Wi must hold for each i.
(ii) To see that the price P is positive, let x ~ O. Then, by the monotonicity
of t:l, we have Xl + X t:l Xl, and therefore
Since from part (i) we have P . Xl = P . W1, it follows that P . X ~ o.

(2) Let (X1, ... , xm) be an allocation and let P be a non-zero price. Keep
in mind that in a pure exchange economy preferences are (by definition) strictly
monotone.
(a) ~ (b) Let x >-i Zi. Since :ti is a maximal element in the budget set Bi(p),
it follows that p.:t > p. Wi. (Otherwise, p.:t :5 p. Wi implies :t E Bi(p) and 80
Xi t:i :t, a contradiction.)
To show that p > 0 we shall establish that p . Xi = P . Wi for each i. Indeed,
from the strict monotonicity of preferences, we have :ti + ~w >-i :ti for each ~ > 0,
and so p. Xi + ~p . W > p. Wi for each ~ > O. Letting ~ - 0+ , we get P·:ti ~ P . Wi
for each i. But then, as in the solution to part (i) above, we obtain p. :ti = P . Wi
for each i.
Now let X > o. Then :t1 +:t >-1 :t1, and so from
P·:t1 + p.:t = p. (:t1 + x) > p. w1 =P·:t1,

we get p . :t > O. This shows that p > O.
(b)~(c) Obvious.
(c) ~ (d) Let:t t:i :ti. Since each preference is strictly monotone, we see that
:t+~W h Xi foreach~ > O. Hence,p·:t+~p·w =p·(x+~w) ~P·Wi holds for
each ~ > 0, and so p . :t ~ P . Wi.
(d) ~ (a) From part (1), we know that p > 0 and P·:ti = p. Wi for each i.
Since W > 0 fix some Ie such that p . Wk > O. We claim that :tic is a maximal
element in the budget set Bi:(p). To see this, assume by way of contradiction
that there exists some:t E BIc(p) (i.e., p.:t:5 p·WIc) satisfying X >-Ic Xi:. From the
continuity of t:k it follows that there exists some 0 < ~ < 1 such that ~:t >-Ic :tic.
Therefore, p. (~x) ~ p. Wic. On the other hand, from p ·Wk > 0 and p.:t S p ·WIc,
we see that
p. Wic > ~(p. Wk) ~ ~(p.:t) = p. (~:t) ~ p. WIc,
which is impossible. Thus, :tic is maximal in BIc(P).
To complete the proof, we shall show that p. Wi > 0 for each i. In fact, we
claim that p> O. To see this, let :t > O. Since Xic + :t >-Ic :tic and :tic is maximal
in BIc(p), we see that p. Xk + p.:t > p. Wic = p. :tic. This implies p.:t > 0, and
sop> 0.•
Problem 3.4.4. Show that if in an exchange economy every consumer has an

extremely desirable bundle, every Walrasian equilibrium is a quasiequilibrium.
Solution: Assume that in an exchange economy every consumer i has some
extremely desirable bundle, say Vi > O. Also, suppose that (Xl,"" xm) is a
Walrasian equilibrium supported by a price p # O. This means that X >-i Xi
implies p . X > p . Wi.
Now let X !:i Xi. Then X + €Vi >-i Xi for each e > 0, and so
p .X + ep . Vi =P . (x + eVi) > p . Wi
for each e > O. Letting e - 0+, we get p·x ~ P·Wi. This shows that (Xl"'" Xm)
is a quasiequilibrium supported by the price p. _
Problem 3.4.5. If in a pure exchange economy the total endowment is strictly

positive, show that every allocation supported by prices is Pareto optimal.
Solution: Assume that in a pure exchange economy an allocation (Xl. ... , xm)
is supported by a price p # O. Since the preferences are (strictly) monotone,
we know from the usual argument (see solution to part 1 of Problem 3.4.3) that
p> O.
To see that the allocation (Xl, ... , xm) is Pareto optimal, assume by way of
contradiction that there exists another allocation (Yl," . ,Ym) satisfying Yi b Xi
=
for all i and YII: >-11: XII: for some k. Since !:II: is continuous and limeT! eYII: YII:,
there exists some 0 < € < 1 such that eYII: >-11: XII:. Now let Zi = Yi + ,;;:.el y"
if i # k and Z/c = ey/c. Then (Zl,"" zm) is an allocation, and in view of the
strict monotonicity of preferences, we have Zi >-i Xi for all i.4 In particular, the
supportability of (Xl. ... ,xm ) by p implies p . Zi ~ P . Xi for each i. Taking into
account that L~l Zi = L~l Xi = w, the latter inequality implies p. Zi = p. Xi
for each i.
=
Since L~l Zi W ~ 0 and p > 0, it follows that p. Zj > 0 for some j. From
lim6116zj = Zj and the continuity of !:j, we get 6zj >-j Xj for some 0 < 6 < 1.
But then, the supportability from p implies
p' Xj = p. Zj > 6(p. Zj) = p. (6zj) ~ p. Xj ,
which is impossible. This contradiction establishes that the allocation (Xl. . .. , xm)
is Pareto optimal. _
Problem 3.4.6. (L. E. Jones [14]) Consider an "exchange" economy with

dual system (Lp[O, 1], Gl[O, I]), where 1 ~ p ~ 00 and Gl[O, 1] is the vector space
4This argument shows that in an exchange economy with continuous and strictly monotone
preferences the sets of Pareto optimal and weakly Pareto optimal allocations coincide.
of all continuously differentiable functions on [0,1], having two consumers with

the following characteristics.
Consumer 1: Initial endowment W1 = !:%:[O,l) and utility function
Consumer 2: Initial endowment W2 = !X(O,l) and utility /unction
a. Show that the allocation (X( i,ll' X[O,!) is an Edgeworth equilibrium.
b. Show that the allocation (X(i,l)' X[O,!) is not a Walrasian equilibrium with
respect to the dual system (L,,[O, 1], e 1 [0, 1]).
c. Show that the allocation (X(!,l)'X[O,!) is a Walrasian equilibrium with
respect to the dual system (L,,[O, 1], e[O, 1]).
Solution: (a) Clearly W = 1, and if we put ;1:1 = X(i,l) and :1:2 = X[O,i)' then
(:1:1,:1:2) is an allocation. Let pet) = max{t, 1- t}. As usual, the function p will
be considered defining a positive linear functional on L,,[O, 1] via the formula
p. :I: = 11 p(t)z(t) dt .
We claim that z >-i :l:i implies p . z > p . Wi. To see this, note first that
=
p. zl p. :1:2 = P . W1 =P . W2 = I. Now if Z >-1 :1:1, then
Similarly, z >-2 z2 implies p. z > p' W2·

To see that (Zl,Z2) is an Edgeworth equilibrium, assume by way of contra-
diction that (Z1. Z2) is not in the core of some r-fold replica economy. So, there
exist a coalition S and an allocation (Yu, ... , 1I1r, 1121, •.. , 1I2r, ••• , 1Im1, ... , Ymr)
of the r-fold replica economy such that:
i. flii hi :l:ii = :l:i for each (i,j) E S, and
ii. E(iJ)eS flii = E(i,i)ES wii .
From (a), we see that p' Yij > p. Wi =p. Wij for each (i,j) E S. Therefore,
p.( L Yij) =L p. Yij > L p. Wij =P . ( L Wij),

(i,j)ES (i,j)ES (i,j)ES (i,j)ES
which contradicts (ii). Hence, (Xl, X2) is in the core of every r-fold replica econ-
omy, i.e., it is an Edgeworth equilibrium.
(b) We shall show that p is (up to a constant) the only linear functional on
Lp[O,l] such that:
X b Xi implies p. X ~ P . Wi •
To this end, let q be a linear functional on Lp[O,l] such that X b Xi implies

q·x ~ q·Wi. From Xi t i Xi, we infer that q'Xi ~ q'Wi and since Xl +X2 = W1 +W2,
it easily follows that
Now since preferences are monotone, it follows that q is a positive linear unctional. 5
Consequently, q is a continuous linear functional on Lp[O,l] and so 0 < q E
Lq[O, 1]; see Statement 1 following the solution to Problem 2.4.3. In other words,
q can be considered as a positive function in Lq[O, 1].
Next, we claim that in fact q is a strictly positive price. To see this, assume
by way of contradiction that the set A =
{t E [0,1]: q(t) O} has positive =
Lebesgue measure. Then for some k > 0 we have ul(kXA) = k IA t dt > u1(xd,
hI
and so
0= q . (kXA) ~ q . Xl = q(t) dt ~ 0,
=
from which it follows that q 0 a.e. on (!, 1]. Similarly, q 0 a.e. holds on =
[0, !], a contradiction. So, q(t) > 0 holds for almost all t.
Now if A is any measurable subset of (!, 1] of positive Lebesgue measure,
then ::g:)XA b Xl· Thus, since q satisfies (*), ::g:» IA q(t) dt ~ Ii q(t) dt,
L hI L
and so
q(t) dt ~ [uJzd q(t) dt] t dt,
for each measurable subset A of (!, 1]. The latter implies q(t) ~ ct for almost
all t E (i, 1], where c = uJzd I! q(t) dt. We claim that q(t) = ct holds for
5 rr x ~ 0, then x + Xl t1 Xl, and so q . (x + xd = q • x + q • Xl ~ q . W1 =q • Xl. This
implies q . X ~ o.
almost all t E (i, 1]. To see this, assume that {t E (!, 1]: q(t) > ct} has positive
Lebesgue measure. Then
=
which is impossible. Consequently, q(t) ct for almost all t E (!, 1]. Similarly,
=
for some c· > 0, q(t) c·(l- t) for for almost all t E [0, i].
Finally, from q ':1:1 = q. :1:2, we get cJ;(l- t) dt = c· Jot t cit. Hence c = c·,
=
and so q cpo
Now notice that since p ¢ Gl[O, 1], we see that (X(t,ll,X[O,tl) is not a Wal-
rasian equilibrium with respect to the dual system (Lp[O, 1], Cl [0, 1]).
(c) Since p E C[O, 1], it follows from part (b) that the allocation (X( i,ll' X[O,tl)
is a Walrasian equilibrium with respect to the dual system (Lp[O, 1], G[O, 1]) .•
Problem 3.4.7. Consider an m consumer exchange economy with Riesz dual

system (Lp(T,E,~),L9(T,E,~», where 1 :5 p,q :5 00 ( ; + ~ 1), (T,E,~) a =
measure space, and the total endowment W is the constant fUnction 1. Assume
that lor each i there exists some function Ii E Lt(T, E,~) such that
Also, assume that Wi = XA. for each i, where Al, ... ,Am are pairwise disjoint
measurable sets with T = U~l Ai and
max{ft (t), 12(t), ... ,/m(t)} = li(t)
for each t E Ai (i = 1, ... , m).
Show that the allocation (XA 1 , XA~, ... ,XA .. ) is a Walrasian equilibrium sup-
ported by the price p defined by
p(t) = max{ft(t), 12(t), ... , Im(t)} , t E T.
> f Ii (t)xA. (t) dl-'(t) = f li(t) d~(t)

IT lA.
= i. pet) dl-'(t) l
= p(t)XAj (t) dl-'(t)
= P,wi
3.4 Walrasian equilibria and quasiequi]ibria 139
Now, from p(t) ~ h(t) for each t E T, we get
p.y = L p(t)y(t) dl-'(t) ~ L /i{t)y(t) dl-'(t) > p . Wi·
This shows that (XA t , XA2' ... ,XA",) is a Walrasian equilibrium supported by
the price p . •
Problem 3.4.8. (L. E. Jones [14]) Consider an exchange economy with Riesz
dual system {i2' i2} and one consumer with initial endowment W = (1, -J,-, b, ... )
and utility function u: it ~ JR defined by
a. Show that the utility function u is strictly monotone, strictly concave and
weakly continuous.
b. Show that the allocation (w) is the only Edgeworth equilibrium of the econ-
omy.
=
c. Show that the price 0 ~ p (1,1,1, ... ) E A~ supports the allocation (w)
on Aw as a Walrasian equilibrium.
d. Show that, aside from a scalar multiple, the only price that supports (w) on
=
Aw as a Walrasian equilibrium is the strictly positive price p (1,1,1, ... ).
e. Show that the preference t represented by the utility function u is not
uniformly i2-norm proper.
f. Study this problem when the Riesz dual system {i2' i2} is replaced by the
Riesz dual system (ip, iq); 1 :::; p, q :::; 00, ~ + = 1.i
Solution: (a) Notice that the function fn: JR ~ JR defined by In(t) = 1_~; .. 2.
= =
satisfies I~(t) e- n2t > 0 and f~(t) _n 2 e- n2t < 0 for each t. So, each In is
a strictly increasing and strictly concave function on JR. This easily implies that
the utility function u:£t ~ JR defined by U(X1,X2, .•. ) =
L:::1/n(zn) is also
strictly monotone and strictly concave.
For the weak continuity of u, let x a = =
(zf, z~, ... ) ~ x (Z1' Z2, ... ) in it
and let e > o. Fix some k such that L::=k ~ < e and then select some index
k 1 1 _ .. 2.,'"
ao such that L:n~le ";;2e_..2""1 < e for all a ~ ao. (Such an index ao exists
140 Cbapter 3: Markets Witb InJinjtely Many Commodities
since xl> -=-. x implies zf -;;+ Zi in R for each i.) But then, for a ~ 0'0 we have
L + L ~ < r: + r: =
k-1 00
\u(xl» - u(x)\ ~ 'e-,,2":,;r,,2""1 2r:,

n=l n=k
which shows that u(xl» -+ u(x), i.e., u is weakly continuous.

(b) By Problem 3.3.2, we know that (w) is an Edgeworth equilibrium. It is
unique since (w) is clearly the only individually rational allocation in any r-fold
replica economYi see also Problem 1.6.9.
(c) Consider the function /:R -+ R defined by lex) e1-~ + x - 2. From =
/,(z) = 1_e 1-s- and /"(x) = e 1-s-, we see that / attains an absolute minimum
= = =
at x 1. So, lex) e 1 -s- + x - 2 ~ /(1) 0, or x ~ 2 - e1-s- for each x E R.
=
Now let x (Xl, X2,··· ) .
>- w In Aw'
+
That IS, Lm=l
. ~oo 1_e-,,2.,..
n' >
~oo
L..,n=l
1
-T'
-1
Then note that

00 00
P.x = L Xn =L n:~.
n=l n=l
00 2 00 2
2_e 1 - " 2-e+e(1-e-" ., .. )
> ~
L..i n::J
"" _
-
~
L..i n!2
n=l n=l
00 00
~ ~ 1 - p. w
> L..i n'
2-e+e(1-e- 1 )
-
_
L..i fi"" - .
n=l n=l
So, the allocation (w) is a Walrasian equilibrium relative to the Riesz dual system
(Aw, A~) supported by the price p.
(d) Assume that P E A~ is a non-zero price that supports (w) as a Walrasian
equilibrium. Since t is strictly monotone and (l2,l2) is a symmetric Riesz
dual system, it follows that P is positive and order continuous on Aw j see [3,
Theorem 3.4.21(2), p. 147]. Now let Pi =
P . ei ~ 0, where ei is the usual unit
vector. If 0 ~ x E A w , then from E?=l Xiei t x and the order continuity of p,
we get
00 n
LPiXi = nl.!.~p. (EXiei) = p. X.
i=l i=l
This shows that p. x = E~=l PnXn for each x = (Xl, X2,"') E Aw, and thus the
price P can be identified with the non-negative sequence (p1,P2," .).
Next, we claim that the price Pi =
(P1,P2,'" ,Pi) supports the allocation
Wi = (1, ~, b, ... ,is)on R i , where the utility function is now
To see this, assume x = (Xl. ... , Xl) >-t Wl in R~, i.e., Ul(x) > Ul(Wl). This
implies
00
1
U ( Xl. •.. ,Xl'~'~""
1 )
= vl
TT ( ) ~
Xl. .•. ,Xl + L..t --nr-
l_e-1
n=l+l
L
00
> Ul(Wl) + l:f1 = u(w)

n=l+l
in At· The supportability from P yields E:=l PjXj + Er:l+l it
'> Er:l it,
which implies Pi . x> p. Wi'
.
Now SInce v i ( Xl,X2, ... ,Xl )
"U =
(-:1'1
e ,e -2~:I'~ , ... ,e -P:I'l)'t r II
,1 100WS f rom
Problem 1.1.20 that
Hence, PI = = ... =
P2 Pi for each l. This shows that the price P must be a
scalar multiple of the price (1,1, ... ).
(e) Assume by way of contradiction that t is uniformly 12-norm proper.
=
Then by [3, Theorem 3.4.22, p. 148] the price P (1,1, ... ) must be 12-norm
continuous on Aw. Since Aw is 12-norm dense in 12 , it follows that P extends
to an 12-norm continuous linear functional on 12. This means that there exists
= =
some q (ql,q2,"') E 12 satisfying q. X p. X for all X E Aw. Since en E A w,
= = =
we have q . en p. en, or qn 1 for each n. In other words, q (1,1, ... ) E 12'
which is impossible. Therefore, t is not a uniformly 12-norm proper preference.
(f) With "lP" replacing "l2", the solutions to (a), (b), (c) and (d) are clearly
valid for any of the Riesz dual systems {lp,lq}. The only nontrivial observation
that must be made for parts (c) and (d) is that the price P = (1, 1, ... ) is in A~.
This follows since W E lp for all 1 :::; P :::; 00. (The reader should also notice that
since P E 100 , the allocation (w) is a Walrasian equilibrium also with respect to
(ll.loo}.)
Since Aw is lp-norm dense in lp for 1 :::; P < 00, a close look at the solution
shows that statement (e) holds for any 1 :::; P < 00. Now Aw is not loo-norm
dense in loo. In fact, the result is not true for P = OOj see [3, Theorem 3.2.4,
p. 118].
However, for the interested reader the following is true: the preference t
represented by u is not uniformly Mackey-proper. The strategy of the solution
to (e) holds provided that Aw is Mackey-dense in 100 , To see this, it suffices to
=
show that Xn (0, ... ,0,1,1, ... ) r(loo.ld) O. This is shown in the last paragraph
of the solution to Problem 3.5.7(a) .•
142 Chapter 3: Markets With IniiniteJy Many Commodities
Problem 3.4.9. Consider an exchange economy having (C[O, 1], ca[O, 1)) as its
Riesz dual system and two consumers with initial endowments W1 W2 1 and = =
utility functions given by
and
U2(X) = (1- A) fa! v;m dt + A1\)X(t) dt,
l
where 0 < A < 1 is a fixed real number.

a. Show that for A :/: ~ the economy does not have any core allocations.
b. Show that for A = ~ the allocation (WI,W2) is a Walrasian equilibrium.
Solution: (a) The solution ofthis part is due to Mike Maxwell. Let (Xl, X2) be a
core allocation with Xl and X2 continuous functions. Since (Xl, X2) is individually
rational, we have Xl t1 W1 and X2 t2 W2. If Xl is a constant, then it is easy to
see that Xl = =X2 1, and so (W1,W2) is the only individually rational allocation
of constant functions. Now consider the allocation (Y1, Y2) defined by
Since A :/: ~, it follows that Y1 and Y2 are not continuous functions. Moreover,
from
U1(yt} U2(Y2) = v'2[A;+(~-A);]

~ v'2[ A+(~-A)]! = ~ = U1(W1) = U2(W2)
and the strict concavity of U1 and U2, we get ~ >-1 W1 and ~ >-2 W2. Tak-
ing into account that preferences are 1I·11t -continuous and C[O, 1] is 1I·11t -dense in
LilO, 1], it easily follows that an allocation of continuous functions approximating
(~,~) can improve upon (W1,W2).
°
Next, assume that Xl and X2 are nonconstant. Without loss of generality, we
can suppose that there exist < t1 < t2 < ~ with X1(tt} :/: X2(t2). Now consider
the allocation (Y1, Y2) of discontinuous functions defined by
if t f/. [tl, t2]

and
if t E [t 1, t2]
An easy computation shows that Ul(Y1) = Ul(Xt} and U2(Y2) U2(X2). SO, =
~ >-1 Xl and xat
ra >-2 x2. Thus an allocation of continuous functions
approximating (~,~) can improve upon (Zl,Z2). The above show that
the core of the economy is empty.
= = =
(b) If ~ t, then U1(Z) U2(Z) t fo1 -/z(t) dt and U1(Wt} U2(W2) = = i.
So, if z >-i Wi, i.e., if Ui(Z) > Ui(Wi), then from Holder's classical inequality6, we
get
! = Ui(Wi) < Ui(Z) = t 11 -/z(t)dt $ 1

t[1112dt]t. [1 z(t)dt] t.
This implies f; z(t) dt > 1 =

f; Wi(t) dt, and this shows that the Lebesgue
measure on [0,1] supports the allocation (W1,W2) as a Walrasian equilibrium.•
Problem 3.4.10. Consider an exchange economy having {Lp[O, l], Lq[O, I]} as
its Riesz dual system (where, as usual, 1 $ p, q $ 00 and + ~ = 1) and two t
consumers with the characteristics 0/ Problem 9.4.9. Show that the allocation
(Xl. X2) given by
and
2(1_>.)' 2>.'
X2 = >.5+(1_>.)5 X[o,tl + X5+(1_>.)5 X( t,11
is a Walrasian equilibrium supported by the price 1 E Lq[O, 1].
Solution: Let Xl and X2 be defined as in the statement of the problem and let
p = 1. That is, the price p satisfies
p . 9 = 11 g(t) dt, 9 E Lp[O, 1] .
=
Direct computations show that p. Xi p. Wi 1 and Ui(Xi) = = J>.'+(~->.)' for
each i.
Now if / =
~X[O,tl + (1 - ~)X<t,11' then note that U1(X) = fo1 /(t)-/x(t) dt,
and so, from Holder's inequality, we get
1 1
U1(X) $ [1 /2(t)dt]t. [1 z(t)dt]t = J>.'+(~->')'. [11 x(t)dt]t.
In particular, if X h Xl, then U1(X) > U1(X1), and so from
J>.2+(~-A)2 = U1(X1) < U1(X) $ JA2+(~_>.t [1 1

x(t)dt]t,
6HOIder's inequality ASserts that if / E Lp(lJ) and g E Lq(IJ), where 1 ~ p, q ~ 00 satisfy

~ + ~ = 1, then /g E L1 (IJ) and JI/gl dlJ ~ II/lip ·llYllq; see [6, p. 205].
we get J; x(t)dt > 1 = Jol Wl(t)dt, or p. x> p ·Wl.

Similarly, x >-2 z2 implies p . Z > p . W2. This shows that (Zl, Z2) is a
Walrasian equilibrium supported by the price p .•
Problem 3.4.11. Consider an allocation (Xl, ... , zm) in an exchange economy

that is supported on Aw by a price 0 < p E A~. If preferences are uniformly
T-proper on Aw and each preference has an extremely desirable bundle on AWl
then show that the price p extends to a T-continuous price on Aw that supports
the allocation (Z1, ... , zm).
Solution: First, we shall establish that the price p is T-continuous-a result due
to N. C. Yannelis and W. R. Zame [21].
Let (Xl, ... ,zm) be an allocation in an exchange economy supported on Aw
by a price 0 < p E A~ and assume that the preferences are uniformly T-proper
on Aw. Since every vector of At is bounded by a multiple of w, it follows that
W is a vector of uniform T-properness; see Problem 3.2.1. Pick a convex, solid
T-neighbothood V of zero such that Z - aw + z b Z in At with a > 0 implies
z f}. aVo
Next, consider the Minkowski functional p of V, i.e., p: E -+ [0,00) is the
seminorm defined by
p(y)=inf{A>O: YEAV}, yEE.
Clearly, p is a T-continuous lattice seminorm on E. Let 0 ~ z ~ W = E~ 1 Zi. By

the Riesz Decomposition Property (see Problem 2.1.13) we can write z = L:~1 Zi
with 0 ~ Zi ~ Xi for each i. Let ai = p(Zi)' and let e > 0 be fixed. Put
Yi = Xi + (ai + e)w - Zi ~ 0, and note that Xi = Yi - (ai + e)w + Zi ~ O. If
Yi - (ai + e)W + Zi ~i Yi holds, then by the uniform T-properness of the preference
b on Aw, we see that Zi f}. (ai + e)V, contrary to p(Zi) = ai· Therefore,
Yi >-i Yi - (ai +e)W + Zi = Zi holds, and so by the supportability of the allocation
by p on Aw, we obtain that
p. Yi ~ p. Zi = p. [Yi - (ai + e)W + Zi] = p. Yi - (ai + e)p· W + p. Zi·

Hence, p. Zi ~ (ai + c)p· W holds for each i and all c > 0, and so
= (p. W)p(Zi) ~ (p ·w)p(z).

p. Zi ~ aiP'W
This implies p. Z = E~l p. Zi ~ (E~1 p. w)p(z) = m(p· w)p(z) for all Z with
o ~ Z ~ W. Now if Z E Aw is arbitrary, then pick some A > 0 such that Izi ~ AW
and note that
Ip, zi ~ p ·Izi = AP' Ulzl) ~ Am(p· w)pCHzl) = m(p· w)p(z).

3.5 Pareto optimality 145
The above inequality shows that the price p is T-continuous on Aw. In particular,
it has a unique T-continuous linear extension p to the T-closure Aw of Aw. (The
vector subspace Aw is in actuality an ideal-to see this, repeat the solution of
Problem 2.4.2.)
Now we shall show that p supports the allocation (Xl, ... , Xm) on Aw. To this
end, let 0 ~ X E Aw satisfy x ~i Xi and let Vi an extremely desirable commodity
for consumer i. Pick a net {xa} of A~ such that xa"":"'x and fix c: > O. From
x + C:Vi :>-i X ~i Xi and the T-continuity of ~i, there exists an index 0'0 such
that Xa + C:Vi :>-i Xi for all 0' 2': 0'0. The supportability from p on Aw implies
p . Xa + c:p . Vi 2': p. Xi for all 0' 2': 0'0. Taking limits, we get p. x + c:p . Vi 2': p . Xi
for all c: > O. Thus, p . x 2': p . Xi and so p supports the allocation (Xl, ... , Xm)
on Aw .•
Problem 3.4.12. If (Xl, ... , xm) is a quasiequilibrium, then show that each
prefer'ence relation ~i is T-proper at Xi.
Solution: Suppose (Xl, ... ,x m ) is a quasiequilibrium in an exchange economy

supported by a nonzero price p. By Problem 3.4.3, we know that p . Xi = P . Wi,
and so x ~i Xi implies p . x 2': p . Xi. Now use Problem 3.2.2 .•
3.5 Pareto optimality
Problem 3.5.1. If in an exchange economy the order interval [0, W 1 is weakly

compact, then show that the economy satisfies the closedness condition.
Solution: Assume that [O,w] is weakly compact. Let a sequence {z,,} of U
satisfy z" --+ z, where z" = (z1'''''z;:') and z =
(ZI, ... ,Zm). For each n
pick a feasible allocation (xl,'" ,x~) such that =i = Ui(Xi) for each i. Since
o ~ xi ~ W for each i and n and the order interval [0, W 1 is weakly compact,
there exists a subnet {n a } of the sequence of natural numbers {n} such that
x7" --;;.. . Xi for each i. Clearly, 0 ~ Xi ~ W for each i and from I::: I X;'" ~ w, we
get I:7~1 Xi ~ w. In other words (Xl, X:!, ... , xm) is a feasible allocation.
Now since each Ui: E+ --+ ffi is Mackey-continuous and quasi-concave, we can
invoke Problem 1.2.8 to obtain
146 Chapter 3: Markets With InIinitely Many Commodities
for each i. Next, notice that the real-valued function I,(t) = u,(tx,), t E [0,1],
is continuous, and so by the Intermediate Value Theorem there exists for each i
some t, E [0,1] such that u,(t,xt) = z,. Since (t1Xlo t2x2,"" tmx m) is a feasible
allocation, we infer that (Zl," . ,zm) E U. This proves that U is a closed set .•
Problem 3.5.2. If in an exchange economy the order interval [O,w] is weakly

compact, then individually rational Pareto optimal allocations exist.
Moreover, the set of all individually rational weakly Pareto optimal alloca-
tions is a non-empty weakly compact subset of Em.
Solution: Problem 3.5.1 informs us that in this case the economy satisfies the
closedness condition. But then, the next problem (Problem 3.5.3) guarantees
that individually rational Pareto optimal allocations exist.
To see that the set of all individually rational weakly Pareto optimal allo-
cations is a weakly compact subset of Em assume that a net {za} of individu-
ally rational weakly Pareto optimal allocations satisfies Xa ~ x in Em. Notice
that if Za = (zf, ... ,z~) and Z = (Xl, ... ,Xm ), then x is an allocation and
xr z,
~ holds in E for each i. Since xr w,
b for each i and a and the set
{y E E+: Y t, wi! is weakly closed 7 , we infer that b x, w,
for each i. That is,
Z is an individually rational allocation.
To finish the proof, it suffices to show that x is also weakly Pareto optimal.
To this end, assume by way of contradiction that there exists another allocation
(Ylo ... ,Ym) satisfying y, >-i Xi for each i. Since the sets {z E E+: Yi h z} are
open (see the footnote) in E+ and zf -;-. Zi for each i, there exists some ao such
that Yi >-i xr for all a ~ ao. This shows that the allocation Za is not weakly
Pareto optimal for each a ~ ao, a contradiction. Hence, x is a weakly Pareto
optimal allocation, as desired .•
Problem 3.5.3. Show that every exchange economy satisfying the closedness
condition has individually rational Pareto optimal allocations.
Solution: We shall denote allocations by lower case letters; for instance, x E A
=
means that x (Zlo X2,"" zm) E A.
Start by introducing an equivalence relation on A r , the collection of all
f'OoJ
individually rational allocations, by saying that Z Y whenever Zi f'OoJi Yi holds for

f'OoJ
each i = 1,2, ... ,m. You should stop and check that", is indeed an equivalence
7Every set of the form {y E E+: y t i x} is convex and T-closed. Since the weak topology
u(E, E') on E is cOll8istent, it follows that the convex set {y E E+: y b x} is also weakly
closed for each x E E+. COll8equently, the set {z E E+: x r i z} is open in E+ for each
xE E+.
relation on A r . For simplicity, we shall denote the set of all equivalence classes
again by Ar (instead of Ar/"-').
Next, we define an order relation ~ on Ar by saying that x ~ y whenever
x. ?:s y. holds for each i. Since Ar now represents the equivalence classes, it is
easy to verify that ~ is indeed an order relation.
Recall that a (non-empty) subset C of Ar is said to be a chain whenever
every two elements of C are comparable, i.e., whenever x, y E C implies either
x ~ yor y ~ x. Now let C be an arbitrary chain of A r . Then, we claim that C
is bounded from above in Ar, i.e., we claim that there exists some x EAr such
that x ~ c holds for each c E C. To see this, we distinguish two cases.
CASE I: There exists some Co E C satisfying Co ~ c for each c E C.
In this case, our claim is obvious.
CASE II: For each c E C there exists some x E C such that x >- c.
In this case, the set C under ~ is a directed set. Now denote by Za the utility
allocation of each a = (at, ... , am) E C, i.e.,
Then, {Za} crEe is a net directed upward in the compact set U and so there exists
some Z E U satisfying Za t z. Next, pick a feasible allocation (Yl, ... , Ym) such
that z. = = =
U.(Yi) for each i and let Xl Y1 + (w - E~l y.) and Xi Yi for i =F 1.
Then x = (Xl. ... , x m ) is an individually rational allocation (i.e., x E Ar) and
x ~ c for each c E C. In other words, x EAr is an upper bound for C.
Now by Zorn's Lemma there exists a maximal element x EAr for ~. Since
yEA and Y ~ x imply yEAr, we see that there is no other yEA satisfying
y>- x, and this shows that x is an individually rational Pareto optimal allocation,
and the proof is complete .•
Problem 3.5.4. Consider the exchange economy having (Loo[O, 1], LdO, I]) as
its Riesz dual system, two consumers with utility functions
and total endowment w = 1. Show that the utility space of this economy is the
set U = {(x,y) E R~: x + y2:::; I}.
Solution: First, we shall show that every vector (x, y) E 1R~ satisfying x+y 2 :::; 1
belongs to the utility space U. To this end, let (x, y) E R~ satisfy x+y 2 :::; 1. Put
Xl =
x·l ~ 0 and X2 = y2 . 1 ~ O. Clearly, both functions are continuous (i.e.,
148 Chapter 3: Markets With InIinitely Many Commodities
Xl! X2 E C[O, 1]), Ul(Xl) = ~ and U2(X2) = y. Since Xl +X2 = (~+y2)·1 ::; 1 = w,
we see that (Xl, X2) is a feasible allocation. Therefore,
To see that U does not contain any other vectors, let (~, y) E U. This means
that there exists a feasible allocation (Xl, X2) (i.e., Xl + X2 ::; W = 1) satisfying
~ = =
ul(xd and V U2(X2). Now using Holder's inequality, we see that
Hence, y = U2(X2) ::; U2(W - xd ::; ~, and so ~ + V2 ::; 1. Consequently,

U ={(~, V) E R~: ~ + y2 ::; l}j see Figure 21a.•
Problem 3.5.5. Assume that an exchange economy with Riesz dual system
(Loa [0, 1], LIfO, I]) has m consumers with utility functions Ui(~) = f;
y'~(t) dt,
= =
i 1, ... ,m, and total endowment w 1. Find the utility space of the economy.
Solution: We shall establish that
To see this, start by considering an arbitrary feasible allocation (Xl, ... ,x.n).
° =
This means Xi ~ for each i and L~l Xi ::; W 1, and so L~l f;
Xi(t) dt ::; 1.
=
Now if Xi Ui(Xi) = f; y'Xi(t) dt, then from Holder's inequality we see that
~i = lo1 y'Xi(t) dt ::; [lol Xj(t) dt] t ,

or (Xi)i ::; fOl Xi(t) dt for each i. This implies L~1 (~i)i ::; L~l f; Xi(t) dt ::; 1.
Therefore,
U ~ {(Xl, ... ,xm ) E R+': ~l + (X2)2 + ... + (~m)m ::; I}.

Now let (Xl,""X m) E R+ satisfy L~1(Xi)i ::; 1. Put Xi =
(xd·1 ~ 0,
i = 1, ... ,m. From L~l Xi =
[L~l (xd] ·1 ::; 1, we see that (Xl, ... ,xm ) is a
feasible allocation. But then,
for each i, and so (Xl, . . ' ,Xm ) E U. Therefore,
and the validity of (*) follows .•
y y
x = 1 - y2
x l[
Fig. 2la Fig. 2lb
Figure 21
Problem 3.5.6. Consider an exchange economy having (C[O, 1], ca[O, I]) as its
Riesz dual system and two consumers with utility functions
U1(X) = 11 x(t) dt and U2(X) = 11 Jx(t) dt
=
and initial endowments W1(t) t and W2(t) =
1 - t . (Keep in mind that ca[O, 1]
is the norm dual of C[O, 1] equipped with the sup norm.)
a. Show that both utility functions are continuous, concave (in fact, U2 is
strictly concave), strictly monotone and uniformly 1I·lIoo-proper.
b. Show that the order interval [0,1] is not weakly compact, and that the
economy satisfies the closedness condition.
c. Show that the economy has quasiequilibria which are, in fact, Walrasian
equilibria.
d. If Xl = X2 = ~X[O,lJ' then show directly that the allocation (Xl> X2) is a
Walrasian equilibrium supported by the Lebesgue measure.
Solution: (a) The utility function U1 is linear (in fact, it represents the Lebesgue
measure). So, it is concave and, of course, 1I·lIoo-continuous. The strict mono-
tonicity of Ul follows from the strict monotonicity of the Riemann integral. Since
150 Cbapter 3: MarJcets Witb Infinitely Many Commodities
the square root function is strictly concave, it is easy to see that U2 is likewise
strictly concave. The strict monotonicity and the II . lloo-continuity of U2 should
be obvious.
The uniform 1I·lIoo-norm properness of the preferences is a consequence of
the following general result .
• Every monotone preference on C+(O) (0 compact) having an extremely
desirable commodity is uniformly II . 1100 -proper.
To see this, let t be a monotone preference on C+(O) having an extremely
desirable commodity. It is easy to see that the constant function 1, being an order
unit, is also an extremely desiraole commodity. We claim that z - cd + z t z
in C+(O) with a > 0 implies IIzlloo ~ a.
=
So, let z - a1 + z t z in C+(O) with a > O. Put Y a1 - z and note that
z - y ~ O. Now assume by way of contradiction that IIzlloo < a. This implies
=
y(w) a - z(w) > 0 for each w EO and so y ~ c1 for some c > O. But then,
from the monotonicity of t and the strict desirability of 1 we get
z = (z - 1/) + y t (x - 1/) + c1 >- z - y =x - a1 + z t: x,
which is impossible. Hence IIzlloo ~ a must be true, showing that t is uniformly

1I·lIoo-proper.
(b) The fact that the order interval [0,1] is not weakly compact is proven in
Problem 3.3.5. Repeating verbatim the solution of Problem 3.5.4, we see that
the utility space of this economy is the set
u = {( x, y) E R~: x + y2 ~ 1} ,
which is a closed set; see Figure 21a.
( c) Our exchange economy satisfies all the hypotheses of Mas-Colell's The-
orem [3, Theorem 3.5.12, p. 161]. Hence, it has a quasiequilibrium. Since
=
w 1 ;» 0, Problem 3.4.3(2) guarantees that in this case the concepts of Wal-
rasian equilibrium and quasiequilibrium coincide.
(d) Now let Zl = X2 = !.1. We shall establish that the allocation (Zl,X2)
is a Walrasian equilibrium supported by the the price p defined by the Lebesgue
measure, i.e., p. x = I;
x(t) dt. Note first that
In addition, if Z ?-2 Z2, then from
we see that p. Z = I; z(t) dt > t = p . W2· •
Problem 3.5.7. (A. Araujo [10)) Consider an exchange economy with Riesz
dual system (ioo, i 1 ) having two consumers with utility functions
= E ¥,
00
and U2(X1,Z2,"')
n=l
and total endowment w = (1,1,1, ... ).

a. Show that the utility function '11.1 is monotone, concave, and has w as an
extremely desirable bundle, but that it fails to be Mackey continuous.
b. Show that the utility function '11.2 is strictly monotone, concave and Mackey
continuous.
c. Show that the utility space of this economy is U = [0,1] x [0,1) U {(O, 1)}
d. If W1 > 0 and W2 > 0 hold, show that the economy has no quasiequilibria.
Solution: (a) The monotonicity of '11.1 follows immediately from the fact that
the lim inf function preserves inequalities. That is, if two sequences {zn} and
{yn} of real numbers satisfy Zn ~ Yn for each n (in fact, we need only Xn ~ Yn
for all n ~ no), then liminfn_ oo Xn ~ liminfn_ oo Yn' (One way of proving this
is to use the familiar formula: liminfn_ oo Zn = supn infA:~n ZA:.)
To see that '11.1 has w as an extremely desirable bundle, we shall use the
following property of the lim inf function .
• If {zn} and {yn} are two bounded real sequences, then
The above inequality is equality if one of the sequences converges.

So, if Z =(Xl, X2,"') E ioo and e > 0, then
U1(X + ew) = liminhn + e > liminhn = U1(Z) ,
n~oo n~oo
which shows that w is extremely desirable for consumer 1.

For the concavity of U1I note that if Z = (Zl' Z2, ... ), Y = (Y1, Y2, ... ) E ioo
and 0 :S a :S 1, then
U1 {az + (1- a)y) = U1 (az1 + (1- a)Y1,az2 + (1- a)Y2"")

= liminf[azn + (1 - a)Ynl
n-oo
~ liminf[aznl + Iiminf[(I- a)Yn]
n ...... oo "-+00
= a liminhn + (1 - a) liminf Yn
n-+oo " ...... 00
In order to establish that U1 is not Mackey continuous, we need to recall

the definition of the Mackey topology. If (X, X') is a dual system, then the
Mackey topology T(X, X') is the largest Hausdorff locally convex topology on
X which is consistent with (X,X'), i.e., (X,T(X,X'»' =
X'. A base at zero
for the Mackey topology T( X, X') consists of the polars of all convex, circled
and u(X',X)-c0Ippact subsets of X'. In convergence terms, a net {za} of X
satisfies Za r(X,X) , Z if and only if the net {za} converges to Z uniformly. on
every convex, circled and u(X', X)-compact subset of X'. That is, Za r(X,X') , Z
if and only if for each convex, circled and u(X',X)-compact subset A of X'
we have sUP:cIEAI(Za - z,z')1 -+ O. For a complete discussion of the Mackey
topology see [1, pp. 161-164].
We now return to the dual system (£00,i1)' We know that 100 is the norm
dual of 11. Moreover, it is known that a subset of 11 is u(l1lioo)-compact if and
only if it is norm compact; see [5, pp. 200-201].
Let Xn = (0, ... ,0,1, I, I, ... ), where the zeros occupy the first n positions,
and note that {Xn} is a sequence of it,. Also, let A be a u(i 11 ioo )-compact
subset of i 1 • By the above discussion, we know that A is a norm compact subset
of i 1 . This means that given € > 0, there exists some no such that L~no IZil < €
for all Z = (Zl,Z2,"') E A; see [5, Theorem 13.2, p. 201]. In particular, if Z E A
and n ~ no, then
00 00
j(xn' z)1 = L IZil :S L IZil < €,

i=n i=no
and this shows that the sequence {Xn} converges to zero uniformly on every
u(11 , loo )-compact subset of i 1 • So, by the definition of the Mackey topology, we
see that Xn r(loo,ll), O. Finally, notice that U1(Xn ) = 1 for each n while U1(0) = O.
This shows that Ul is not Mackey continuous on l;t.
(b) Let p = (t, -Jr, -ls, ... )E 11 and notice that
for each x. In addition, p is strictly positive on it" from which it easily follows
that U2 is strictly positive on it,. The linearity of U2 shows that U2 is concave
and Mackey continuous.
(c) To verify that U = [0,1] x [0,1) U {(O, 1)} is the utility space of this
economy, note first that (x, y) E U implies 0 ~ x ~ 1 and 0 ~ y ~ 1. Now
assume that (x, y) E 1R~ satisfies 0 ~ x ~ 1 and 0 ~ y < 1.
Since limn _ oo 2::1 = 1, there exists some n such that y < 2::1 y = z < 1.
Next, consider the vectors
X1=(0,0, ... ,0,X,X,X, ... ) and X2=(Z,Z, ... ,z,0,0,0, ... ),

'-..--' '-..--'
n n
and notice that (X1,X2) isa feasible allocation. Moreover, we have

n
u1(xd = x and U2(X2) = (L ir)z = (1- 2~)z = y,

,=1
which shows that (x,y) E U.
Now, assume that (x,1) E U for some 0 < x ~ 1. Pick some feasible
allocation (X1,X2) such that U1(Xt} = x and U2(X2) =
1. Also, write X2
(Xl, X2, ... ) with 0 ~ x,
~ 1 for each i. If 0 ~ Xk < 1 holds for some k, then
= U2(X2) = L L L
00 00
1 ~~ 21.. + ~ ~ 2~ + ~ - ~ =1 - 1;f" < 1 ,

n=1 n;tk n=1
which is a contradiction. Hence x, =

1 for each i. This implies Xl 0 and 80 =
= =
(x, 1) (0,1). In other words, we have shown that U [0,1] x [0,1) U {(O, 1)};
its picture is shown in Figure 21b.
(d) Assume (Xl. X2) is a quasiequilibrium supported by a price 0 < p E i l .
Now note that if Xl = (Xl, X2, X3, ... ) E loo and
Zn = (0,0, ... ,0, Xn+l. Xn+2, ..• ),

where the zeros occupy the first n positions, then zn ""'I Xl for each n. This
implies p. Zn ~ p. WI ~ 0 for all n. Thus, p. WI = limn _ oo p. Zn = 0. Since
p . W > 0, the latter implies p' W2 > O.
Now notice that the strict monotonicity of ~2 implies W2 +Wl >-2 W2. SO, by
the Mackey continuity of U2, there is some 0 < C < 1 such that C(W2 +Wl) >-2 w2.
The supportability from p yields P.c(W2+Wt) ~ P'W2, orcP'W1 ~ (1-c)P'W2 > O.
Therefore, P . W1 > 0, a contradiction. Hence, if W1 > 0 and W2 > 0, then the
economy has no quasiequilibria.•
Problem 3.5.8. Consider a two consumer exchange economy whose Riesz dual
system is either (C[O,I],ca[O,I]) or (Loo[O,I],Lt[O,I]). The consumers' initial
endowments are WI = W2 = 1, where 1 denotes the constant function one on
[0,1]. The preferences are represented by the utility functions
11
and
U2(X) = ~ lat Jx(t)dt + Jx(t)dt.
2
Show this exchange economy satisfies the closedness condition with respect
to the Riesz dual system (Loo[O, 1], L1[0, I]) but fails to satisfy the closedness
condition with respect to (C[O, 1], ca[O, I]).
Solution: The Riesz dual system (Loo[O, 1], L1[0, I]) is symmetric. This is equiv-
alent to saying that the order intervals of Loo[O, 1] are all weakly compact; see [3,
Theorem 2.3.6, p. 102]. By Problem 3.5.1, this exchange economy satisfies the
closedness condition.
To see that the economy with Riesz dual system (C[O, 1], ca[O, 1]) does not
satisfy the closedness condition you can use [3, Property 3, p. 130] which states
that: If (Xl, X2) is an allocation with 0 < Xl E C[0,1] (i = 1,2), then there
exists another allocation (Y1, Y2) with Y1, Y2 E C[O, 1] satisfying Yi >-i Xi for each
i = 1,2.•
3.6 Examples of exchange economies
Problem 3.6.1. Let {rO,rl, ... } be an enumeration of the rational numbers of

[0,1] and consider the utility function u: (C[O, 1])+ - R defined by
00
u(x) =1)-iJx(r,).
i=O
Show that u is sequentially weakly continuous, i.e., show that Xn ~x in
(C[O,I])+ implies u(xn) - u(x).
Solution: Assume Xn ~x in (C[O, 1])+. By the statement at the beginning of
the solution to Problem 3.3.5, we know that there exists some M > 0 satisfying
3.6 ExampJes of exchange economies 155
IIznlloo :$ M for each n and zn(t) -+ z(t) for each t E [0,1]. In particular,
IIzlIoo:$ M.
Now let t > O. Fix some k so that 2VME~i 2- i < t and then select some
no such that IE~;i 2- i [JZn(ri) - Jz(ri)] I < t for each n ~ no. But then, for
n ~ no we have
IU(Zn)-U(Z)1 = 1I:2-i[v'zn(ri)-v'z(ri)]1
i=O
i-l 00
:$ IE2-i[v'Zn(ri) - v'z(ri»)I + 2VME2- i

i=O i=i
< e+t=2t,
and hence u(zn) -+ u(z). In other words, the utility function U is sequentially
0'(0[0,1], ca[O, 1])-continuous. _
Problem 3.6.2. Let {rn} denote the sequence o/Rademacher functions on

the interval [0, 1], i.e., rn(z) = Sgn sin(2n n).
a. Sketch the graphs of the functions rn.
b. Show that {rn} converges weakly to zero in LdO, 1].
Solution: (a) Recall that the Sgn: R -+ R function is defined by Sgn(z) = 1

= =
for Z > 0, Sgn(z) -1 for Z < 0 and is (usually) left undefined if Z O.
i)
Clearly, ro = 1. The function rl is equal to 1 on the interval (0, and to
-Ion (i, 1). It is easy to see that in general rn is the function that assumes
the values 1 and -1 alternately on the 2n subintervals
of [0,1] starting with the value one on the first interval. In other words, the
Rademacher function rn can be described by the formula
2"
rn = L( -1)i+1 X«i_l)2-.. ,i2-") .
i=l
Since the Rademacher functions are considered elements of the L,[O, I]-spaces,
their values at the endpoints of the subintervals are arbitrary or can even be
left undefined. The graphs of the first three Rademacher functions are shown in
Figure 22.
156 C.hapter 3: Markets With InIiniteJy Many Commodities
y =ro(x) =rl(x) =r2(x)

,
y y y Y y
~,
I I I
I I I
I I I
1 II 11 II I I 11 II
I I I I
I I I I I I
-1 ~ -1 .... W
Figure 22
(b) We shall establish this part by proving the following general property.
• A norm bounded net {fa} of some Lp[O, 1]-space, where 1 :$ p < 00, sat-
J:
isfies fa ~ f if and only if fa(z) dz -+ J:
f(z) dz for each subinterval
(a,b) 0/[0,1]'
To establish this, we must recall that for 1 :$ p < 00 the norm dual of
Lp[O, I] can be identified with Lq[O, 1], where 1 < q :$ 00 satisfies ~ + 1 = 1. The
identity L~[O, 1] = L9 [0, 1] is interpreted as follows. Each 9 E Lq[O, 1] gives rise
to a unique continuous linear functional Fg on Lp[O, 1] via the formula
Fg(h) = fal h(z)g(z) dz,

and the mapping 9 1-+ Fg from L 9 [0, 1] to L~[O, 1] is an onto lattice isometry. For
details, see [6, pp. 239-242].
Now if fa ~ f, then by the above
holds for each subinterval (a, b) of [0,1]. For the converse, assume that IIfalip :$
M holds for each cr and some M > 0 and that J:
fa(z) dz -+ J:
f(z) dz for each
subinterval (a,b) of [0,1]. Replacing the net {fa} by {fa - fl, we can assume
that I: °
fa(z) dz -+ 0 for each subinterval (a, b) of[O, 1].
First, we claim that 10 fa(z) dz -+ for each open subset 0 of [0,1]. To
see this, let 0 be an open subset of [0,1]. Then 0 is an at most countable
union of pairwise disjoint open intervals of [0,1]. If 0 is a pairwise disjoint
union of a finite number of open intervals, then from our hypothesis it easily
follows that fo /a(Z) dz -+ 0. So, assume that 0 = U:=l In is a countable
°
union of pairwise disjoint open subintervals of [0, 1]. Let e > and fix some Ie so
that the Lebesgue measurable set A = 0 \ U~=l In satisfies [>'(A)]! < e, where
>. denotes the Lebesgue measure on [0,1]. Also, fix some index ao such that
1L:~=1 h, /a(x) dxl < e for all a ~ ao. But then, using Holder's inequality, for
a ~ aD we have
< I; i~
I:
/a(Z) dzi + Ii /a(Z) dzi
< e + II/lip' [>.(A)];

< e + Me = (1 + M)e ,
which shows that fo /a(x) dx -+ 0.

Next, let A be an arbitrary Lebesgue measurable subset of [0,1] and fix
e > 0. Pick an open subset 0 of [0,1] such that A ~ 0 and [>'(0 \ A)]! < e
(see [6, Theorem 15.2, p. 111]) and note that
Ii /a(X) dxl IL /a(X) dx - L'A /a(X) dxl
< 110 /a(X) dxl + 11o\A /a(Z) dxl

< IL /a(X) dxl + II/allp . [>'(0 \ A)]!
< 110 /a(X) dxl + Me.

So, if 1J0 /a(x) dxl < e for all a ~ aD, then IfA /a(x) dxl < (1 + M)e for all
°
a ~ aD. That is, fA /a(x) dx -+ for each Lebesgue measurable subset A of
[0,1].
=
Now if rp is any simple function of [0,1]' i.e., rp L:~=1 aiXA, with each Ai
a Lebesgue measurable subset of [0, 1], then it easily follows from the above that
f; /a(x)rp(x) dx -+ 0.
Finally, to show that /a ~o in Lp[O, 1], let g E Lq[O, 1] and fix e > 0. Pick
a simple function t.p such that IIg - rpllq < € and then select some index ao such
that If01 /a(x)rp(x) dxl < e for all a ~ ao. Now, from Holder's inequality, we see
that
III fa(z)g(z) dzl $ III fa(z)cp(z) dzl + III fa[g(z) - cp(z)] dzl
< ~+lIfallp'lIg-cpllq$~+Me;
= (1 + M)e;
for all a ~ ao. That is, we have shown that J;

fa(z)g(x) dx -I- 0 for each
9 E Lq[O, 1], meaning that fa ~O.
And now we return to the Rademacher sequence {rn}. First, notice that
= =
Irnl 1 and so IIrnlip 1 for each n. Next, it should be noted that for the
subintervals of [0, 1] of the form (i2- 1 ,j2- 1 ) we have Ia~::· rn(z) dx = 0 for all
n > Ie.
Now let (a, b) be a subinterval of [0, 1] and fix e; > O. Choose some Ie so that
2- 1 < min { ~, 6; a , a}. Then there exist i and j with i < j such that
Consequently, for n > Ie we have
< l''2-·
Irn(X)1 dx + 11:-.
'2-·
rn(X) dxl + l2_.l rn (X) Idx
6
(i2- 1 - a) + 0 + (b - j2- 1 ) < 2- 1 + 2- 1 < e;.
That is, J: rn(x) dx -I- 0, and so, by the above discussion, rn ~ in Lp[O, 1].
It is also very interesting to note that since Irnl =
1 for each n, we have
°
Irn I ~ 1 in Lp[O, 1]. This implies that for 1 $ p < 00 the lattice operations
of Lp[O, 1] are not sequentially weakly continuous. Compare this with the con-
clusion at the end of the solution to Problem 3.3.5. Incidentally, we can use
Problem 3.3.5 to conclude (the fast way) that {rn} does not converge weakly
to zero in Loo[O, 1]. Otherwise, rn ~O in Loo[O, 1] would imply Irnl = 1 ~O,
a contradiction. Here, we use the fact that Loo[O, 1], being a C(O)-space, has
sequentially weakly continuous lattice operations .•
Problem 3.6.3. If (X, E, 1') is a IT-jinite measure space, then show that the
Riesz dual system (L oo (I'), L 1 (1'») is symmetric.
Solution: Recall that a symmetric Riesz dual system is Riesz dual system
(E,E') with the property that the order intervals of E are IT(E,E')-compact.
(See [3, p. 102] for several useful characterizations of the symmetric lliesz dual
systems.) We shall use the classical Alaoglu Compactness Theorem which asserts
that a subset in the norm dual X' of a Banach space X is O'(X', X)-compact
if and only if it is norm bounded and O'(X', X)-closed; for a reference see [1,
Theorem 5.25, p. 194].
We know that for a O'-finite measure I' the norm dual of the Banach lattice
L 1 (1') coincides with L oo (I'); see, for instance, [6, Theorem 27.10, p. 241]. This
= = =
means L~(I') L1'(I') Loo(I')' Since the order intervals of Loo (l') L~(I') are
norm bounded and O'(Loo(I'), L 1(1'»)-closed, it follows from Alaoglu's theorem
that the order intervals of Loo (I') are 0' (Loo (1'), L1 (I') )-compact.
So, to establish that (L oo (I'),L 1 (1'») is a symmetric Riesz dual system, we
need, according to [3, Definition 2.3.7, p. 102], only to verify that L1(1') is an ideal
in the order dual L~(I') of Loo(I')' But this is a general result for AL-spaces,
i.e., for Banach lattices which are lattice isometric to L1 (1')-spaces. Every L 1 (1')-
space is a band, and hence an ideal, in L~(I') = L~(I'); see [1, Theorem 7.30,
p. 256] .•
Problem 3.6.4. This exercise presents some examples of utility functions on

Roo, the vector space of all real-valued sequences. The product topology r on Roo
is an order continuous locally convex-solid topology, and (Roo, r) is a Frichet
lattice. We know that (JRoo , r)' consists of all sequences that are eventually zero.
Let F denote the collection of all strictly monotone, strictly concave and
=
continuous functions u: [0,00) -+ JR with u(O) O. (For instance, if u(x) =
1~~
=
and v(x) 1- e-fJ~'" (f3 > 0; a ~ I), then u, v E F.) Now consider a uniformly
bounded sequence {un} of :1", i.e., there exists some M > 0 such that un(x) ~ M
holds for all n and each x E [0,00). Also, let {An} be a sequence of strictly
positive real numbers such that 2::=1 An < 00 and define U: JR;!;, -+ JR by
00
U(Zl,Z2,".) = LAnUn(Xn).
n=l
Establish the following properties for the utility function U.

a. U is strictly monotone, strictly concave and r-continuous.
b. U is not uniformly r-proper.
Solution: Before we present the solution, let us establish the claims stated at
the beginning of the problem.
• The topological Riesz space (Roo, r) is a Frichet lattice whose topological
dual coincides with ifJ, the Dedekind complete Riesz space of all eventually
zero sequences. That is,
(Roo, r)' = {(Zl' X2, ••• ): Xi = 0 for all i sufficiently large} .

Moreover, (Roo, 'P) under the natural duality
=L
00
x .Y XiYi, x E Roo, Y E 'P,

i=l
is a symmetric Riesz dual system.

=
Note first that the product topology ron 1Roo RN is simply the topology
of pointwise convergence. That is a net {x a }, where Xa = (xf, x~, ... ), satisfies
Za ~ Z =(Zl' Z2, ... ) if and only if zf -;;+ Zi in R for each i. Also, the linear
topology r is generated by the countable family of lattice seminorms {qn}, where
=
qn (z) IX n I. Therefore, r is a metrizable topology8, and an easy argument shows
that (Roo, r) is also topologically complete. In other words, (Roo, r) is a locally
convex Frechet lattice.
Now let us compute the norm dual of (Roo, r). Clearly, each Y E 'P gives rise
to a continuous linear functional I'J: Roo -+ R via the formula
L
00
f'J(z) = ZiYi·
i=l
Now let I: Roo -+ R be a r-continuous linear functional. Then there exist some
£ > 0 and an integer Ie such that if Z E Roo satisfies IZi 1 < e for 1 SiS Ie,
then If(x)1 < 1. (This expresses the continuity of f at zero.) So, if x E Roo is
arbitrary and Y = (Zl' Z2, ... , XI:, 0, 0, ... ), then n(z-y) has its first Ie coordinates
equal to zero, and so nlf(z - y)1 < 1 for each n. Thus,
I:
f(x) = f(y) =L zi!(ei), z E Roo,
i=l
proving that I can be identified with the vector (J(ed, f(e2), ... , f(el:), 0, 0, ... ) E
!p.In other words, we have shown that (Roo, r)' tp. =
Finally, notice that a net {za} satisfies Za ! 0 in Roo if and only if zf !a Zi
in R for each i. Therefore, Za ! 0 in Roo implies Za ~ z. Since Roo is Dedekind
complete, it follows (from [3, Theorem 2.3.6, p. 102]) that (Roo, tp) is a symmetric
Riesz dual system.
(a) The strict monotonicity and the strict concavity follow immediately from
the strict monotonicity and the strict concavity of the functions Ui. For the
8 It is well known that a Hausdorff topological vector space is metrizable if and only if the
topology has a countable base at zero; see [13, Theorem I, p. 111].
continuity of U let {xa} be a net of lRoo satisfying Xa -:. x in lRt" where Xa =

(xf, x~, ... ) and x = (Xl, X2, ... ). By the discussion preceding this part, this
means xi 7 Xi in lR for each i.
Now fix £ > O. Pick some k such that ME:".An < £, and then choose
some index ao such that IE!:i 1<
.An [Un(X~) - un(xn)] £ for all a ~ ao. Thus,
if a ~ ao, then
k-1 00
W(x a) - U(x)1 IE.A n [Un(X~) - Un(Xn)] + E.An [Un(X~) - Un(Xn)] I

n=l n="
k-1
1+ M E.A
00
< IE.A n [Un(X~) - Un(Xn)] n

n=l n=k
< £+£=2£,
proving that U(xa) - U(x), i.e., U is T-continuous.
(b) The desired conclusion follows from the following general result.
• Every preference on lRt, which is T-continuous, strictly convex and strictly
monotone is not uniformly T-proper.
To see this, let t be a T-continuous, strictly convex and strictly monotone

preference on lRt,. Consider the exchange economy with Riesz dual system
(IRoo, <p) and one consumer with initial endowment w = (1, 1, ... ) and preference
t. Since the order interval [0, w] is weakly compact, it follows that this economy
satisfies the closedness condition; see Problem 3.5.1. But then, by Mas-Colell's
Theorem [3, Theorem 3.5.12, p. 161] the economy has a quasiequilibrium which
is supported by a price p E <po Now, by Problem 3.4.3(2), the price p must be
strictly positive. Since <p has no strictly positive elements acting on lRt" we have
obtained a contradiction. Hence, t is not uniformly T-proper .•
Problem 3.6.5. Determine if the following preferences are uniformly norm

proper.
1. The preference on Lt (/1) represented by the utility function u: Lt (/1) - 1R

defined by
We assume that (X,E,/1) is a finite measure space, 1 ~ p ~ 00 and

O<a~1.
2. The preference on it represented by the utilUy function 1.1: it -+ IR defined

by
= :L: wn(xn)a .
00
U(X1, X2,· •• )
n=l
We assume that 1 ~ p ~ 00, 0 <a ~ 1 and (Wb W2, ... ) E it satisfies

Wn > 0 for each n.
Solution: The solution below is due to Mike Maxwell.
(1) Let (X,E,Jl) be a finite measure space, and let t denote the preference
represented by the utility function u. Clearly, t is a monotone preference having
the constant function 1 as an extremely desirable commodity. If p 00, then =
Lp(Jl) is an AM-space and so t is necessarily a uniformly 1I·lIoo-proper preference;
see [3, Theorem 3.2.4, p. 118]. So, we can assume 1 $ p < 00.
Now consider the case a =1. Since the linear functional f 1-+ If dJl is
norm continuous, the set r = {h E Lp (Jl): I h dJl < o} is an open convex cone
containing -1. Moreover, we claim that
(g + r) n {J E Lt(/J): 1.1(/) ~ u(g)} = 0

for each 9 E Lt(Jl). Indeed, if for some 9 E L+(Jl) and some hEr we have
J
u(g + h) ~ u(g) , then I(g + h) dJl ~ I 9 dJl, or h dJl ~ 0, which is impossible.
Now [3, Theorem 3.2.3, p. 117] guarantees that t is uniformly 1I·lIp-proper.
So, we can assume 1 $ p < 00 and 0 < a < 1. We now distinguish two cases.
I. Assume that lor each E > 0 there exists some E E E such that 0 < Jl(E) < E.
In this case, we claim that t is not uniformly II . lip-proper. To see this,
assume by way of contradiction that there exist some E > 0 and some function
v> 0 in Lp(Jl) such that 1- AV + z t z in Lt(Jl) with A > 0 implies IIzllp ~ AE.
For each n pick some En E E such that 0 < Jl(En) < n+~("). Put Cn Jl(En) =
and note that
o < Cn < 1 and 0 ~ Cn u( v) < 1
for each n. Now fix an integer Ie so that 1e(1 - a) ~ 2, and for each n define
In = (c;;k + l)vXE~ and Zn = (v + [cnu(V)]-i")XE ...

Clearly,
and so In, Zn, and In - V + Zn belong to Lt(Jl) for each n.

Next, consider the function <p:(O,oo) -+ 1R defined by <p(t) = tao Since
<p"(t) < 0 for each t > 0, we see that o. Letting t = c~l: > 0 we get

( c-l:
n + l)a <
_nc-l: a + acl:(l-a)
n <
_nc-l: a + cl:(l-a)
n <n
- c-l: a + c n
2 (**)
for each n. Therefore,
u(fn) f (c~l:+ltvadJ.'~c~l:a f vadJ.'+c; f vadJ.'

~ h: h:
< c~l:a f va dJ.' + c;u(v)
JE~
and from (*) we see that
Therefore, u(fn - v + zn) ~ u(fn) and hence, by the uniform properness assump-
tion, IIznllp ~ c > 0 for each n. Notice now that 0 ~ Zn ~ (v + l)XE" holds true
for each n and so
which is impossible. This shows that t cannot be uniformly II . lip-proper.

II. Assume that there exists some c > 0 such that lor each E E E we have either
J.'(E) = 0 or J.'(E) ~ c.
In this case, we claim that t is I-uniformly 1I·lIp-proper. To see this assume
that I - Al + Z t I holds in Lt(J.') with A> o. This means J(f - Al + z)a dJ.' ~
J fa dJ.'. Since integration is strictly monotone, we see that Z - Al I. o. So, the
=
set E {x E X: z(x) ~ A} E E has positive measure, and hence J.'(E) ~ c. Now
notice that the inequality Izi ~ AXE implies
and this shows that t is I-uniformly II . lip-proper.

(2) The proof is similar to the one of the previous part. We shall consider
only the case 1 ~ p < 00 and 0 < a < 1 and leave the other cases to the
reader. In this case, we claim that the preference t represented on by u is it
not uniformly" . lip-proper. To see this, assume by way of contradiction that
164 Chapter 3: MarJcets With InfiniteJy Many Commodities
there exist 0 <v= (Vi, V2, ••. ) E ip and some e > 0 such that y - ~v + Z t y in
it with ~ > 0 imply IIzllp ~ ~e. Let
Next, fix some integer k such that k(l- a) ~ 2 and then define
Yn = (w;& + l)vn and Zn = (vn + [wnu(v)1=-)en,

where en is the sequence having its nth-component equal to one and every other
zero. Clearly,
From (**) we see that (w;& + 1)° ~ w;&O + w~ for all n. Therefore,
U(Yn) = 2: Wi (w;& + 1tvi ~ w;&O 2: Wivi + W~ 2: Wivi

i¢n i¢n i¢n
~ w;&°2:wivi +W~U(v) = 2:Wiw;&Ovi +wn [w n u(v)1
i¢n i¢n
= U(Yn - V + Zn)
for all n. Now the uniform properness assumption implies IIznllp ~ e for each
n. However, the latter contradicts the fact IIznllp = Vn + [wn u(v)1=- -+ O. So, t
cannot be a uniformly 1I·lIp-proper preference .•
Problem 3.6.6. This exercise presents another example showing that in the
infinite dimensional case demand functions need not exist even when the order
interval [O,w1 is compact. Consider the symmetric Riesz dual system (i 2 ,i2 ) and
define the utility function u: it
-+ It by
2:(i)t..,lii".
00
U(Zl, Z2, ... ) =

&=1
Also, let w = (t,~,~,···) and p = (l, -j,-, is,·· .).
a. Show that the order interval [O,w1 is norm compact.
b. Show that the price p is strictly positive.
c. Show that the utility function U is strictly monotone, strictly concave and
norm continuous.
d. Show that the preference relation represented by the utility function u does
not have any maximal elements in the budget set
B={X=(Zl,Z2, ... )Eit: p.x~p.w=l}.
3.6 Examples of excbange economies 165
Solution: (a) We shall show that if x = (Xl, X2"") E it, then the order interval
[0, x] is norm compact. Since [0, x] is clearly norm closed, it suffices to show that
[0, x] is norm totally bounded. To see this, let e > O. Fix some k such that
(2::1: xn! < e. Observe that the set
C = [O,xd x [0,X2] x ... x [0, XI:] x {O} x {O}···
is a norm compact subset of i 2 • Moreover, if B denotes the open unit ball of i 2 ,

then [O,x] ~ C + cB. This easily implies that [0, x] is a norm totally bounded
set and hence a norm compact set.
(b) If x E it satisfies Xi > 0 for some i, then
00
p.x=L~~~>O,
n=l
and so p ~ O.
(c) If 0 ~ x < y holds in i 2 , then 0 ~ Xi ~ Yi for each i and Xi < Yi for some
i. This implies
= L (~) Jj..;z; < L (~) Jj v% = u(y) .

00 00
u(x)
n=l n=l
That is, u is strictly monotone on it.

For the strict concavity of u let x, y E it satisfy x 'I y and fix 0 < a < 1.
Since Xi 'I Yi must hold for some i, the strict concavity of the square root function
implies Vaxi + (1 - a)Yi ~ a..jZi + (1 - a)...jfji for all i while strict inequality
holds for some i. Therefore,
00
u(ax + (1 - a)y) L(~) t vaxl: + (1- a)YI:

1:=1
> L U) ~ [ay'Xk + (1 - a)VYi]

00 "
1:=1
= au(x) + (1 - a)u(y),
which guarantees that u is strictly concave.

=
For the norm continuity of u let "xn-X"2 -+ 0, where Xn (x~, x~, ... ) E it
for each n. There exists some M > 0 such that IIxnll2 ~ M for each n (and, of
course, "X1l2 ~ M). Now fix e > O. Pick some i such that 2v'M2:~=l(~)! < e
and then choose some no such that l2:i:~ (~) ! [..[iif - v'Xk] I < e for all n ~ no.
166 Chapter 3: MarJcets With InIinitely Many Commodities
(The existence of such an integer no follows from the fact that IIxn
implies Z~7ZI: for each k.) Consequently, for n ~ no we have
- XII2 -+ °
lu(Xn) - u(x)1 = If)~) t [~- y'ik] I
1:=1
I
~1 ~
< I~::<~) t [~ _ y'ik] + 2vML)~) t

1:=1 I:=l
< E:+E: = 2E:,
which shows that U(Xn) -+ u(x). That is, u is norm continuous.
(d) Note first that p . w = 1::=1 23" . 2~ = 31::=1 41" = 1. Next, let
Xn = (0, ... ,0, 2n , 0, 0, ... ) = 2n en ~ 0, and note that p . Xn = 2n . l" = 1 for
each n. This implies Xn E B for each n. Now observe that
for each n. Since (t)t i 00, we see that the preference ~ represented by u does
not have any maximal elements in the budget set B .•
Chapter 4
Production With Infinitely Many

Commodities
4.1 The model of a production economy
In the economic model for a production economy, the commodity price duality
is described by a Riesz dual system (E, E'). The Riesz space E represents the
commodity space and the Riesz space E' the price space. The production model
will consist of m consumers indexed by i and k production firms indexed by j.
The characteristics that describe the production economy are as follows.
1. Consumers
There are m consumers indexed by i such that:
a. Each consumer i has E+ as her consumption set.
b. Each consumer i has an initial endowment Wi > O. As usual, the total

endowment is denoted by w, i.e., W = E~l Wi.
c. The preference of each consumer i is represented by a monotone quasi-

concave utility function Ui: E+ --+ JR. Without loss of generality, we can
assume Ui(O) = 0 for each i.
d. There is a locally convex-solid topology T on E consistent with the dual

system (E, E') for which every utility function Ui is T-continuous. (Equiv-
alently, we can say that every utility function is continuous for the abso-
lute Mackey topology ITI(E, E')j this implies, of course, that every utility
function is Mackey continuous.)
168 Cbapter 4: Production Witb Infinitely Many Commodities
2. Producers
There are Ie production firms indexed by j. Each production firm is characterized
by its production set lj, whose elements are called the production plans for
producer j. For a production plan y = y+ - y- E lj the negative part y- is
interpreted as the input and the positive part y+ as the output. The production
sets are assumed to satisfy the following property.
e. Each production set lj is a weakly closed convex set and lj n E+ = {o}.
The above properties characterize the production economies in this chapter.
Formally, we have the following general definition of a production economy.
Definition 4.1.1. A production economy [; is a 3-tuple
where
a. the Riesz dual system (E, E') represents the commodity-price duality;
b. each consumer i has the characteristics (Wi, ud as stated in (1) above; and
c. there are Ie producers indexed by j each of whom has a production set lj.
In the private ownership model of Arrow-Debreu the households hold limited

liability shares in firms entitling them to a share of the firm's profit. The model
for a private ownership production economy is defined as follows.
Definition 4.1.2. A private ownership production economy [; is a 4-tuple
[; = ((E,E'), {wi,ud~l' {lj}j=l, {Oij: i = 1, ... ,m; j = 1, ... ,Ie}),
where
a. The Riesz dual system (E, E') represents the commodity-price duality.
h. There are m consumers indexed by i such that each consumer has a strictly
monotone preference b and the characteristics (Wi, 'Ui) stated in (1) above.
c. There are k producers indexed by j each of whom has a production set lj.
d. The economy is a private ownership economy. That is, for each (i,j) the
real number Oij represents the share of consumer i to the profit of producer
j; 0 ~ Oij ~ 1 holds for all i and j and E~18ij = 1 for all j = 1, ... , k.
4.1 The model of a production economy 169
It should be noted that by assigning the production sets Yj = {O} and arbi-
trary shares, every exchange economy can be considered as a private ownership
production economy with any desired number of producers.
We remind the reader that if in a private ownership production economy the
prevailing price vector is pEE', and each producer j chooses a production plan
Yj, then the income (or the wealth) of the ith consumer is
Wi (p) =p . Wi + L: Oij P . Yj .
j=l
Some discussion regarding the important features of production economies

are in order. Recall that in a production economy with production sets Y1 , •.. Yk,
the convex set
Y =
Y1 + Y2 + ... + Yk
is called the aggregate production set.

An (m+k)-tuple (X1, ... ,X m ,Y1, ... ,Yk), where Xi E E+ for i = 1, ... ,m
and Yj E Yj for j =
1, ... , k, is said to be an allocation whenever
m m k k
L: =L:Xi Wi + L: Yj =W + L: Yj .
i=l i=l j=l j=l
The set of all allocations is denoted, as before, by A. That is,

m m k
A = { (Xl, ... , X m , Y1, ..• , Yk): Xi E E+, Yj E Yj and L: Xi = L: Wi + L: Yj } .
i=l i=l j=l
It should be obvious that the set A of all allocations is a non-empty, convex and
weakly closed subset of Em+k.
The feasible consumption set Xi of the ith consumer is the convex set of
all his feasible consumption bundles, i.e.,
Similarly, the feasible production set fj for the ph producer is the convex
set of all feasible production plans for producer j, i.e.,
Regarding weak compactness of the feasible consumption and production

sets, we have the following result. (For a proof see [3, Theorem 4.2.4, p. 183].)
170 Chapter 4: Production With Infinitely Many Commodities
Theorem 4.1.3. For a production economy with a symmetric Riesz dual system
the following statements hold.
1. If all production sets are order bounded /rom above, then each feasible
production set is weakly compact.
2. If each feasible production set is weakly compact, then the set (Y +w)nE+
is weakly compact-where Y = Y1 + ... + Yk is the aggregate production
set.
3. If (Y + w) n E+ is weakly compact, then the feasible consumption sets Xi
are all weakly compact subsets of E+ .
Now let C be a private ownership production economy, and let S be a coali-

tion of consumers. Then a subset {Zi: i E S} of E+ is said to be a feasi-
ble assignment for the coalition S whenever there exist production plans
hj E Yj (j = 1, ... , k) such that
k
EZi = EWi + E(Eoi;)hj.

iES iES j=l iES
In case C is a general production economy, then a subset {Zi: i E S} of E+

is said to be a feasible assignment for the coalition S whenever there exist
production plans hj E Yj (j = 1, ... , k) such that
k
E Zi = E Wi + E
iES j=l
hj .
iES
A coalition S improves upon an allocation (Xl. ••• , X m , Y1, ... , Yk) when-
ever there exists a feasible assignment {Zi: i E S} for S such that Zi h Xi holds
for each i E S. As usual, a core allocation is an allocation that cannot be
improved upon by any coalition. The core Core(C) of a production economy C
is the set of all core allocations.
The following result guarantees the existence of core allocations in private
ownership production economies.
Theorem 4.1.4. If the Riesz dual system of a private ownership production

economy is symmetric and each production set is or:der bounded from above, then
its core is non-empty.
Proof: Define an m-person game V by
V(S) = {(Z1. ... ,zm) E R m : There exists a feasible assignment
{Xi: i E S} with Ui(Xi) ~ Zi 'I i E S} .
4.1 The model of a production economy 171
We claim that the m-person game V satisfies the hypotheses of Scarf's Theo-
rem [3, Theorem 1.5.9, p. 44]. Indeed, assumptions (b) and (c) of Scarf's Theorem
are trivially true. To verify assumption (d), fix some a E E+ such that Y E }j
(j = 1, ... ,k) implies Y::; a and observe that X; ~ [O,W + ka] holds. Thus, if
{x;: i E S} is a feasible assignment, then we have X; E X; ~ [0, W + ka]. Since
each utility function is monotone, the set V(S) is bounded from above in R S .
The closedness of the sets V(S) and the balancedness of the game need
special verification. Let S be a coalition. Since (U1(W1), ... ,Um(wm)) E V(S),
we see that V(S) is non-empty. Also, since V(S) is bounded from above relative
to RS, we infer that V(S) is a proper subset of Rm.
To see that V(S) is closed, assume that a net {(zf, ... , z~)} of V(S) satisfies
(zf, ... , z~) -> (Zl,.'" zm) in Rm. For each a pick xf E E+ (i E S) and yj E }j
(j = 1, ... , k) satisfying
k
Lxf=Lw;+L(LO;i)yj and zf::;u;(xf) for all iES.
iES iES i=l iES
In case L;ES O;i = 0, we can assume without loss of generality that yj = O.
Since for each j we have (L;ES O;i)Yj E"fj and"fj is weakly compact (see Theo-
rem 4.1.3(1)), it follows-by passing to a sub net if necessary-that yj ::""Yi E Yj
holds for all j = 1, ... , k. Also, 0 ~ xf ~ W + ka holds for all i E S, and so by
the weak compactness of the order interval [0, W + ka]-by passing to a subnet
again-we can assume that xf ::""x; E E+ holds for all i E S. Consequently,
k
L: Xi = L: Wi + L: (L: Oii) Yi .
iES iES i=l iES
By [3, Lemma 1.2.4, p. 15] each utility function is weakly upper semicontinuous.
So, for each i E S, it follows from Problem 1.2.8 that
Z; =limzf
a
::; lim sup Ui(xf) ::; Ui(Xi),
a
and so (Zl, ... , zm) E V(S). Hence, each V(S) is a closed subset of Rm.
To see that the game is balanced, consider a balanced family 8 of coalitions
with weights {ws: S E 8}. That is, LSEB; Ws =
1 holds for all i, where
8i = {S E B: i E S}. Now let (Zb"" zm) E nSEB V(S). We must show that
(Zl, ... ,Zm) E V({l, ... ,m}).
Let S E 8. From (Zb ... , zm) E V(S), it follows that there exist xf E E+
(i E S) and yf E Yj (j = 1, ... , k) with LiEs xf = LiEs Wi+ L7=1 (LiEs Oii)yf
and Ui(xf) ~ Zi for all i E S. Now put
Xi = L: wsxf E E+ , i = 1, ... , m,
SEB;
and
m
Yj = L LWS(}ijYJ = L(}ij(L W,yl) EYj, j= 1, ... ,k.

SES, iES i=1 SES,
Since each Xi is a convex combination, it follows from the quasi-concavity of Ui

that Zi ::; Ui(Xi) holds for each i = 1, ... , m. Moreover, we have
m
= L L wsxf = LWS(Lxf)
i=1 SES, SES iES
l:
L Ws [LWi + L(L(}ij )YJ)
SES iES j=l iES
m l: m l:
= L L WSWi + L L LWS(}ijYJ = LWi + LYj,
i=l SES, j=l SES iES i=l j=1
which proves that (Zb ... , Zm) E V( {I, ... , m}), as desired.
Now by Scarf's Theorem the m-person game V has a non-empty core. That
is, the set
Core(V) = {x E V(N): ~ S E.N and y E V(S) such that Yi > Xi ViE S}
is non-empty, where .N denotes the set of all coalitions. Let (Z1, ... , zm) be a
core vector. Pick Xi E E+ (i = 1, ... , m) and Yj
E Yj (j = 1, ... , k) such that
a. 2:;:1 Xi = 2:;:1 Wi + 2:7=1 Yj; and

b. Ui(Xi) ~ Zi for each i = 1, ... ,m .
Clearly, (Xl' ... ' Xm , Y1, ... , Yl:) is an allocation, and we claim that it is a core
allocation. To see the latter, assume by way of contradiction that there exists a
coalition S and a feasible assignment set {xi: i E S} satisfying xi >-i Xi for all
i E S. Then Ui(Xt) > Ui(Xi) ~ Zi holds for each i E S, and from this, we see that
(Zl, ... ,zm) ¢ Core(V), which is a contradiction. Hence, (Xl, ... ,X m, Y1, ... ,Yl:)
is a core allocation, and therefore the economy has a non-empty core .•
4.2 Edgeworth equilibria and the core
Problem 4.2.1. Show that the weak compactness of (Y + w) n E+ does not

imply the weak compactness of the feasible production sets.
Solution: Consider the production economy with Riesz dual system (JR?, R2)
having one consumer with initial endowment W = (1,1) and two producers with
production sets Yl Y2 = =
{(x,y) E 1R?: y ~ -x}. Clearly, Y =
Yl + Y2 Yl , =
and so in this case
(Y + w) n E+ = {(x, y) E R~: x + y ~ 2} ,
which shows that (Y + w) n E+ is a compact set.
Now from w = w + (-n, n) + (n, -n), we see that (-n, n) E Yl for each n.
This shows that Yl cannot be bounded and hence cannot be a compact subset
ofR2 .•
Problem 4.2.2. Consider an allocation (Xl, ... , X m , Yl, ... , YA:) in a private
ownership production economy with monotone preferences. Show that a coalition
S improves upon the allocation (Xl, ... ,Xm,Yl, ... ,YA:) if and only if there exist
consumption bundles Zi E E+ (i E S) and production plans h j (j = 1, ... , k)
such that
a. Zi >-i Xi holds for each i E S; and

Ie
b. I>i $ LWi + L(LOij )h j.

iES ieS j=l iES
Prove a similar result for an arbitrary production economy.

Solution: Let (XlJ"" X m , Yl, ... , YIe) be an allocation in a private ownership
production economy and let S be a coalition of consumers. If the coalition S
can improve upon the allocation, then clearly there exist consumption bundles
Zi E E+ (i E S) and production plans hj
(j = 1, ... , k) such that
a. Zi >-i Xi holds for each i E S; and

Ie
b·LZi$Lw;+L(LOij)h j.
ieS iES j=l iES
For the converse, assume that there exist consumption bundles Zi E E+

(i E S) and production plans hj (j = 1, ... , k) satisfying (a) and (b). Fix some
=
consumer k E S, and for each i E S let z; Zi if i =F k and
Then, the monotonicity of!:k implies zk !:k Zk >-k Xk and, of course, for i i= k
we have zi = Zi >-i Xi. On the other hand, note that
l:
L Zi + zZ =L Zi + [Zl: + L Wi + L (L 0i; ) hj - L Zi]
:~~ :~~ iES ;;1 iES iES
l:
LWi + L(LOij )h j ,
iES j;1 iES
showing that S can improve upon the alloaction (Xl,.·., X m , Yl, ... , Yl:). The
general production case can be established in a similar fashion .•
Problem 4.2.3. Show that in an arbitrary compact production economy the set
(Y + w) n E+ - W is non-empty and weakly compact.
Solution: Recall that a production economy is said to be compact whenever
1. its Riesz dual system is symmetric; and
2. if Y = Yl + ... + Yl: is its aggregate production set, then (Y +w) n E+ is
a weakly compact set.
Now consider a compact production economy. So, the set (Y + w) n E+ is

weakly compact. Since 0 E Y and wE E+, we see that w = O+w E (Y +w)nE+.
Hence 0 belongs to the weakly compact set (Y + w) n E+ - w .•
Problem 4.2.4. Show that the core of a compact private ownership production
economy is non-empty and weakly closed.
Solution: Put Y= (Y + w) n E+ - w, where Y = Yl + ... + Yl: is the aggregate
production set of a compact private ownership production economy E, and note
that Y is a weakly compact set. Also, define the set A by
l:
A == {(Xl, ... , Xm , y) E Em+l: Y= LYj with (Xl, ... ,Xm, Yl,···, Yl:) E A}.
j;l
Clearly, A ~ Xl X ••. X Xm X Y and so from Theorem 4.1.3(3), it follows that A

is a weakly compact subset of Em+l. The proof will be completed in two steps.
1. The core is non-empty.
For each a E E+ we shall denote by Ea the private ownership produc-
tion economy which is obtained from the original private ownership produc-
tion economy E by replacing each production set }j by the production set
~a = {y E }j: y S; a}; the set ~a is represented geometrically by the dark-

ened region in Figure 23.
By Theorem 4.1.4, we know that Core(Ea ) # 0. For each a E E+ pick
some allocation (x~, . .. , x~, yf , ... , Yk) in the core of Ea and let ya = 2:7=1 yj.
Then (x~, ... , x~, y a ) lies in A for each a E E+. Since A is weakly com-
pact, the net {(x~, ... , x~, ya): a E E+} has a ,weak accumulation point in
A, say (Xl, ... ,Xm,y). Clearly, Xl + ... + Xm = W + y and y E Y. Pick
Yj E }j (j = =
1, ... , k) with Y Yl + ... + Yk· We claim that the allocation
(Xl, ... , X m , Yl, ... ,Yk) is a core allocation for the private ownership production
economy E.
Figure 23
To see this, assume by way of contradiction that there exist a coalition S of

consumers, consumption bundles Zi E E+ (i E S) and production plans hj E }j
(j = 1, ... , k) satisfying
a. Zi ~i Xi for all i E S; and
k
b. L:Zi = L:Wi + L:(L:Bij)hj.
iES iES j=l iES
Then for each i E S the set
is a weakly closed subset of Em+l, and so V = UiES Vi is also weakly closed.

=
Thus, its complement VC E m +1 \ V is weakly open. Since (Xl,.'" Xm , y) E V C
and (Xl, ... ,Xm , y) is a weak accumulation point of {(x~, ... ,x~, ya)}aEE+, there
exists some a ~ E:= 1 Ihj I such that (X~, ... , X~, ya) E V e . Clearly, hj E ~a for
each j. Also, Zi >-i x~ holds for all i E S, and so from (b), we conclude that
(x~, ... ,x~, YI," . , y~) rt:. Core(Ea ), a contradiction. Therefore, the allocation
(Xl, ... , X m , Yl, .•. , Yk) is a core allocation for e.
2. The core is a weakly closed set.

Denote by C the (non-empty) set of all core allocations, and let an allocation
Yk) lie in the weak closure of C. Assume by way of contra-
(Xl, ... , X m , Yl,""
diction that there exist a coalition S, consumption bundles Zi E E+ (i E S) and
=
production plans hj E Y; (j 1, ... , k) such that
k
Zi >-i Xi for all i E S and L Zi = L Wi + L (L Oij ) hj .
iES iES j=l iES
For each i E S the set of allocations
=
is a weakly closed subset of Em+k. Thus, the set W UiES Wi is weakly closed,
and so we =Em+k \ W is weakly open. Since (Xl, ... ,Xm,Yl, ... ,Yk) belongs
to we, we infer that WenC::/= 0. If(bl, ... ,bm,gl, ... ,gk) E wenc, then we
have
k
Zi >-i bi for all i E Sand L Zi = L Wi + E (E Oi; ) hj ,
iES iES j=l iES
which contradicts the fact that (b l , ... , bm , g1, ... , gk) is a core allocation. Hence,
the allocation (Xl, ... , X m , Yl, ... , Yk) belongs to C, and so C is weakly dosed .•
Problem 4.2.5. Consider an allocation (Xl"'" Xm , Yl, ... , Yk) in a private

ownership production economy. If the allocation (Xl"'" Xm , Yl, ... , Yk) is a
Walrasian equilibrium, i. e., if there exists a non-zero price pEE' such that
a. X h Xi in E+ implies p . X > p' Wi + E:=l OijP' Yj; and
b. p' Yj = max{p· y: Y E Yj} for each j,
then show that (Xl, ... , Xm , Yl, ... , Yk) is an Edgeworth equilibrium.
Solution: First, we must recall the definitions of a replica private production
economy and an Edgeworth equilibrium. If n is a natural number, then the
n-fold replica of a private ownership production economy E is a new private
ownership production economy En with the following characteristics.
1. The production economy Cn has the same Riesz dual system (E, E') as C.
2. There are mn consumers indexed by (i, s), i =

1, ... , m; s 1, ... , n, =
=
such that the consumers (i, s) (s 1, ... , n) are of the "same type" as the
consumer i of C. That is, each consumer (i, s) has:
a. E+ as her consumption set;

b. an initial endowment Wi, equal to Wi, i.e., Wi, = wi (and so the total
endowment of Cn is L~l L~::;:l Wi, = nw); and
c. a utility function Ui, equal to Ui, i.e., Ui, = Ui.
3. There are len producers indexed by (j, t) (j = 1, ... , Ie; t = 1, ... , n) with
the following properties.
1. The production set of producer (j, t) is Yj, i.e., Yjt = Yj; and
11. The share Oi,jt of consumer (i, s) to the profit of producer (j, t) is
if s =I t;
if s=t.
Now let (Xl, ... , X m , Yb ... , Yk) be an allocation of some private ownership
production economy C. If n is a natural number, then by assigning the consump-
tion bundle Xi to each consumer (i, s) (i.e., Xi, =
Xi for s =
1, ... , n) and the
production plan Yj to each producer (j, t) (i.e., Yjt =
Yj for t =
1, ... , n), it is
easy to see that this assignment defines an allocation for the n-fold replica econ-
omy Cn. Thus, every allocation of C defines (in the above manner) an allocation
in every n-fold replica economy of C. An allocation in a private ownership pro-
duction economy is said to be an Edgeworth equilibrium whenever it belongs
to the core of every n-fold replica of the economy.
Now assume that an allocation (Xl, ... , X m , Yl, ... , Yk) in a private ownership
production economy is a Walrasian equilibrium supported by a price p. Suppose
by way of contradiction that this allocation is not in the core of some r-fold
replica of this economy. So, there exist a coalition of consumers S, consumption
bundles {Zi,: (i,s) E S} and production plans {hjt: j =
1, ... ,k; t =
1, ... ,r}
such that
a. Zi, h, Xi, = Xi for all (i, s) E S; and

b. L(i,')ES Zi, = L(i,')ES Wi, + L;::;:l L~::;:l (L(i,')ES Oi,jt) hjt.
Using (a) and the supportability from the price p, we see that
178 Cbapter 4: Production Witb Infinitely Many Commodities
Ie
P . Zi. > p . Wi + :L: (Jij P . Yi
j=l
Ie r Ie r
p' Wi, + :L:(:L: (Ji.jt)P· Yj = p. Wi. + LL(Ji.jtP· Yj

j=l t=l j=l t=l
Ie r Ie r
> p 'Wi, + L L (Ji'jtP' hjt = p. (Wi, + LL(Ji,jthjt) .

j=lt=1 ;=It=1
Therefore,
which contradicts (b). Hence, (Zl,"" :l: m , Y1,.'" YIe) belongs to the core of every
replica economy, and so it is an Edgeworth equilibrium. _
4.3 Walrasian equilibria and quasiequilibria
Problem 4.3.1. In a private ownership production economy with preferences

and production sets uniformly r-proper and W ~ 0, show that an allocation is an
Edgeworth equilibrium if and only if it is a Walmsian equilibrium.
In particular, in this case, if the private ownership production economy is
also compact, then Walrasian equilibria exist.
Solution: Let (Z1,··.,:l: m , Yt. ... , YIe) be an allocation in a private ownership
production economy whose preferences and production sets are all uniformly T-
proper. If the allocation (Zl' ... , Zm, Y1 , ... , YIe) is a Walrasian equilibrium, then
from Problem 4.2.5 we know that it is also an Edgeworth equilibrium.
For the converse, assume that (Zl,"" Zm, Y1, ... , YIe) is an Edgeworth equi-
librium. Then by [3, Theorem 4.3.5, p. 198] the allocation (:1:1, ... , :l:m , Y1,···, YIe)
is a quasiequilibrium. Let p > 0 be a price supporting (Zl' ... , Zm, Y1, ... , YIe) as
a quasiequilibrium. That is,
i. :I: ~i Zi implies P':I: ~ p. Wi + E:=l (JijP' Yj = Wi, and

11. p' Y $ P . Yj for each Y E Yj.
We shall establish that the price p also supports (Xl, ... , X m , Yl , ... , Yk) as
a Walrasian equilibrium. That is, we shall show that X >-i Xi implies p . X > Wi,
which is equivalent to saying that each Xi is a maximal element in the budget
set Bi(p) = {x E E+; p. X ~ wil.
To see this, start by observing that W ~ 0 and p > 0 imply p . Wr > 0 for
some r. Now let x >-r Xr and assume by way of contradiction that p. x ~ Wr .
Now (by the continuity of tr) there exists some 0 < £ < 1 such that £x >-r X r ,
and so
k
p. (£x) ~ p. x ~ p. Wr + L,orjP' Yj = Wr ·
j=l
On the other hand, from Wr ~ P . Wr > 0 and x >-r Xr , we see that
Wr > £Wr ~ £(p. x) =p. (£x) ~ Wr
which is impossible. Thus, p. X> w r . This shows that Xr is a maximal element
in the budget set Br(P)'
Now we claim that p ~ O. To prove this, note first that Xi ti Xi implies
p. Xi ~ Wi for each i. Taking into account that E~l Xi = E7=1 Yj + E~l Wi,
=
the latter inequalities imply P'Xi Wi for each i. Now let X> O. Then the strict
monotonicity of tr implies x + Xr >-r Xr , and since Xr is maximal in Br(P), we
infer that
= =
P . x + P . Xr P . (x + x r ) > Wr P . Xr ,
from which it follows that P . x > O. Thus, P ~ O.
Next, notice that since P ~ 0 implies p. Wi > 0 the above arguments show
that Xi is a maximal element in the budget set Bi(p) for each consumer i.
For the existence of a Walrasian equilibrium note that [3, Theorem 4.2.10,
p. 190] guarantees the existence of an Edgeworth equilibrium, which, by the
above, must be a Walrasian equilibrium .•
Problem 4.3.2. A subset Y of a vector space E is said to be continuous for

a linear topology e on E (briefly, e-continuous) whenever {ya} ~ Y and Y;; ...t. 0
imply yJ -4 O. The continuity of a production set captures the economic intuition
according to which a decrease in the input must cause a decrease in the output.
If a production set Y in the dual of an AM-space with unit (in particular, in
a finite dimensional space) is a w· -closed cone, show that Y is norm continuous.
Solution: Assume that a cone Y is a production set in the dual of an arbitrary
AM-space E with unit, and let {zn} ~ Y satisfy IIz;1I -+ O. Now suppose by
way of contradiction that IIz.t1l > £ holds for all n and some £ > O. Put
Since Y is a cone, we have :l: n E Y for each n. From
z- II lI!.a --+ 0 ,
II Uztu = ji;fi
liz: II
~ £
we see that limn -+ co II:~II = o. On the other hand, we have IIII:!IIII

= 1 for each n.
=
Since the set {y E E+: lIyll 1} is weak· compact, it follows that the sequence
{1I:ill} has a weak· accumulation point z > O. From (*), we conclude that
z EY n E+ = {O}, which is impossible. Hence the cone Y is norm continuous .•
Problem 4.3.3. Assume that the Riesz dual system for a production economy is
symmetric, preferences are strictly monotone, and that the aggregate production
set Y = Yl + ... + YI: is a cone. If the economy has a Walrasian equilibrium,
then show that {yn} ~ Y and y;; -40 imply yt /\ a -40 for each a E E+ .
In particular, if in this· case E is also finite dimensional, then {yn} ~ Y and
IIY;;II- 0 imply lIytll- o.
Solution: Assume that a production economy has a symmetric Riesz dual sys-
tem (E, E'), strictly monotone preferences, and that its aggregate production
=
set Y Yl + ... + YI: is a cone.
Let (:1:1, •.. , X m , hI, ... , hI:) be a Walrasian equilibrium supported by a price
=
o < pEE'. We claim that p . hj 0 for each j. Indeed, if p . hj > 0 holds for
=
some j, then from hj E Yl + ... + YI: Y and the fact that Y is a cone, we infer
that
A(p . hj ) = p . (Ahj) ~ p . (h l + ... + hI:)
for all A > 0, which is impossible. So, if h = hI + ... + hI: E Y, then
max:{p· y: Y E Y} = p . h = o.
Next, we claim that p ~ O. To see this, let x > O. Since b is strictly
monotone, we have Xl + X >--1 Xl and so
I:
p. Xl + p. X = p. (Xl + X) > p. (Wl + L 91jhj) =p. Xl·
j=1
Thus, p . x > 0 showing that p is strictly positive.

Now let {yn} ~ Y satisfy y;; -40, and let a E E+. From
p . y: - p . y;; = p . Yn ~ 0 ,
we see that p. yt ~ p. y;; , and so in view of 0 ~ p . (yt /\ a) ~ p. yt ~ p. y;; - 0,
we conclude that
p.(y~/\a)-O. (**)
Since the function

IIxll = P . Ix!, x EE,
defines an order continuous norm on E, by a well known theorem of I. Amemiya

(see [4, Theorem 12.9, p. 87]), the topology generated by the lattice norm II ·11
agrees with T on the order interval [0, a]. From (**), we see that y;t I\a ~o .•
Problem 4.3.4. Assume that for a private ownership production economy:

a. Its Riesz dual system {E, E'} is given by a reflexive Banach lattice.
b. There is only one producer whose production set Y is a norm continuous
closed cone (see Problem 4.9.2 for the definition).
c. The share Oi of each consumer to the profit of the producer is positive,
i.e., 0i > 0 holds for each i =
1, ... , m.
If (Xl, ... , X m , Yl, ... , Yk) is an allocation, then show that the convex set
m
H = co [ U(Fi - 0i Y - ws)] = G- Y ,
i=l
where G = co[U~l(Fi - wd], is weakly closed.

Solution: Recall that Fi = {x E E+: x ~i xd for each i. We have OiY = Y for
each i and so H = G - Y. We claim first that the convex set G is weakly closed.
To see this, let a net {gal of G satisfy ga ~g in E. Observe that
m m
G = co [ U(Fi - Wi)] ~ co [ U(Fi - z~ - Wi)] =H0 ,

i=l i=l
where Zp = {OiY: Y E Y and Y ;:; O} =

{y E Y: Y ;:; O} Y-. In particular,=
=
note that Ho G - Y-. Also, from [3, Lemma 4.3.8, p. 203], we know that Ho
is a weakly closed subset of E, and so 9 E Ho. That is, 9 = 91 - Y with 91 E G
and Y E Y with Y ;:; O. Write 91 = E~l Ai(1i - Wi), where Ii ~i Xi and Ai ~ 0
for each i with E~l Ai = 1. If z = -Y ~ 0, then Ii + Z ~i Xi for each i and
moreover
m
9 = gl - Y = 91 + z = L Ad(fi + z) - Wi] E G .
i=l
This shows that G is a weakly closed set.
To see that G - Y is also weakly closed, let I be in the weak closure of G - Y.
Then there exists a sequence {gn - Yn} of G - Y with limn -+ oo IIgn - Yn - III = O.
(Keep in mind that since G - Y is a convex set its weak and norm closures
coincide.) For each n write gn = 2:~1 >.rUf' - Wi)' where If' ~i Xi, >.r 2: 0 for
= =
each nand 2:7::1 >.r 1. Then gn +W ~ gn + 2:7::1 >.rWi 2:7::1 >.r If' ~ 0, and
so from
we see that {y;;-} is a norm bounded sequence.

Next, we claim that the sequence {Yn} is itself a norm bounded sequence. For
this, assume (by passing to a subsequence if necessary) that IIYnll - 00. Since
{y;;-} is norm bounded, we see that limn-+ oo I lit: I I = O. The norm continuity of
Y implies limn-+oo IIII~:IIII = 0 and so
1 = II~II $11611 + II~II- 0,

which is a contradiction. Thus, {Yn} is a bounded sequence.
Since E is reflexive, we can assume (by passing to a sUbsequence) that
Yn'::"'Y E y.1 Finally, from the relation gn = (Un - Yn) + Yn'::"'l + Y = 9 E G,
we see that I =
9 - Y E G - Y .•
Problem 4.3.5. Let us say that an allocation (Xl, ... , X m , Y1, ... , Yk) in some
private ownership production economy is an approximate Walrasian equilib-
rium whenever for each c > 0 there exists some price p such that;
a. p. e = 1 (where e = 2:~1 Xi);
h. X b Xi in E+ implies p. X 2: p. Wi + L:;:::1 (hjp· Yj - C; and

c. p. Yj 2: p . y - c for each Y E Y;.
Assume now that for a compact private ownership production economy e
with strictly convex preferences the following statements hold.
1. Its Riesz dual system (E, E') is given by a reflexive Banach lattice.
2. Its aggregate production set Y = Y1 + ... + Yk is a norm continuous closed
cone-see Problem 4.3.2 for the definition.
1 Here we use the following well known facts:

1. A Banach space is reflexive if and only if its closed unit ball is weakly compact; see for
instance [5, Theorem 10.5, p. 1521.
2. A subset of a Banach space is weakly compact if and only if every sequence of A has
a weakly convergent subsequence in A; see [5, Theorem 10.13, p. 1561.
3. The total endowment is strictly positive, i.e., W ~ 0 holds.
Show that the economy has an approximate Walrasian equilibrium.

Solution: Let £ be a compact private ownership production economy satisfying
properties (1), (2), and (3). Consider a new production economy with Riesz dual
system (E, E') having the same consumers, endowments and preferences but
having one producer whose production set is Y. Also, assume that for this new
production economy each consumer has the share (Ji = ~ (i =
1, ... , m) to the
profit of the producer. From our hypothesis, it follows that this new production
economy is also compact and by [3, Corollary 4.3.6, p. 202] it has an Edgeworth
equilibrium, say (Xl;"" Xm , y). Write Y = Y1 + .. '+YI: E Y. We now claim that
the allocation (Xl, •.. , X m , Y1, ... , YI:) is an approximate Walrasian equilibrium.
To see this, let G = co[U~l(Fi - Wi)]' where Fi = {x E E+: x ti xd, and
let € > O. Then, G is a weakly closed set; see the first part of the solution to
Problem 4.3.4. Now put H = G - Y, and note that (in view of Problem 4.3.4)
the convex set H is also weakly closed. Now letting e = L:~1 Xi > 0, we see
that
Le
m
+ G - Y ~e= 2m
+ (~e
2m
+ H) C ~e + H* '
-2m
where H* = co[U~l(Ft - Zi -Wi)], Ft = {x E E+: x h xd, and Zi = ~Y =

Y. From [3, Theorem 4.3.3, p. 195], we infer that 0 rI. ~e + G - Y. Then, by
the Separation Theorem, there exists some pEE' such that
p.(~e+g-y»O
holds for all 9 E G and all Y E Y. Since 0 = L:~1 ~(Xi -Wi) - ~Y E G - Y, we

see that p. e > 0, and so, replacing p by fe, we can assume that p. e = 1.
Now assume x ti Xi. Then X-Wi E G and L:;=1 (JijYj E Y. Thus, from (*),
we see that
I: I:
p. x? p. Wi + p. (2: lJijYj) - ~ ? p. Wi + 2: lJijp· Yj - Co
j=l j=l
Next, note that L:~1 ~(Xi - Wi) E G. For ZE y;, put Zt = Yt for t ::j:. j and
Zj= z, and note that
m I:
~(Yj - z) = L ~(Xi - Wi) - ~ LZt E G - Y.
i=l t=l
Therefore, from (*), we see that p. [~e + ~(Yj - z)j > 0, and so p. Yj ? p. Z - €
for all Z E Y;. •

184 Cbapter 4: Production Witb InIinitely Many Commodities
4.4 Approximate supportability
Problem 4.4.1. An allocation (Zl, ... ,Zm,Yt. ... ,Yi:) is said to be approxi-
mately supported by prices whenever for each g > 0 and each a E E+ there
exists a price P such that:
1. p. e = 1 (the total income e = 2:~1 Zi of the consumers is positive);
2. Z ti Zi implies p . x ? p . Zi - g; and
3. p·Y; ?p·y-gforallYEY/={YE¥;: y~a}.
Any price satisfying properties (1), (2) and (3) above will be referred to as a price
that supports the allocation (g, a)-approximately.
Verify that every price that supports an allocation (g, a)-approximately is
necessarily a positive price.
Solution: Suppose an allocation (ZlJ ... ,Zm,Yl, ... ,Yi:) is (g,a)-approximately

supported by a price p. Let Z ? O. From Zl + nx ? Xl and the monotonicity of
b, we see that Zl +nx b Zl for all n. But then, from (2), we get P·(Zl +nz) ?
p. Xl - g or p. X ? -~ for all n. This implies p. X ? 0, and so p is a positive
price .•
Problem 4.4.2. lIthe total endowment is strictly positive (i.e., ilw ~ 0 holds)
in a private production economy, then show that every allocation supported by
prices is also approximately supported by prices.
Solution: Assume that w ~ 0 holds in a private production economy, and let
(Zl' ... , Zm, Yl, ... , Y") be an allocation supported by a price p > o. That is,
a. X ti Zi implies p . x ? p . Xi, and
b. p. Y $ p. Yj for each Y E Yj.
Now let z > O. We claim that p·z > 0, i.e., we claim that p is strictly positive.
Since p.y; ? 0 for all j (to see this put y = Oin (b) above), 2:~1 Zi = 2:7=1 y;+w
=
and w ~ 0, we see that 2:~1 p . Xi 2:7=1 p. Yj + p. w > O. Hence, there exists
some 1 $ i $ m withp·xi > O. The strict monotonicity ofti implies Xi+ Z >-; Zi·
=
The continuity of b in connection with lim6fl(6zi + z) Zi + Z guarantees the
existence of some 0 < 6 < 1 such that 6z i + Z >-; Zi. Hence, the supportability
from p implies
=
6p· Zi + p. z p. (6z i + z) ? p. Zi,
4.4 Approximate supportability 185
and so p. z ~ (1- O)p· Xi > O.

Now replacing p by fe, where e = E~l Xi > 0, we can assume p·e = 1. But
then, properties (a) and (b) trivially show that for each £ > 0 and each a E E+
the price p supports (£, a)-approximately the allocation (Xl, ... , Xm , Y1 , ... , Yk)
as defined in Problem 4.4.1. •
Problem 4.4.3. Assume that an allocation (Xl"'" Xm , Y1, ... , Yk) in a private
production economy is supported by a price p. If a production set Yj is also a
cone, then show that p . Yj = O.
Solution: Let (Xl, ... , Xm , Y1, ... , Yk) be an allocation in a private production
economy supported by a price p. Also, assume that some production set Yj is a
cone. We know that p. Y ~ p. Yj for all Y E Yj. In particular, since 0 E Yj, we
have p. Yj ~ O. On the other hand, since Yj is a cone, we have 2Yi E Yj and so
=
2p . Yj P . (2Yj) ~ p . Yj, or P . Yj ~ O. Hence p . Yj O.• =
Problem 4.4.4. If an allocation (Xl, .. . , Xm , Y1, ... , Yk) in a production econ-
omy is approximately supported by prices, then for each a ~ E~l Wi + E:=l IYj!
show that the allocation can be supported by a price with respect to the Riesz dual
system (Aa,A~), i.e., show that for every a ~ E~l Wi + E:=l!Yj! there exists
a price 0 < p E A~ such that
1. X b Xi in At implies p . X ~ P . Xi; and
2. p. Yj ~ P . Y for all Y E Aa n Yj .
Solution: Assume that (Xl"'" Xm , Yl, ... , Yk) is an allocation approximately

supported by prices and let a ~ E~l Wi + E;=l !Yj! be fixed. Then for each n
there exists a price 0 < qn E E' such that
1. qn' e = 1;
11. X!:i Xi in E+ implies qn . X ~ qn . Xi - ~; and
111. qn' Yj ~ qn . Y - ~ for all Y E Yj with Y ~ a.

In view of a ~ e and the positivity of each qn, we see that qn . a ~ qn . e 1.=
Thus, if Pn = f:a"
then Pn . a = 1 holds for each n. Moreover, a straightforward
argument shows that
a. X!:i Xi in E+ implies Pn . X ~ Pn . Xi - ~, and
b. Pn' Yj ~ Pn . Y - ~ for all Y E Yj with Y ~ a.

186 Chapter 4: Production With InJinitely Many Commodities
Next, note that each Pn considered as a positive functional on the AM-space

Aa has 1I·lIoo-norm equal to one. Thus, the sequence {Pn} lies in the w· -compact
set {p E A~: IIplioo =
Ipl· a =
I}. Now let P E A~ be a w*-accumulation point
of the sequence {Pn}. Then, there exists a subnet {Pn .. } of the sequence {Pn}
(in fact, {na} is a subnet of the sequence of natural numbers {n}) such that
=
Pn .. ~p. From Pn .. · a 1 for each a, we get p. a 1, and so P > O. =
Now let x b Xi in At. Then, from (a), we get Pn .. · X ;::: Pn .. · Xi - nl.. and
so (by taking limits with respect to a) P . x ;::: P . Xi. Finally, for Y E Aa n Yj, it
follows from (b) that Pn,; Yj ;::: Pn ..· Y - nl.. ' and by taking limits we get p. Yj ;::: p. y.
Therefore, the allocation (Xl, ... , X m , Yl. ... , Yi:) can be supported by prices with
respect to the Riesz dual system (Aa, A~) .•
Problem 4.4.5. Assume that the Riesz dual system for a production economy
is symmetric and that the total. endowment is extremely desirable by each con-
sumer. Then show that an allocation is weakly Pareto optimal if and only if it is
approximately supported by prices.
Solution: Before discussing the solution let us recall the definitions of the no-
tions involved. An allocation (Xl, ... , X m , Yl, ... , Yi:) in a production economy is
said to be:
1. Pareto optimal, whenever no other allocation (Zl,"" Zm, hi, ... , hi:)
satisfies Zi b Xi for all i and Zi ~i Xi for at least one ij and
2. weakly Pareto optimal, if no other allocation (Z1,"" Zm, h1' ... , hi:)
satisfies Zi h Xi for all i.
Now let (Xl, ... , X m , Yb ... ,Yi:) be an allocation in a production economy.
Assume first that the allocation is approximately supported by prices. We shall
establish that the allocation is weakly Pareto optimal-the first welfare theorem.
To see this, assume by way of contradiction that there exists another allo-
cation (Z1,' .. , Zm, hi, ... , hi:) with Zi ~i Xi for each i. Choose 0 < 6 < 1 such
that 6Zi h Xi holds for each i. Now let e > O. Put a = L:7=1 Ihj I and then pick
a price P such that
1. p·e = 1, where e = L:~lXij
ii. X b Xi implies P . X ;::: P . Xi - ej and
iii. p. Yj ;::: P . Y - e for all Y E Yj with Y :$ a.
From 6Zi ~i Xi and (ii), we infer that p . (6Zi) ;::: p. Xi - e and so
m m
6p· (L: Zi) ;: : P . (L: Xi) - me = 1 - me.
i=l i=l
4.4 Approximate supportability 187
Using (*) and taking into account (iii), we infer that
> p. (t i=l
Xi) - me
m It:
p. (I: Wi) + I: p . Yj - me
i=l j=l
m It:
> p. (I: Wi) + I: p . h j - ke - me
i=l ;=1
m
p. (I:Zi) -(k+m)e.
i=l
Hence, (k+m)e ~ (1-6)p'(E~1 Zi),

and from (*), we get (k+m)e ~ (1-6)(f- mc ),
i.e., 6(k + m)e ~ (1 - 6)(1 - me). This implies 6 ~ 1- (m + 6k)e. Since e > 0
is arbitrary, the latter inequality shows that 6 ~ 1, which is impossible. This
contradiction shows that (Xl, ••• , X m , Y1, ... , YIe) is weakly Pareto optimal.
Now we need to introduce some notation. If a E E+, then we shall put
ya = Y1a + ... + Ylea ,
where as usual ~a = {y E Yj: Y ~ a}. In order to prove the converse, we need
to verify the following property. (Keep in mind that a Riesz dual system {E, E'}
is symmetric if and only if each order interval of E is weakly compact.)
• Let {Xl,'" ,Xm } ~ E+. If Fi = {x E E+: X b xd, then for each a E E+
the convex set
F = F1 + ... + Fm _ ya
is weakly closed.
To see this, fix a E E+, and let z be in the weak closure of F. Since F is
convex, z also belongs to the r-closure of F. Thus, there exists a net {zQ} of F
with ZQ -4 z. For each ex write
m It:
ZQ = LX~
i=l
- I:1la,
;=1
. +. . .
where x~ E E and 110. E Yj satisfy x~ b Xi and 110. ~ a.
Clearly, (1la)+ ~ a and so, since the order interval [0, a] is weakly compact,
every subnet of {(lIa)+} has a weakly convergent subnet. Now from
m Ie It:
o ~ I: x~ + I:(1la)- = ZQ + I:(1la)+ ~ ZQ + ka ,
i=l j=1 ;=1
188 Chapter 4: Production With InJinitely Many Commodities
we see that
o :::; x~ :::; Za + ka and
hold for all i and j. Thus, by [3, Lemma 3.3.10, p. 132], we can assume (by
passing to an appropriate subnet) that all nets are weakly convergent. That is,
we can assume that x~ ~Vi and lIc. ~Yj hold for all i and j. Since E+ and
the ~a are weakly closed sets, we see that Vi E Fi (i =
1, ... , m) and Yj E ~a
(j = 1, ... , k). Now taking weak limits in (**), we see that
m k m k
Z = li~za = li~CLx~ - L:Y1.) = L:Vi - L:y; E F,

i=l ;=1 i=l ;=1
as claimed.
Now assume that (Xl' ... ' Xm , Y1, ... , Yk) is weakly Pareto optimal. We shall
show that the allocation can be approximately supported by prices-the second
welfare theorem.
To this end, let a E E+ and e > 0 be fixed. We have to show that there
exists some price p that satisfies properties (i), (ii), and (iii). Start by letting
=
b a + 2:7=1 !Y;! and Fi =
{x E E+: X ?:: xd for all i. Next, choose some
o < t < 1 such that 0 < 1 - t < e and l;t < e. By the property above, the
=
convex set F F1 + ... + Fm - yb - tw is weakly closed.
We claim that 0 f/. F. To see this, assume that 0 E F. Then there are Vi E Fi
= =
(i 1, ... , m) and hj E ~b (j 1, ... , k) with 2:~1 Vi - 2:7=1 h; -tw O. This =
implies
m m k
L:(Vi + l,;;tw) = L:Wi + L:h;.
;=1 i=l ;=1
Since w is extremely desirable by each consumer, we see that Vi + l,;;t w h Vi ?::i Xi

for each i, contradicting the weak Pareto optimality of (Xl, ... , Xm , Y1, ... , Yk).
Hence 0 f/. F.
Now by the Separation Theorem there exists a price q E E' satisfying q. f > 0
for each f E F. From
m k
{1-t)e = L:Xi - L:tYj -tw E F,
i=l ;=1
we see that q . e > O. Put p = -7 E E' and note that p . f > 0 holds for all
f E F. The rest of the proof is d:voted to proving that the price p supports the
allocation (Xl, ... , Xm , Y1, ... , Yk) (e, a)-approximately.
i.p·e=l.
4.5 Properness and tbe welfare tbeorems 189
This is immediate from the definition of p.

ii. If x tr x r , then p . x 2: p . Xr - g holds.
To see this, let x E E+ satisfy x tr x r . Define E E+ by = x if i = r
Xi
Zi Zi
and Zi = if if. r. Then
m 10 m 10
x- Xr + (1 - t)e =L Zi - LY; - w + (1 - t)e =L Z; - L ty; - tw E F,

i=1 ;=1 i=1 ;=1
and so p . [x - Xr + (1 - t)e] > O. Therefore, p . x > p. Xr - (1 - t) > p . Xr - E:.
iii. If y E Y,a, then p . y, ~ p. y - g holds.

To see this, let y E Y, satisfy y ::; a. Define hj E Y/ by h; = y if j = sand
hj = Yj if j i- s. Then we have
m 10
(1 - t)e + t(y, - y) = (L Xi - :L: tYj - tw) + t(y. - y)
i=1 ;=1
m 10
LXi - L thj - tw E F ,
;=1 j=1
and so p. [(1 - t)e + t(y. - V)] > O. This implies p. (Y. - y) ~ _1;t > -g. So,
p. y, ~ p . y - g, and we are done. _
4.5 Properness and the welfare theorems
Problem 4.5.1. (A. Mas-ColelI [18]) A set Z is said to be a pre-technology

set for a production set Y whenever
a. Y ~ Z,
b. Z is comprehensive from below (i.e., y::; Z and Z E Z imply y E Z), and
c. Z E Z implies z+ = Z V 0 E Z.
Assume that a production set Y has a pre-technology set Z, a vector w >0

and a r-neighborhood W of zero such that Z E Z \ Y and Z + o:w + y E Z with
0:> 0 imply y 'I. o:W. Show that the production set Y is uniformly r-proper.
Solution: Recall that a production set Y is said to be uniformly r-proper

whenever there exists a vector w > 0 and a convex r-neighborhood W of zero
such that the convex cone
r = {a( w + x): a > 0 and x E W}
satisfies
(z+r)n{YEY: y+~z+}=0
for all z 'i Y. The geometrical interpretation of the uniform properness for the
production set Y is shown in Figure 24.
Figure 24
Now let r = {a(w + x): a> 0 and x E W}, where wand Ware as stated
in this problem. If
for some z 'i Y, then there exist a > 0 and x E W such that z+a( w+x) E Y ~ Z
and [z+a(w+x)]+ ~ z+. By (c) and (b) z+ E Z, and from z ~ z+ we see that
z E Z. On the other hand, from z 'i Y, z + a(w + x) = z + aw + ax E Y ~ Z
and our hypothesis, it follows that ax 'i aW (i.e., x 'i W), which is impossible.
Hence, the production set Y is uniformly r-proper . •
Problem 4.5.2. Let E be an AM-space with unit-in particular, let E be a finite

dimensional vector space. If a production set Y is comprehensive from below,
then show that Y is a uniformly II .. 1100 -proper production set.
4.5 Properness and tbe welfare tbeorems 191
Solution: Let E be an AM-space with unit e. So, the closed unit ball of
E coincides with the order interval [-e, e]. We assume, of course, that E is
equipped with the II· lloo-norm, i.e.,
IIxlioo =infp > 0: Ixl S; Ae}.

In particular, Ilell oo = l.
Now let W denote the open unit ball of E, i.e.,
W = {x E E: IIxlioo < I} ~ [-e,e].
Also, let w = e and consider the convex open cone r generated by w + W. That
is, let
r= {a(w+x): a>OandxEW}.
Since w + x ~ 0 for each x E W, we see that r ~ E+ .
Now let Y be a production set which is comprehensive from below (and as
matter of fact, Y could be any set comprehensive from below) and fix z fI Y.
We claim that
(z + r) n {y E Y: y+ ~ z+} 0. =
Indeed, if z + r E Y holds with some r E r ~ E+, then z S; z + r, and so by the
comprehensiveness of Y we get z E Y, a contradiction. Hence, every production
set in this case is uniformly 1I·lIoo-proper .•
Problem 4.5.3. Consider a production economy with Riesz dual system (ne, R2)
having two producers with production sets
Y1 {(x,y) E R2: x S; 0 and y S; -2x},

Y2 {(x,y) E R2: y S; 0 and x S; -y},
and one consumer with utility function u(x, y) = x + y and initial endowment
W = (1,1).
Show that Y1 + Y 2 = R2 and conclude from this that U = [0,00) -and so,
U is an unbounded set.
Solution: Before determining the utility space for this economy, let us recall its
definition. Recall that a vector (Xl, ... , xm, Y1, ... , Yk) is said to be a feasible
allocation for a production economy if Xi ~ 0 for each 1 S; i ~ m, Yj E Y; for
each 1 ~ j ~ Ie and L~l Xi ~ L~=l Yj + L~l Wi· The utility space for a
production economy is now the subset U of R~ defined by
U ={( U1 (xd, ... ,Um(xm)): (Xl, ... , Xm) is a part of a feasible allocation} .
An example of a utility space is shown in Figure 26.

The production sets Y1 and Y2 are shown in Figure 25.
Figure 25
Clearly both Y 1 and Y2 are cones. Moreover, (-1,2) E Y 1 and (1, -1) E Y2 .
Now let (x,y) E 1R? Clearly,
(x, y) =(x + y)( -1,2) + (2x + y)(l, -1).

We distinguish the following cases.
1. x + y ~ 0 and 2x + y ~ o.
Notice that (x + y)( -1,2) E Y 1 and (2x + y)(l, -1) E Y2 . From (*) we get
(x,y) E Y1 + Y2 ·
2. x +y < 0 and 2x + y ~ o.
In this case we have x < -yo Moreover, -2x ~ y ~ -x implies x > 0 and
y ~ -x < o. So, (x, y) E Y2 S;;; Y 1 + Y2 ·
3. x + y ~ 0 and 2x + y < o.
It follows that y < -2x. From -x ~ y < -2x, we get x < 0, and so in this
case (x, y) E Y 1 C Y1 + Y2 ·
4. x + Y < 0 and 2x + y < o.
Note first that -(-1,2) = (1, -2) E Y2 and -(1, -1) = (-1,1) E Y 1 . Now
use (*) to see that
(x, y) (x + y)( -1,2) + (2x + y)(I, -1)

[-(x + y)](I, -2) + [-(2x + y)]( -1,1) E Y2 + Y1 .
The above show that Y1 +Y2 = IR? This guarantees that the vector W+Y1 +Y2
(where Y1 E Y1 and Y2 E Y2) can be any vector in IR? Therefore, part of a
feasible allocation can be any non-negative vector (x, y). The latter implies that
u(x, y) = x + y can be any non-negative real number. In other words, we have
shown that U = [0,00) .•
Problem 4.5.4. If a production economy satisfies the boundedness condition

and the total endowment is extremely desirable by each consumer, then show
that the function p: d -+ (0,00) defined by
pes) = sup{a > 0: as E U}
is a continuous function.
Solution: We assume that the total endowment w is extremely desirable by
each consumer. Let Sn -+ Sin d = {s = (Sl, ... ,sm) E IRm : 2:;:1 Si = I}. We
must establish that p( sn) -+ p( s).
First, we claim that the utility space U of satisfies the following two basic
properties.
1. If 0 ~ (Zl, ... , zm) ~ (zi, ... , z~) holds in IRm and (zi, ... , z~) E U, then
(Zl, ... ,Zm) E U.
2. There exists some r > 0 such that 0 ~ z E IRm and IIzll ~ r imply z E U.
To see (1), assume that 0 ~ (Zl, ... , zm) ~ (zi, ... , z~) E U. Pick a part
of a feasible allocation (xi, ... ,x~) (that is, xi ~ 0 for each i and there exist
Yj E Yj (j = 1, ... , k) with L;:l xi ~ w + L%=l Yj) such that zi = Ui(Xi) holds
for each i. Since for each i the real-valued function /;(A) = Ui(AXt), A E [0,1]'
is continuous, it follows from the Intermediate Value Theorem that there exist
= =
o ~ Ai ~ 1 such that ui(Aixt) Zi. Put Xi Aix; ~ 0 and note that from
2:;:1 Xi = 2:;:1 Aixi ~ 2:;:1 xi ~ w + 2:;=1 Yj it follows that (Xl, ... , xm) is a
part of a feasible allocation. This implies ~Zl, .. . ,zm) E U.
For (2) notice first that since the total endowment w is extremely desir-
able by each consumer, it follows that Ui (~w) > 0 for each i, and more-
over (U1 (~w), ... ,U m (~w)) E U. Now note that the positive real number
r = min {Ui (~w): i = 1, ... , m} satisfies the desired property. Indeed, if z E IRm
satisfies IIzll ~ r, then 0 ~ z = (Zl"",Zm) ~ (ul(;~·w)"",umUiw)) E U, and

so from (1), we infer that z E U.
Figure 26
Now let a > 0 satisfy as E U, and fix 0 < {3 < a. Pick a feasible allo-
cation (Xl, ... ,Xm) such that as = (U1(Xt},U2(X2),""Um(X m») > {is. By the
continuity of the utility functions there exists some 0 < 6 < 1 such that
Now note that (6Xl + t;;/ w, 6X2 + 1;;/ W, ... , 6x m + \~6w) is a feasible allocation
which, by the extreme desirability of w, satisfies Ui (6Xi + 1,:;;6 w) > Ui (6Xi) ~ {isi
for each i. In view of Sn -+ s, we see that
(Ul(6x1 + 1,:;;6 w), U2(6x2 + 1,:;;6 w), ... , um(6xm + 1,:;;6 w)) > {isn
holds for all sufficiently large n. By (1), {3sn E U for all sufficiently large n,
and thus (3 $ p(sn) likewise holds for all sufficiently large n. Consequently,
{i ~ liminfn_ oo p(sn) holds for all 0 < {i < a and thus a ~ liminfn_ oo p(sn) for
all a > 0 with as E U. We conclude that
pes) ~ liminf P(Sn).

n-oo
Now let pes) < (3. Fix some 1 with pes) < 1 < {3. From Sn -+ sand
1Si < {isi for each i with Si > 0, we infer that 1S ~ {isn holds for all sufficiently
large n. Now note that if {isn E U, then it follows from (1) that 1S E U, contrary
to pes) < 1. Thus, (3sn fI. U holds for all sufficiently large n, and so p(sn) ~ {3
holds for all sufficiently large n. This implies limsuPn-+oo p(sn) $ (3 for all (3
with p(s) < (3, and consequently
lim sup p(sn) $ p(s) . (**)

n-+oo
Finally, from (*) and (**), we see that limn-+oo P(Sn) = p(s) .•
Problem 4.5.5. If a production economy satisfies the compactness condition,

then show that for each s E ~ there exists an allocation (x~, ... , x!, yf, ... , yr)
such that
Solution: Consider a production economy satisfying the compactness condition,

and let s E ~. Since p(s)s E U there exist bundles Xi ~ 0 (i = 1, ... , m) and
=
Yj E}j (j 1, ... , k) satisfying E~l Xi $ w + E7=1 Yj and
The geometric meaning of the vector p(s)s can be seen in Figure 26. IfE~l Xi =
W + E7=1 Yj, then there is nothing to prove. So, assume that E~l Xi < w +
L:7=1 Yj holds, and let z = w + L:7=1 Yj - L:~1 Xi > O.

By the monotonicity of the preferences, we have Xi + ~z ?:; Xi for each i.
On the other hand, if Xi + ~z >-; xi holds for each i (i.e., if Ui(Xi + ~z) > Ui(Xi)
for each i), then there exists some € > 0 such that
=
which is a contradiction. Thus, Ui(Xi + ~z) Ui(Xi) must hold for some i. Now
let (X1,1' X1,2, ... ,X1,m) be a part of a feasible allocation with X1,i = Xi for all but
one i and for that exceptional i we have X1,i = Xi + ~z with Ui(Xi+ ~z) = Ui(Xi).
Clearly,
k m
W + L: Yj - L: X1,i = (1 - ~)z = Zl > O.

;=1 i=l
Now repeat the above argument with Zl in place of z and continue on by
repeating the above process. Thus, we obtain a sequence {(X n ,l, X n ,2,···, xn,m)}
of parts of feasible allocations with the following properties.
a. X n +1,i = Xn,i holds for all but one i and for that exceptional i we have
Xn +1,i -
_ Xn,i + m 1 )n -1 z,.
1 (1 - m
h. Ui(Xn,i) = ui(xd for all i =:= 1, ... ,m and all n; and

c. w + 2:7=1 Yj - 2::1 Xn,i = (1- ;k)n z .
Clearly, Xn,i 1n holds for each i and moreover (in view of 2::=1 (1- ;k)n < 00), it
=
follows that each sequence {Xn,i} is r-convergent in E. If limn_co Xn,i xf, then
from (c), we see that 2::1 xf = w + 2:7=1 Yj, i.e., that (xr,··· ,X!,Yb ... ,Yk)
is an allocation. From (b) and the continuity of the utility functions, we infer
=
that 'Ui(Xr) 'Ui(Xi) holds for each i, and consequently
holds, as desired .•
Chapter 5
The Overlapping Generations

Model
Before discussing the problems in this chapter, it is appropriate to remind the

reader of the basic features of the overlapping generations (OLG) model. The
present OLG model and its generalizations are essentially the offsprings of the
fundamental work of P. A. Samuelson [20].
In the overlapping generations model the index t denotes the time period.
The commodity-price duality at period t is represented by a Riesz dual sys-
tem (Et , E;). Consequently, we have a sequence «(E l , ED, (E 2 , E~), ... ) of Riesz
dual systems each of which designates the commodity-price duality at the corre-
sponding time period. Each Riesz space E t is assumed equipped with a locally
convex-solid topology that is consistent with the dual system (Et , E;). As usual,
the terms "consumer" and "agent" are used interchangeably.
In most cases, we assume that only one consumer is born in each period
and has a two-period lifetime. Thus, consumer t is born at period t and is alive
in periods t and t + 1. Each consumer trades and has tastes for commodities
° < E E t at period t and < °

only during her lifetime. We suppose that consumer t gets an initial endowment
w: w:+1
E Et+l at period t + 1 (and, of course,
nothing else in any other periods). Consequently, her initial endowment Wt is
represented by the vector
Wt = (O, ... ,O,w;,w:+l,O,O, ... ),
where w: and w:+ l occupy the positions t and t + 1, respectively. Also, for
°
mathematical convenience, we assume that the parent of consumer 1 is present in
the model at period 1. She will be designated as consumer and her endowment
will be taken to be of the form
Wo = (w5,0,0, ... )
198 Chapter 5: The Overlapping Generations Model
with °< w5 E E 1. Thus, the vectors of the Riesz space E1 x E2 X ... given by
Wt-1 = (0, ... , °0,

, wt -
t-1
1, 0, 0, 0, ...)
Wt (0, ... , 0,
represent the initial endowments of the two consecutive consumers
t
W H1
,
° ° ...t )-
, ,
1 and t.
Consequently, the commodity bundle
_ t t
()
t - W t -1 +w t
represents the total endowment in period t. An illustration of the overlapping
generations model is shown in Figure 27 below.
~
Generation 1 2 3 4 ••• t t+1 • ••
0 ro6
1 rof ro~
2 ~ ~
3 ~ ~
•• ••
• • [-1
t-1 cot-I rot-I
t rot rol+ 1
t+1 roltl rorttr
• ••
•• •
Figure 27
The vectors of the form
Xt = (0, ... ,0, xL x:+1, 0, 0, ... ) ,
where x: E Et and x:+1 E Ei+1' represent the commodity bundles for consumer
t during her lifetime. Each consumer t maximizes a utility function Ut defined
on her commodity space, i.e., Ut is a function from Et X Ei+1 into JR. The value
Chapter 5: The Overlapping Generations Model 199
of Ut at the commodity bundle Xt = (0, ... ,0, xL X:+l, 0, 0, ... ) is denoted by

Ut(xLx!+I). We shall also consider Ut defined everywhere on Et x Et x ... by
the formula
= =
Ut(X) Ut(x 1 , x 2 , ... ) Ut(x t , x H1 ) .
The utility functions are assumed to satisfy the following properties:
1. Each Ut is quasi-concave.
2. Each Ut is strictly monotone on Et x E?+I' That is, if(x,y) > (Xl>yr)
holds in Et x E?+I' then Ut(x,y) > Ut(XI,yr).
3. Each Ut is weakly continuous on the order bounded subsets of Et x Ei+l'
°
The case t = is a special case. The utility function Uo is a function of one
variable defined on Et. It is also assumed to satisfy properties (1), (2) and (3)
above.
A sequence (xo, Xl, X2, ..• ), where
O~Xo=(x~,o,o, ... ) and OSXt=(O, ... ,O,x:,x!+I,O,O, ... ), t;?: 1,
is said to be an allocation whenever
holds for each t = 1,2, ... , or, equivalently, whenever :L~o Xt = :L~oWt.
For brevity, an allocation (xo, Xl, X2, ... ) is denoted also by the symbol (Xt).
A price system (or simply a price) for the overlapping generations model is any
sequence p = (pI, p2, ... ), where pt E E; for each t ;?: 1. The linear functional pt
should be interpreted as representing the prices prevailing at period t.
Next, we define the Riesz dual system for the overlapping generations model.
We shall denote by boldface E the ideal of El x E2 X ... consisting of all sequences
that vanish eventually, i.e.,
By E' we shall denote the product Riesz space
E' = E~ X E~ X ....
Thus, the prices for the OLG model are the elements of the Riesz space E'. Now
the pair (E, E'), under the duality
00
p·x= Lpt 'Xt

t=1
for all x = (:1:1,:1:2, ... ) E E and all p = (pl,p2, ... ) E E', is a Riesz dual sys-
tem. In this context, the overlapping generations model defines a pure exchange
economy with a countable number of agents having (E, E') as its Riesz dual
system.
The supportability of allocations by prices in the overlapping generations
model is defined as follows. A non-zero price p = (pI, p2 , ... ) is said to support
an allocation (XO,XbX2, ... ) whenever
a. x to x5 in Et implies pI . X ~ pl. :1:5; and
b. (x, y) b (x:, :1::+ 1) in Et x E"!.tl implies
for all t = 1,2, ....

It should be noted that if a price p = (p1, p2 , ... ) supports an allocation (x,),
then x b Xt implies p . x ~ p . x t . Supporting prices are necessarily positive
prices. To see this, let a price p = (p1, p2 , ... ) support an allocation (Xl) and
fix x ~ O. Then x, + x b x, holds, and so p . (x, + x) ~ p . x,. This implies
p . x ~ 0, and thus p = (p1, p2, ... ) is a positive price, which means, of course,
that p' ~ 0 holds for all t ~ 1.
An allocation (xo, Xl, X2, ... ) is said to be a competitive (or Walrasian)
equilibrium for the overlapping generations model whenever there exists a price
p = (pI, p2, ... ) > 0 such that each x, is a maximal element in the t,h consumer's
budget set B,(p)-where, as usual, the budget set is defined by
B,(p) = {x E E+: p. x :5 p. w,}.

As expected, the competitive equilibria can be supported by prices. Specifically,
we have the following result
• If an allocation (XO,X1,X2, ... ) is a competitive equilibrium with respect to
a price p = (pI, p2, ... ) > 0, then it can be supported by p. Moreover, we
have the budget equalities
a. pl.x5=pl.wJ (orp·xo=p·wo);and
b. p'.:1:~ + pH1 . :I:!+l = p' .1.11: + pt+l .1.11:+ 1 (or p . Xt = P .wt ) for all
t ~ 1.
To see this, let (xo, Xl, X2, ... ) be a competitive equilibrium with respect to
the price p = (p1 ,p2 , ... ) > O. Note that 1.11, h 0 holds. Thus, if Xt = 0, then (in
view of Wt E Bt(p» the element Xt cannot be a maximal element in the budget
set Bt(p). Therefore, Xt > 0 must hold for all t. Since Xt belongs to Bt(p), we
Cbapter 5: Tbe Overlapping Generations Model 201
see that p . x t ~ P . wt holds. On the other hand, if p . x t 1 such that
p·(6Xt) = 6p· Xt < p .Wt ,
and note that 6xt E Bt(p) and 6xt h Xt hold, contrary to the maximality
property ofxt in Bt(p). Consequently, p ·xt = P ·W t holds for all t.
As indicated earlier, we employ the notation
Ot=WL1+W:' t=1,2, ....
Clearly, the commodity bundle Ot = W:_1 + w:
E Et, t = 1,2, ... , represents the
total endowment present at period t.
It is useful to consider the situation when the commodity space at period
t is the ideal generated by the total endowment present at period t. The ideal
generated by Ot in E t is denoted by 0 t . That is,
0t = {x E E t : There exists A> 0 with Ixl ~ ABt} .
=
The ideal 0 t under the norm IIxlloo infp > 0: Ixl ~ AOtl is an M-space (and
in fact an AM-space if E t is Dedekind complete) having Ot as a unit. As usual,
the norm dual of 0 t will be denoted by 0~.
Let 0 denote the ideal of 0 1 x O 2 X ... consisting of all sequences having at
most a finite number of non-zero coordinates, i.e.,
0= {(X1,X2' ... ) E 01 X 02 X •• -: 3 k such that Xi = 0 for all i > k}.
Clearly, 0 is an ideal of E. Also, let
0' = 0~ x 0~ x ...
be the product Riesz space of the sequence (0i, 0~, ... ). It should be clear that
the pair of Riesz spaces (0, 0'), under the duality
00
p . x = Ept . Xt
t=l
= =
for all x (Xl, X2, . .. ) E 0 and all p (p1, p2, . .. ) E 0', is a Riesz dual system.
We also need to consider the situation when the commodity price duality at
each period is given by the Riesz dual pair (0 t , 0~). A price vector (or simply
a price) for this OLG model is any sequence of the form
p = (p1,p2, ... ),
where pt E 0~ for each t. In our discussion, the properties ofthe OLG model are
studied in connection with the mathematical structure of the Riesz dual systems
(E, E') and (0, 0').
5.1 The setting of the OLG model

Problem 5.1.1. We define two utility functions for OLG models as follows.
1. Consider two (symmetric) Riesz dual systems of the form (if' iq) and
(ir,i$)' where 1 $ p, q $ 00 and 1 $ r, 8 $ 00 satisfy ~ + r + ~ 1,t= =
and define u: it x it - IR by
= l:
00
u(x,y) ~, x = (Xl,X2,"') E it, y = (Yl,Y2,"') E it.

n=l
2. Consider the two Riesz dual systems (ip, i 1) and (Lr[O, 1], L.[O, I]), where
1 $ p, q $ 00 and 1 $ r, s $ 00 satisfy ~+q = ~+! = 1. Fix some strictly
positive /unction h E L$[O, 1]-for instance, the function h(x) = x 2 . Now
define v: it x Lt[O, 1) - IR by
v(x, f) = fl f(x)h(x) dx+

Jo
f vy,
n=l
x = (Xl, X2"") E i:, f E Lt[O, 1].
Show that u and v are concave, strictly monotone, norm continuous, and
weakly continuous on the order bounded sets.
Solution: (1) First consider the function f: [0,00) -IR defined by f(x) = y'Z,
where n ~ 1. Since f" (x) = 1;;2n x;. - 2 $ 0 for each X > 0, it follows from
Problem 1.1.3 that f is concave. So, yto:x + (1 - o:)y ~ 0: y'Z + (1 - 0:) v'Y for
each 0 $ 0: $ 1, all x, Y ~ 0 and each n ~ 1 (with equality holding when n = 1).
Therefore, if x, = (xL x~, ... ) E it and y, =
(yLy;,··.) E it (i = 1,2) and
o $ 0: $ 1, then
00
~ Y'a(x~+II~)+(I-a)(x~+II~)
L.t n2
n=l
00
> ~
L.t
a~+(1-a)~
n2
n=l
0:I: 0JPI+(I-o:)I: ~
n=l n=l
proving that u is a concave function.

5.1 Tile setting of tile OLG model 203
Now let (x,y) > (Xl,yI). Then x ~ Xl and y ~ YI with at least one of the
inequalities strict. That is, we have Xn ~ x~ and Yn ~ Y~ for all n with at least
one of the inequalities being strict. This implies ytxn + Yn ~ y'xh + YA for each
n with strict inequality for some n. Hence
n=l n=l
which shows that u is strictly monotone.

For the norm continuity of u let a sequence {( X.i:, Y.i:)} of it x it satisfy
(X.i:,Y.i:) -+ (x,y) in norm, where X.i: = (xt,x~, ... ), Y.i: =
(Yf,Y~, ... ), X =
(Xl,X2, ... ), and y = (Yl,Y2, ... ). Also, let e > O. Since both sequences {X.i:}
and {Y.i:} are norm bounded, there exists some M > 0 such that y'x~ + y~ :::; M
for all nand k. This implies that there exists some no such that
t~t~<e
n=no
nll~
for all k. Next, pick m such that I:n~~ ~ - ~I
~ < e for all Ie ~ m.
Hence, for Ie ~ m we have
IU(X.i:,Y.i:)-U(X,y)1 = If: ~-;~I

n=l
no-l 00
< ~I~-;~I+~
n=l n=no
< e+e=2e,
which shows that u(X.i:, Y.i:) -+ u(x, y). In other words, U is norm continuous.
For the weak continuity of u on the order bounded subsets of it x f:t fix e > 0
and let a net {(xa, Ya)} satisfy (xa,y a) ":'(x, y) in it x it where 0 :::; (Xa, Ya) :::;
(a, b) for each 0-. Then, there is some M > 0 such that y'x* + Y:: :::; M for all
0- and n. Now, as above, (*) is true for some no and (in view of X~7Xn and
y~ ... Yn in 1R for each fixed n) it follows that there exists some 0-0 satisfying
I:~~ll t'~
~ - ~I
~ < c for all 0- ~ 0-0. Now, as above again, we see that
lu(xa,Ya) - u(x,Y)1 < 2e for all 0- ~ 0-0.
(2) We know that the square root function is strictly concave. Therefore, if
Xi = (xL x~, ... ) E it, Ii E LnO, 1] (i = 1,2) and 0 :::; 0- :::; 1, then
=Jo [ah(x) + (1 -
f ]
1 00
~ va." +(I-a).,~
a)h(x) h(x) dx + L.J n' n n
o n=1
~11 [ah(x) + (1- a)h(x)]h(x) dx + ~ ag+~2-a)g
= [1 a
1
II(x)h(x) dx+ f;~] +(I-a) [1 1
h(x)h(x) dx+ f; ~]
=aV(X1, II) + (1 - a)v(x2, h)·
This shows that v is a concave function.
For the strict monotonicity of v assume (x1,fd > (x2,h). This means
Xl ~ X2 and II ~ 12 with at least one of the inequalities strict. So,
f
n=l
~~ f
n=l
~ and 11 II(x)h(x)dx ~ 11 h(x)h(x)dx
with one of these inequalities being strict. Hence,
For the continuity of v, let (XA:, fA:) --+ (x, f) in norm in it

x Lt[O, 1]. This is
equivalent to saying that XA: --+ x in norm in it
and fA: --+ f in norm in Lt[O, 1].
In particular, 101 h,(x)h(x) dx --+ I;
f(x)h(x) dx since norm convergence implies
weak convergence. Since {XA:} is a norm bounded sequence of there exists it,
some M > 0 satisfying x~ $ M for all nand k, where XA: =
(xt,x~, ... ). Now
let £ > 0 be given. Fix some natural number no such that L:~=no ~~~ < €.
Also, pick some ko such that
for all k ~ k o. Therefore, for k ~ ko we have
111 fA:(x)h(x)dx -1 1
f(x)h(x)dx + ~ ~-;~I
< £+f:I~l~l+
n=l
f
n=no+1
~t~
< £+£+£=3£,
i.e., V(Xk,f,.) -+ vex, I). This shows that v is norm continuous.

For the weak continuity of v on the order bounded sets, fix some c > 0 and
let a net {(XC" la)} of it x L;!"[O, 1] satisfy (xa, la) ~(x, I) in ip x Lr[O, 1] where
o $ (xa,la) $ (y, g) for each Il. Then Io! la(x)h(x) dx -+ I; I(x)h(x) dx, and
°
there exists some M > satisfying x~ $ M for all a and n. In view of X~7 Xn in
m, for each fixed n, there exists some no such that E:~d 0%~.;x; I < c. Now,
as above, there is some ao such that Iv(x a , la) - vex, 1)1 < 3c for all a ~ ao .•
Problem 5.1.2. II (XO,X1,X2,"') is an allocation in the overlapping genera-

tions model, then for each non-negative integer k show that E:=o Xt ~ E:;~ Wt
E:=o Wt ~ E:;~ Xt both hold.

°
and
°
Solution: Recall that a sequence (Xo, Xl, X2, ... ), where $ Xo = (X6, 0, 0, ... )
and ~ Xt = (0, ...
OLG model whenever
,xL
X!+l, 0, 0, ... ), t ~ 1, is said to be an allocation for the
X:_l
+ = x: W:_l w: + holds for each t = 1,2, .... Now
note that
< (w5 + wLwr + w~, ... ,WLI + wZ,wZ+1 + wZt~ ,wZt~, 0, 0, ... )
HI
LWt.
:=0
Similarly,
< (X6 + xL xi + x~, ... , xLI + xt xZ+ 1 + xZtL xZt~, 0, 0, ... )

k+1
LXt
t=o
holds true. _
Problem 5.1.3. Consider the overlapping generations model having the follow-
ing characteristics.
=
Commodity Spaces: E t 1R for each t.
Initial Endowments: Wo =
(~,O,O, ... ) and Wt =
(0, ... ,o,~, ~,o,o, ... ) for each
t ~ I, where the numbers ~ and ~ occupy the t and t + 1 positions.
Find an allocation (Xt) satisfying Xt -:f Wt for all t.

Solution: Notice that
That is, the initial endowment allocation (WO,W1,W2, ••. ) is given by the matrix
1
0 0 0 0 0
Wo
W1
1
2"
1
0 0 0 0
0 ~ 1
0 0 0
W2 2" ~ 1
W3 0 0 2" 0 0
W4 0 0 0 2"~ 1
3 0
An allocation (XO, Xl, X2, ..• ) that satisfies Xt -:f Wt for each t is the one given
by the following matrix
1
Xo 0 0 0 0 0
Xl
~ 1
0 0 0 0
4
X2 0 ~ 1
0 0 0
"6
X3 0 0 "6~ 1
0 0
X4 0 0 0 ~ 1
0
"6 "6
where as usual the vector Xt is the t + 1 row of the infinite matrix. _
Problem 5.1.4. Consider an OLa model with the following characteristics.

=
Commodity Spaces: E t IR for each t.
= =
Utility Functions: uo(X O) XO and Ut(x t , xt+1) ....(it + v'xt+1 fort ~ l.
Initial Endowments: Wo =
(~, 0, 0, ... ) and Wt =
(0, ... , O,~,~, 0, 0, ... ) for each
t ~ 1, where the number ~ occupies the t and t + 1 positions.
a. Find an allocation (Xt) such that Xo >-0 Wo and Xl >-1 W1·
b. For each fixed integer k find an allocation (x,) such that Xt h Wt holds
for 0::; t ::; k.
Solution: (a) Note first that
uo(wo) =~ and Ut(Wt) = j"f + j"f = 1 for t ~ 1.

Now let
Xo = (~,O,o, ... ), Xl = U,~,O,o, .. .),
and
Xt = ~,!,O,O, ... ) for t ~ 2.
t
Clearly, (xo, xl, X2, ... ) is an allocation for this OLG model. Moreover, from
uo(xo) = =
~ > ~ uo(wo) and U1(X1) = If + 0 =¥ > 1 = U1(Wt), we see
that Xo >-0 Wo and Xl >-1 W1'
(b) We claim that there is
given by
€ > ° such that the allocation (xo, Xl, X2, ... )
Xo = (i+€,O,O,O, ... ),
Xt ~,~-t€,~+(t+l)€,O,O, ... ), l:::;t:::;k,
t-1
Xk+1 ~,~ - (k + 1)€, 0, 0, ... ), and
k
Xt ~,!,O,O, ... ), t~k+2,
t-1
satisfies Xt >-t Wt for each °: :;
t :::; k.
To see this, note first that uo(xo) = ~ + € > uo(wo) is trivially true for each
€ > 0. Now for 1 :::; t :::; k, we have Ut(Xt) = 0
+ J~ + (t + 1)c, and so
[Ut(Xt)] 2 = ~ + + 2J 116 +
€ € a-t(t + 1)€] .
In particular, if there exists some € °

> satisfying
for each 1 :::; t :::; k, then Xt >-t Wt should hold for each 1 :::; t :::; k. Now notice
that (*) is equivalent to t- t(t + 1)€ > 0. But then, if we choose € > so that °
° < € < 4k(:+1) ' then Xt >-t Wt holds for each 1 :::; t :::; k .•
°
Problem 5.1.5. Show that, in the overlapping generations model, for each fixed
k ~ there exists an allocation (Xt) satisfying Xt h Wt for each t > k.
Solution: We shall establish the existence of an allocation (XO,Xl,X2,"') sat-
isfying Xt >-t Wt for each t ~ 1. Keep in mind that w6 > 0, w: > and w;+1 >
for each t ~ 1.
° °
We claim that there exist real numbers eO,e1>e2,'" satisfying 0 < et < 1 for
each t 2:: 0 and
(**)
for each t 2:: 1. The existence of such a sequence {en} is established by induction.
Start by choosing a real number co such that 0 < co < 1. Since the utility
function U1 is strictly monotone and weakly continuous on the order bounded
subsets of Et x Et, we see that
lim U1 (w~ + eow5, (1 - e)wD = U1(W~ + eow5,w~) > U1(W~ ,wn.

~lO
So, there exists some 0 < e1 < 1 such that

U1 (wi + eow5, (1- cdwD > U1(wi,wn·
Next, for the inductive step, assume that the real numbers e1, ... ,en have been
selected to satisfy (**) for each t = 1, ... , n. Again, from
>
we see that there exists some 0 < Cn+1 < 1 such that
and the inductive step is complete.

Now consider the allocation (xo, Xl, X2, ... ) defined by
Xo (l-eo)w~,O,O,O, ... ), and

Xt ~,w:+et-1wL1,(1-edw:+l,O,O, ... ) for t2::l.
t-1
Then by the above construction, we have Xt >-t Wt for each t 2:: 1. (However,
notice that Wo >-0 xo.) •
Problem 5.1.6. If a price 0 < pEE' supports an allocation (Xo, Xl, ... ) and
satisfies p . x t > 0 for each t, then show that the price p is strictly positive.
Solution: Assume that a price 0 < pEE' supports an allocation (xo, Xl, X2, ... )
=
with p . X t > 0 for ea<,:h t 2:: O. Let 0 < X (Xl, X2,"') E E. Then Xt > 0 must
hold for some t, and so Xt + X >-t Xt by the strict monotonicity of the preference
tt. Since tt is weakly continuous on the order bounded sets, there exists some
5.2 The OLG commodity-price duality 209
o< c < 1 such that c(Xt + x) ~t Xt. Thus, by the supportability from p, we
have
and so p . x 2: l~E P . X t > O. Therefore, x > 0 implies p . x > 0, which means

that p is a strictly positive linear functional on E .•
5.2 The OLG commodity-price duality
Problem 5.2.1. From the theory of locally convex spaces it is well known that a
locally convex topology on a vector space is completely determined by a non-empty
family U of convex subsets with the following properties:
a. 0 E V for each V E U;
b. for each U and V in U there exists some WE U such that W ~ V n U;

c. each V E U is absorbing (i. e, for each x there exists some A > 0 with
AX E V), balanced 1 (i.e., AX E V for alllAI ~ 1 and all X E V); and
d. for each V E U there exists some U E U such that U + U ~ V.

In this case the family U is a base for the neighborhood system at zero.
1. Assume that 0 ~ an 1 holds in an Archimedean Riesz space, let An denote

the ideal generated by the sequence {an}, and let A = U;:'=l An. Show
that the family U of subsets of A consisting of all sets of the form V =
co(U;:'=l Vn ) , where Vn is a balanced en-neighborhood of An, satisfies the
above properties, and so it defines a locally convex topology e on A.
2. The topology e is called the inductive limit topology of the sequence

{(An' en)} and is precisely the finest locally convex topology on A which
makes continuous all the natural embeddings in: (An,en) '-....> (A,e). Show
that e has indeed this property.
Solution: (1) Assume that 0 ~ an 1 holds in an Archimedean Riesz space E,

and let An denote the ideal generated by an in E. We denote by en the locally
convex topology generated on An by the lattice norm II . lin defined by
1A balanced set is also called circled.

Now we shall show that the indicated family U of convex sets defines a locally
convex topology on A = U:":1 An by verifying properties (a) through (d). To see
that the linear topology is Hausdorff, the reader should check nv
EU V = {O}.
(a) Since 0 E Vn for each n, we see that 0 E V for each V E U.

(b) Assume that V = co(U:":1 Vn) and U = co(U:":l Un) belong to U, where
Vn and Un are balanced en-neighborhoods of An for each n. Since each en is a
linear topology, there exists for each n a balanced en-neighborhood Wn of An
such that Wn ~ Vn n Un· If W = co(U::l Wn ), then WE U and W ~ V n u.
(c) Let V = CO(U:":l Vn ) E U and fix x E A. Choose some k such that
x E AA:. Since VA: is an absorbing subset of AA:, there exists some A > 0 such that
AX E VA: ~ V, i.e., V is an absorbing subset of A.
Now to see that V is also balanced, let Y E V and IAI ::;; 1. Choose Yi E V;
and Ai ~ 0 (i = 1, ... , k) with L:~:1 Ai = 1 such that Y = L:~=1 AiYi. Since each
V; is balanced, we have AYi E V; for each i, and so
k A: 00
AY = A LAiYi = LAi(AYi) E co(U Vn ) = V,

i=1 i=1 n=1
showing that V is also balanced.
(d) Let V = CO(U:"=1 Vn ) E U. For each n pick a convex en-neighborhood
Un of zero such that Un +Un ~ Vn and put U = CO(U:"=1 Un). Now let x, Y E U.
We can write x = L:~=1 AiUi and Y = r=:=1 J.'iWi, where ui, Wi E Ui for 1 ::;; i::;; k
and 0 ::;; Ai,J.li ::;; 1 satisfy r=::1 Ai = r=::1 J.'i = 1. For each 1 ::;; i ::;; k, let
Zi = '>'+'P. Ui + "",,."+'/J..Wi E Ui if Ai + J.'i i= 0 and Zi = 0 if Ai + J.'i = O. Then
2Zi = Zi + Zi E Ui + Ui ~ V;, and moreover
A,
k k k
X +Y LAiUi + LJ.'iWi = L(Ai + J.'i)Zi
i=1 i=1 i=1
k
L
00
~(2Zi) E co(U Vn ) = V.
i=1 n=1
This shows that U + U ~ V.
(2) For the characterization of e,
let us show first that every natural em-
bedding in: (An, en) ~ (A,e) is continuous. Indeed, if V =
CO(U::1 Vn) is a
basic e-neighborhood of zero, then from the inclusion Vn ~ i;;-l(V), we see that
i;;-l(V) is a en-neighborhood of zero, and consequently in: (An,en) ~ (A,e) is
automatically continuous.
Now let r be a locally convex topology on A such that every natural embed-
ding in:(An,en) ~ (A,r) is continuous, and let W be a convex and balanced
r-neighborhood of zero. Then Vn =

i;:;-l(W) =
W n An C W is a balanced
en-neighborhood, and U::"=l Vn = U::"=l W n An ~ W implies that W is also a
e-neighborhood of zero. That is, r ~ e holds, proving that e is the finest locally
convex topology on A for which the natural embeddings in are continuous .•
Problem 5.2.2. Assume that the ideal A is generated by a disjoint sequence

{w n } of E+. Let Cn be the ideal generated by wn = L:7=1 Wi and let en denote
the locally convex-solid topology generated on Cn by the norm II . lin defined by
Show that Cn is en+!-closed in Cn+!.

Solution: First, we claim that IIYlln = lIylln+! for each y E Cn . To see this, let
y E Cn . The claim will follow immediately from the identity
To verify this identity, note first that Iyl ~ AWn clearly implies Iyl ~ AWn+l. On
the other hand, if y E Cn satisfies Iyl ~ AWn+!, then
Iyl AWn+! /\ IYI

(Awn + AWn+d /\ Iyl
< (Awn) /\ Iyl + (Awn+d /\ Iyl
(Awn) /\ Iyl ~ AWn'
Now let {XI:} be a sequence of Cn satisfying liml:_oo IIxl: - xlln+l = 0 for

some X E Cn + 1 . From
Ixi < Ix - XI:I + IXI:I ~ IIx - XI: lin+! . Wn+l + II xl:lln . Wn

= IIx - xl:lln+l . Wn+! + IIxl:lln+l . Wn ,
and taking into account
we see that Ixi ~ IIxlln+l ·wn. This shows that x E Cn and thus Cn is en+!-closed
in Cn +1 . •
Problem 5.2.3. Let E = IRoo, the vector space of all real sequences, and let
r be the locally convex-solid topology of pointwise convergence. For each n let
Wn = (0, ... ,0,1,0,0, ... ), where the 1 occupies tfle nth position. Clearly, {w n }
is a disjoint sequence of positive elements such that
W =sup{wn: n = 1,2, ... } = (1,1,1, ... ).

Establish the following:
1. Aw = loo;
2. A = {(Zl. Z2,"') E Roo: There exists It with Zn = 0 for all n ~ It};
3. A' = A"" = lRoo;
4. the inductive limit topology e
is the locally convex-solid topology on A
having a base at zero consisting of the sets of the form
where (Yl, Y2,' .. ) E Roo satisfies Yi > 0 for each i; and

5. (A, r)' = A.
Solution: (1) It should be obvious that
Aw = {z E lRoo: Izi $ AW for some A> o} = loo.
(2) Notice that wn = E~l Wi = (~, 0, 0, ... ). Hence,

n
An = {(Zl,Z2,"') E loo: Zi =0 for all i > n}.

This shows that A = U:=l An is the ideal of lRoo consisting of all eventually
zero sequences.
(3) From [3, Theorem 5.2.5, p. 241], we know that (A, e)' = A"". We shall
show that A"" = A* = lRoo, where A* denotes the algebraic dual of A (the vector
space of all linear functionals on A).
Clearly, every sequence Y = (Yll Y2, ... ) E lRoo defines via the formula
00
(Z,y) = LZnYn, Z=(Zl,Z2, ... )EA

n=l
an order bounded linear functional on A. To see that every linear functional on
A is given by a sequence in Roo as in (*), let f E A*. Put Yn = f(en), where
en is the sequence having its nth term equal to one and every other zero. Now
if x = (Xl, X2, ... ) E A, then write X = E:=l Xnen (where Xn =I 0 holds for all
but a finite number of indices n) and note that
00 00
I(x) = L xnl(en ) = L XnYn'

n=l
So A· = lRoo . Since every functional in lRoo can be written as a difference of two
positive linear functionals of 1Roo, we see that 1Roo ~ A ..... ~ A *. This establishes
that A* = A ..... = (A,e)' = lRoo.
(4) Let U denote the collection of all convex subsets V of A of the form
V = {(X1,X2,"') E A: Ixd ~ Yi for all i},

where (Y1,Y2, ... ) E lRoo satisfies Yi > 0 for each i. We leave the details to the
reader of verifying that U forms a base for a locally convex topology r on A; see
Problem 5.2.l.
Also, from Problem 5.2.1, we know that a base for the inductive limit topol-
ogye consists of the convex sets of the form V = CO(U:=l Vn ), where each Vn is
a balanced en-neighborhood of zero in An. Here, the en-neighborhoods can be
taken to be of the form en[-wn,w n ], where en> O.
°
Now let V = co(U:=l en[-Wn,Wn]), where en > for each n (and, of course,
= "--..-'
wn (1,1, ... ,1,0,0, ... )). IfU= {(X1,X2,"') EA: IXil ~ei for each i}, then
n
Uen[-wn,wn] ~ co(U en[-Wn,Wn]) = V.

00 00
U ~
n=l n=l
On the other hand, if
°
where Yi > for each i, then put en = min{Y1, ... ,Yn} > 0 and note that
en[-wn,Wn] ~ U for each n. This implies CO(U:=l en[-Wn,wn]) ~ U, and
consequentlye coincides with r.
(5) We know that (A, r)' ~ A* = lRoo . In addition, it should be clear that
A ~ (A, r)', i.e., each element of A defines a r-continuous linear functional on A.
Now let Y = (Y1,Y2,"') E 1Roo be r-continuous on A. The r-continuity
of Y at zero guarantees the existence of some e > 0 and some k such that if
=
x (Xl, X2, ... ) E A satisfies IXi I < e for each 1 ~ i ~ k, then
00
l{x,y)1 = II:XiYil < 1.

;=1
Now note that for each n > Ie the first Ie coordinates of the vector men are all
=
zero. Therefore, I(men,y)\ mlYnl < 1 for all m and each n > Ie and so Yn 0 =
for all n > Ie. Hence, yEA and from this it follows that (A, r)' = A. _
5.3 Malinvaud optimality
Problem 5.3.1. Show that Pareto optimal allocations are Malinvaud optimal.
Solution: Let us recall the notions involved. An allocation (Xt) in an overlap-
ping generations model is said to be:
1. Pareto optimal, if there is no other allocation (Yt) satisfying Yt ~t Xt
for all t and Yt >-t Xt for at least one t.
2. Malinvaud optimal, if there is no other allocation (Yd such that
=
a. Yt Xt for all but a finite number of t,
b. Yt b Xt for all t, and
c. Yt >-t Xt for at least one t.
Now let (xo, xl, X2, ... ) be a Pareto optimal allocation in an overlapping gen-
erations model. If (Xt) is not Malinvaud optimal, then there exists an allocation
(Yt) satisfying properties (a) through (c) above. But then properties (b) and (c)
show that (Xt) cannot be Pareto optimal, a contradiction. Hence, every Pareto
optimal allocation is necessarily Malinvaud optimal. _
Problem 5.3.2. Consider the overlapping generations model with the following
characteristics.
Commodity Spaces: E t = lR for each t.
= =
Utility Functions: uo(xO) x O and Ut(x t , xt+l) xt + Xt+l.
= =
Initial Endowments: Wo (2,0,0, ... ) and Wt (0, ... ,0,2,2,0,0, ... ) for t ~ l.
Show that the allocation (Wt) is Malinvaud optimal, and hence this is an
example of a Malinvaud optimal allocation which is not Pareto optimal. More
generally, show that every competitive equilibrium is M alinvaud optimal.
Solution: Notice first that the allocation (WO,Wl,W2, ... ) is a competitive equi-
librium supported by the price p =
(1,1,1,1, ... ). To see this, let x >-t Wt, i.e.,
assume that Ut(x) = xt + xt+l > Ut(Wt). Therefore,
p . x = xt + xt+l > Ut(Wt) = p. Wt ,
which means that the strictly positive price P supports the allocation (Wt). Now
an easy argument shows that Wt is a maximal element in the budget set Bt(p).
Next, we shall show that the competitive equilibrium (Wt) is not Pareto
optimal. To see this, consider the allocation (Yt) given by the matrix
YOI
Yi [22 30 0 0 0 0 ...
.. . 1
[ Y2 0 1 3 0 0 0 .. .
Y3 0 0 1 3 0 0 .. .
..
. ..
... .
A simple calculation shows that Yt ~t Wt holds for all t and that Yi h Wi.
Therefore, the competitive equilibrium (Wt) is not a Pareto optimal allocation.
Now we claim that (WO,Wi ,W2, ... ) is Malinvaud optimal. As a matter offact,
we shall establish that every competitive equilibrium is Malinvaud optimal. So,
let (xt} be a competitive equilibrium in an OLG model supported by a price p.
If (Xt) is not Malinvaud optimal, then there exists an allocation (Zt) satisfying
a. Zt = Xt for all t > k,

b. Zt b Xt for all t, and
c. Zt >-t Xt for at least one t.
From E~o Zt = E~o Xt and (a), we get E:=o Zt = E:=o Xt .2 Now from (b)
=
and (c), we get p . Zt ~ P . W t P . x t for all 0 ~ t ~ k and p . Zt > p . x t for at
least one 0 ~ t ~ k. But then, we have
Ie Ie Ie Ie
p·(LZt) = LP· Zt > LP· x t = p·(LXt)

t=o t=o t=o t=o
which contradicts E:=o Zt = E:=o Xt. Hence, every competitive equilibrium in

an OLG model is Malinvaud optimal. •
2Here we need a clarification. The expression E:'o Zt is the supremum of the sequence
{E7=o Zt: n = 0, I, 2, ... } in the lliesz space El X E2 X Ea X ••• , i.e.,
00 n
LZt=SUP{LZt: n=o,I, ... }.

t=o t=O
In particular, note E:'o Zt = E~=o Zt + E:'k+l Zt holds in El X ~ X Ea X •.• for each k.

Problem 5.3.3. If a non-zero price p E Sf supports an allocation (Xt) with

X:_l > 0 and x:
> 0 for each t ~ I, then show that the price p is strictly
positive.
Solution: Recall that An denotes the ideal generated by the vector
(0 1 , O2 , •.• ,On,w~+l, 0, 0, ... )
= =
in the Riesz space El x E2 X Ea x ... (where 0, WLl +w: for t 1,2, ... ) and
S=A=U:=lAn.
Now let (x,) be an allocation satisfying X:_l > 0 and x: > 0 for each
t ~ 1 which is supported by a price 0 0 for some n.
Since 0 < W~+l ~ On+l, we infer that pkO" > 0 must hold true for some k ~ 1.
Taking into account that Ok = xLl + x~, we see that p. X t > 0 for some t ~ 1.
Since (by our hypothesis) X:_l > 0, it follows from the strict monotonicity of
the preferences that x, +X'-l h x,. Hence, by continuity, c(x, +x,-d h Xt for
some 0 < c < 1. Invoking the supportability from p, we get cp·(x,+x,_d ~ P'X,
and so p' xt-l ~ l~tp. x, > O. Similarly, p. XHI > O. It is now a matter of
an easy inductive argument to verify that p. X t > 0 holds for each t.
The rest of the solution is now the same as that of Problem 5.1.6. Let
x = (Xl, X2, ••• ) E S. Then Xt > 0 for some t and so (by the strict monotonicity
of the preferences) we have x, + x >-t x, for that t. By continuity, eS( x, + x) >-, x,
for some 0 < eS < 1, and the supportability from p yields eSp· (x, + x) ~ p . x"
This implies p . x ~ 16 6 P . x, > 0, proving that the price p is strictly positive
on S .•
Problem 5.3.4. An allocation (XO,Xl,"') in an overlapping generations model

is said to be weakly Pareto optimal whenever there is no other allocation
(Yo, Yl,· .. ) satisfying Yt >-t Xt for all t. Give an example of a weakly Pareto
optimal allocation.
Solution: It should be noticed first that in an OLG model a competitive equilib-
rium need not be weakly Pareto optimal. For instance, consider the competitive
equilibrium (WO,Wl,W2, ..• ) given in Problem 5.3.2 by the matrix
. 'j
...
As shown in Problem 5.3.2, this allocation is a competitive equilibrium relative

to the price p = (1,1,1, ... ). Now consider the allocation (Xt) given by the
matrix
[X'] = [2+ 1
0 0 0 0 0
Xl 1 + 2- 1 3 - 2- 2 0 0 0 0 ...
]
2-
X2 0 1 + 2- 2 3 - 2- 3 0 0 0 .. , ,
X3 0 0 1 + 2- 3 3 - 2- 4 0 0
·· ...
·
and note that Xt ~t Wt holds for each t ~ O.
For an example of a weakly Pareto optimal allocation, consider the overlap-
ping generations model of problem 5.3.2, and note that the allocation (Yt) given
via the matrix
YO]
Yl [40 02 00 00 00 00 ...
.. . ]
[ Y2 0 2 2 0 0 0 .. .
Y3 0 0 2 2 0 0 .. .
.. .
....
....
... ..
. ' .'
is weakly Pareto optimal. As a matter of fact, there is no other allocation (Zt)
satisfying Zo ~o Yo· •
Problem 5.3.5. Consider two allocations (XO,Xl,"') and (YO,Yl,"') in an

overlapping generations model. If there exists a finite set B of natural numbers
such that Xt = Yt for all t ~ B, then show that there exists some integer k such
that2::=0 Xt = 2::=0 Yt holds.
Solution: If (Zt) is an allocation, then 2:~0 Zt always exists in El x E2 XE3 x· ..
and 2:~oZt = (llt,02,"')' Moreover, using the properties of the supremum, it
is easy to see that for each k we have
00 k 00
L:>t =E Zt + E Zt·
t=O t=o t=k+l
See the footnote in the solution to Problem 5.3.2.

=
Now let k max B. Then, it should be clear that Xt = Yt for all t > k. So,
from
k 00 00 00 k 00
L:Xt + L: Xt = EXt = L:Yt = L:Yt + L: Yt,

t=O t=k+l t=o t=o t=O t=k+l
Problem 5.3.6. In an OLG model show that for each positive integer k there
exists an allocation (Xt) such that Xt >- Wt holds for all t =1= k.
Solution: The solution is similar to that of Problem 5.1.5. As a matter of fact,
=
for k 0 the solution is exactly the solution of Problem 5.1.5. So, assume k ~ 1.
Start by choosing some co such that 0 < co < 1. The same inductive argu-
ment used in the solution of Problem 5.1.5 shows that there exist real numbers
Cl,C2,." satisfying 0 < Ct < 1 for each t and
Ut (Wtt + Ct-lWt_l,
t (1 - Ct )WtHI) > Ut (t
wt,W tHI)
for each t ~ k + 1.
Next, fix some 0 < bo < 1. From
limuk_l((1- b)wZ=LwL1
6!0
+ bow;)
> Uk-1 (wkk-1 k ),
_ 1,wk-1
we see that there exists some 0 < b1 < 1 such that
Uk-l ((1- b1)W:=~ ,WL1 + bow;) > Uk-1(W:=~ ,WL1)'

Continuing this way, we can choose numbers bo, b1, ... , bk-1 satisfying 0 < bi <1
for each 1 ~ i ~ k - 1 and
; ;+1 ;+1) ; ;+1
Ui ( (1-0k-i)Wi'Wi +Ok-i-1Wi+l > Ui(Wi'Wi )
=
for each i 1,2, ... , k - 1.
Now consider the allocation (Yt) defined by
Yo = (w~ + Ok-lWt, 0, 0, 0, 0, ... ),
Yl = (1-ok_dwLwi+bk_2w~,0,0,0, ... ),
Y2 (0, (1 - 6k-2)W~ ,w~ + bk_3W~, 0, 0, 0, ...),
Yk-1 = ~,(1- b1)W:=Lw:_1 + bow:,O,O,O, .. .),

k-1
Yk ~,(1-6o)w:,(I-co)w:+1,0,O,O, ... ), and
°° )
k
Yk+i = (0 ..... 00 Hi + ci-1Wk+i_1'

~,Wk+i k+i (1 - Ci )wkHi+l
+i " , . . . I:lor > 1,
•
1_
k+i
or, schematically, via the matrix
w~+8k_1W\ 0 0 0 0 0·· .
(1-Sk-t}W1 W~+Sk_2W~ 0 0 0 0···
0 (1-Sk-2)W 2 W~+Sk_3wg 0 0 0···
-....-.-
0, ... ,0
k-1
(l-St}wZ=~ wLl +Sow; 0 0 0···
0, ... ,0 0 (l-So)w; (1-eo)wZ+ 1 0 0···

0, ... ,0 0 0 k +1 +e w k + 1 (l-el)wZt~
w k+1 0···
0 k
11:+2 1c+2
0, ... ,0 0 0 0 Wk +2 +EIW k+1 (l-E2 ) w kk+3
+2
Note that Yt >-t Wt holds for all t f:. k. Observe also that WIc >-Ic YIc· •
Problem 5.3.7. Consider an overlapping generations model for which each

commodity-price system (Et , E:) is a symmetric Riesz dual system. Show that
every Malinvaud optimal allocation (Xt) that satisfies xL1 > 0 and x~ > 0 for
each t ~ 1 is supported on 0 by an order continuous price.
Solution: Let (Xt) be a Malinvaud optimal allocation in an OLG model sat-
isfying xL 1 > 0 and x:
> 0 for each t ~ 1. Under these conditions, we know
from [3, Theorem 5.3.5, p. 250] that (Xt) is supported by a strictly positive price
P E 0'. We shall establish that this strictly positive price p is order continuous
on0.
To this end, assume Ya ! 0 in 0. Without loss of generality, we can suppose
(why?) that O:S; Ya :s; (01,02, ... ,Ok_1IO,0, ... ) for each ex and some k. This
implies
Ie
o :s; Ya :s; L Xt = X
t=O
for each ex. Invoking the Riesz Decomposition Property, we can write Ya =
L~=o y~ with 0 :s; y~ :s; Xt for each ex and each 0 :s; t :s; k. Since each Riesz dual
system (Et , E:) is symmetric, it follows that Ya ~O in El x E2 X ••. X Elc and
consequently, from 0 :s; y~ ;:; Ya, we obtain y~ ~O in El x E2 X .•. X Ele for
each 0 :s; t :s; k.
Now fix 0 :s; t :s; k and let e > O. In view of x!_l > 0 and x! > 0 for
each s ~ 1, we have Xt + eX >-t Xt. Since Ut is weakly continuous on the
order bounded sets, it follows that for some ao we have Xt - y~ + eX >-t Xt for all
a ~ ao. Hence, the supportability from p implies p. xt-p· y~+eP' X ~ p. Xt,
°S s °
°S
or p. y~ cp· x for each a ~ ao. Therefore, p. y~ - in 1R for each
S k. But then, p. Ya = L::=o p . Y~ - 0, proving that p is an order
t
continuous linear functional on e supporting the allocation (Xt) .•
Problem 5.3.S. Consider the overlapping generations model with the following
characteristics.
=
Utility Functions: uo(xO) = xO and Ut(x t , xt+l) = xt + xt+l.
Initial Endowments: Wt = (0, ... ,0, ~, ~,o, 0, ... ) for t ~ 2, where the numbers ~
and ~ occupy the t and t+ 1 positions, Wo = =
(j, 0, 0, ... ) and Wl (j,~, 0, 0, ... ).
Establish that the allocation (xo, Xl, X2," .), where Xo = (~, 0, 0, ... ) and
=
Xt (0, ... ,0, j,~, 0, 0, ... ) for t ~ 1, is Malinvaud optimal.
Solution: Assume by way of contradiction that (xo, Xl, X2, ... ) is not Malinvaud
optional. So, there exists an allocation (Yt) and some k such that
a. Yt = Xt for all t > k,
b. Yt b Xt for aliOS t S k, and
c. Yt >-t Xt for some °S t $ k.
Clearly, L::=o Yt = L::=o Xt = ~, ~, 0, 0, ... ), and so
k
yLl + y: = 1 for 1 $ t $ k and y:+l = j.

Now from (b) and (c) and the form of the utility functions, we have
y~ + (yt + yD + ... + (y: + y:+l) > x~ + (xt + x~) + ... + (x~ + X:+l),
and consequently
(**)
Taking into account (*), we get k + ~ > k + ~, which is impossible. Hence, (Xt)
must be a Malinvaud optimal allocation .•
characteristics.
=
= =
Utility Functions: uo(XO) xO and Ut(x t , xt+!) xt + 2xt+l.
= =
Initial Endowments: Wo (~, 0, 0, ... ) and Wt (0, ... ,0, ~, ~,O, 0, ... ) for each
t ~ 1, where the number ~ occupies the t and t + 1 positions.
Establish that the allocation (Wt) is Malinvaud optimal.

Solution: Start by observing that uo(wo) = ~ and Ut(Wt) = ~ for each t ? l.
Now assume by way of contradiction that (Wt) is not Malinvaud optimal. This
means that there exists another allocation (Yt) satisfying
a. Yt = Wt for all but a finite number of t,
b. Yt ~t Wt for all t, and
c. Yt >-t Wt for at least one t.
Let k = minim: Yt = Wt for all t ~ m}. If k = 1, then from 1 = y~+Yi = y~+~,
we get y~ = ~ and so Yt = Wt for all t, a contradiction. Hence, k > 1.
From yLl + ~ = yLl + YZ = 1, we get yLl = ~. Since
we see thatyZ=t ? ~. Now from the definition of k, we infer that yZ=t > !, say
yZ=t = ! + c for some c > O. This implies YZ=~ = ! - c, which in view of
! !
yields y:=~ ~ + 2c, and so yZ=~ = + 6. Continuing the same argument a
finite number of times, we see that yi !
= + TJ for some TJ > O. This implies
y~ = ~ - TJ and so uo(wo) = ~ > ~ - TJ = y~ = uo(yo). That is, Wo >-0 Yo, a
contradiction. So, (Wt) is Malinvaud optimal. _
Problem 5.3.10. In the overlapping generations model, a finite coalition S

of consumers is simply a non-empty finite subset of N = {O, 1,2, ... }. As usual,
let us say that a coalition S improves upon an allocation (Xo, xl, ... ) whenever
there exists another allocation (Yo, Yl, ... ) such that
a. LiES Yi = LiES Wi; and
b. Yi >-; Xi holds for each i E S.
1. Define the r-fold replica of the overlapping generations model and show
that every allocation defines an "equal treatment" allocation for each r-
fold replica of the overlapping generations model.
2. The finite core (or simply the f-core) consists of all allocations that
cannot be improved upon by any finite coalition of N. An allocation in the
overlapping generations model is said to be an Edgeworth equilibrium
whenever it belongs to the f-core of every replica of the OLG model.
Show that in an overlapping generations model every competitive equilibrium

is an Edgeworth equilibrium.
Solution: (1) The r-fold replica of an overlapping generations model is a new
OLG model where there are r "identical" consumers born at each period. That
is, in each period t there are r consumers born (designated by (i, t); i = 1, ... , r)
each with initial endowment
Wi,1 = ~,w:,/,w:tl,O,O, ... ),

1-1
where wt
I = w: and w;t
1 = w:+
1 for each t, and each with the same utility
function ~i,1 = Ut. A co~odity bundle for consumer (i, t) is any vector of the
form
Xi,t = ~,x:,t,X:tl,O,O, ... ).
t-l
An allocation for the r-fold replica of an OLG model is any sequence of the
form
where Xi,t is the bundle consumer i gets at period t, such that

00 ,. 00
t=O i=1 t=O
The allocation described in (*) will be denoted in short as (Xit).

An allocation (Xi,t) in some r-fold replica of an OLG model is said to have
the equal treatment property if Xi,t "'it Xj,t for all i, j =
1, ... ,r and each t.
Clearly, every allocation (Xt) in an OLG model gives rise to an equal treatment
allocation for its r-fold replica OLG models by letting Xi,t = Xt for all i = 1, ... ,r
and each t.
(2) Let (Xt) be a competitive equilibrium of an OLG model supported by
a price p > O. Also, assume that (Xt) is not an Edgeworth equilibrium. This
means that there exist some r-fold replica overlapping generations model of our
OLG model, a finite coalition of consumers S (Le., S is a non-empty subset of
{I, 2, ... , r} x {O, 1,2, ... }) and an allocation (Yi,t) for the r-fold replica OLG
model satisfying
a. L(i,t)ES Yi,t = L(i,t)ES Wi,t; and

b. Yi,t >-it Xi,t for each (i, t) E S,
5.4 Existence of competitive equilibria 223
where Xi,t = =
Xt and ~it ~t· It follows from (b) that Yi,t >-t Xt for each
(i, t) E S. So, by the supportability from P, we have p. Yi t > p. wt = P . Wi t
for each (i, t) E S. Therefore, we have ' ,
p' ( :L: Yi,t) = :L: P'Yi,t

(i,t)eS (i,t)eS
> L P ,wi,t = p.( L Wi,t),

(i,t)eS (i,t)eS
contrary to (a). Hence, (Xt) must be an Edgeworth equilibrium. _
5.4 Existence of competitive equilibria
In this section, we assume that all Riesz dual systems {El , En

in our overlapping
generations models are symmetric. As usual, we let Ot =
WLI + for each t. w:
The ideal generated by L::=OWt = (01,02, ... ,On,w~+1,0,0, ... ) in the Riesz
space El x E2 X ... will be denoted by An. It should be kept in mind that
An is an AM-space. The exchange economy En is the exchange economy with
Riesz dual system (An, A~) and set of agents {O, 1, ... , n} with their original
characteristics.
Problem 5.4.1. If(xo,xl, ... ,xn;p) is a Walrasian equilibrium for the ex-
change economy En, then show that the vectors Xi are of the form
Xo = (x6,0,0, ... ) and Xt = (0, ... ,0,x!,x!+1,0,0, ... ) for 1 ~ t ~ n.
Solution: Let (xo, Xl,"" Xn; p) be a Walrasian equilibrium with respect to the
exchange economy En. First, we claim that the positive price P is strictly positive
on An. To see this, let 0 < X = (Xl"", Xn , Xn+l, 0, 0, ... ) E An. Then Xt > 0
must hold for some 1 ~ t ~ n + 1. So if p. X = 0 then Xt-l + X >-t-l Xl-I, and
consequently by the supportability from p, we have P'(Xt-l + x) = p . x t - l =
P . Wt_l, contrary to the maximality of Xt-l in the budget set of consumer t - 1.
Hence, p . X> 0 must be true, proving that p is strictly positive.
Now wn'te Xt = (1 Xt , Xt2, .•• , X tt-l , Xtt , X HI
t 0,
, ... , X tn+l " 0 . .•) an d conSI'der
the case t ~ 1. Also, let Yt = (O, ... ,O,xLx:+l,O,O, ... ). Since Ut(Xt) =
Ut(yt) and p. Yt ~ p. Xt, we see that Yt is a maximal element in the bud-
get set of consumer t, and so p. Yt =
P ·w t · Next, let Zt = Xt - Yt =
224 Cbapter 5: Tbe Overlapping Generations Model
(X;' ... ,X!-1,0,0,X!+1,X!+2, ... ,xf+1,0,0, ... ). If Zt >

the strict positivity of p and so
°then p·Zt > °by
= P . Xt = p·(Zt + Yt) = p . Zt + P . Yt = P . Zt + P . W t > P . W t ,
p . Wt
which is impossible. Hence, Zt = °and consequently Xt = Yt. The case t = °

can be established in a similar manner .•
Problem 5.4.2. Show that if (XO,Xl, ... ,Xn;p) is a Walrasian equilibrium

for the exchange economy En, then the strictly positive price p is also order
continuous on An.
Solution: We can assume that p·(L~;Ol Wt) =
1. Let Yo ! 0 in n and fix
€ > 0. Since each Riesz dual system (Et , En is symmetric, it follows that Y0 ~O.
Without loss of generality we can suppose that 0 ~ Y0 ~ L~;; Xt holds for all
a. Thus, by the Riesz Decomposition Property, we can write Ya = L~;Ol y~
with 0 ~ y~ ~ Xt for t = 0,1,2, ... ,n+ 1. From 0 ~ y~ ~ Ya, we infer that
y~ -;"0 for each t = 0,1, ... , n+ 1. From Xt +€Wt >-t Xt, and the weak continuity
of the utility function Ut on the order bounded sets, we see that there exists some
f3 such that Xt + €Wt - y~ >-t Xt for all a ~ f3 and all t =
0,1, ... , n + 1. (Note
that, in view of y~ ~ Xt, we indeed have Xt + €Wt - y~ ~ 0 for each a and t).
By the supportability from p, we infer that
p·(Xt + €Wt - y~) = p . Xt + €P . W t - p . Y~ ~ P . W t = P . x t ,
and so 0 ~ p . y~ ~ €P . wt for all a ~ f3 and all 0 ~ t ~ n + 1. Thus, for a ~ f3

we have
n+l n+l
o ~ p . Ya =L
p . y~ ~ L
€P . W t €, =
t=o t=O
=
proving that lima p . Ya O. Therefore, p is order continuous on An .•
Problem 5.4.3. Consider a sequence ... ,X~;Pn)} of Walrasian equi-

{(x~,xf,
libria for the sequence of economies En and let fn = (x~, xi, ... , X~, 0, 0, ... ) EX.
If x is an accumulation point of the sequence {fn}, then show that x is an allo-
cation for the overlapping generations model.
Solution: Recall that Xo = [0,0 1] x 0 x 0 x ... and
Xt = 0 X 0 X ... x 0 x [O,Ot] x [0,01+1] x 0 x 0 x ...
for t = 1,2,3, ... , where 0 =

{OJ. Since each Riesz dual system (Et , En is
symmetric, each order interval [O,Ot] is u(Et , ED-compact and so each Xt is a
compact topological space. The topological space
is compact under the product topology.

We now consider the sequence {fn} of X, where fn = (x~, x~, ... , x~, 0, 0, ... )
is a Walrasian equilibrium for the economy En for each n. As usual, we let
Xo = (:z:~,o,O,O, ... ) and x~ = (O, ... ,O,:z:~,i,:z:~;l,o,o, ... ) for 1 ~ i ~ n.
Also, let x = (XO,Xl,X2,"') be an accumulation point of the sequence {fn} in

X, where
Xo = (:Z:o,O,O,O ... ) and

_ i i+l
Xi-(O, ... ,O':Z:i':Z:i ,0,0, ... ).
Pick a subnet {n.d of the sequence of natural numbers such that the net
{fn,,} satisfies~" -x in X, or equivalently, X?"-rXi in Xi for i = 0,1,2, ....
The latter is, of course, equivalent to :z:~",OT :Z:o, :z:~",iT:z:L and :Z:~~~i -T+ :z:;+1 in
E l , Ei and Ei+b respectively.
Next, fix some t 2': 1. Choose some index Ao such that n). > t + 1 for all
=
A 2': Ao. Since E?~o x?" E~oWi' it follows that
for each A 2: Ao. But then, taking the weak limit in (*) with respect to A, we get
:z:Ll + :z:! = Ot for each t 2': 1. This shows that x is indeed an allocation for the
overlapping generations model. _
Problem 5.4.4. Show that every general overlapping generations model with
symmetric Riesz dual systems has an asymptotic limit (x, p) such that
1. p is a non-zero positive order continuous linear functional on 9, and
n. y ~it Xi,t implies p . y 2': p . Wi,t·
Solution: First, let us recall the framework of the general overlapping genera-
tions model. This is the OLG model where
a. there is a countable number of periods indexed by the set of natural num-
=
bers IN {I, 2, 3, ... };
b. r consumers are born in each period (r 2': 1); and
c. each consumer lives £ + 1 periods (£ 2': 1).
In this OLG model a consumer is identified by a' pair (i, t). That is, (i, t) des-
ignates consumer i (where 1 ~ i ~ r) born at period t. This consumer lives in
periods t, t + 1, ... , t + i and her initial endowment is
-
Wi,t- (0 , ... , 0 ,Wi,t,Wi,t
t t+l 0 , 0 , . . .).
HI ""'Wi,t'
We shall assume that wit;

> 0 for each 0 ~ j ~ i and all i and t. A commodity
bundle for consumer (i, t) is any vector Xi,t of the form
. --
X.,t (0 , ... , 0 J Xi,t,
t Hl , 0 , 0 , . . .).
HI , ... , Xi,t
Xi,t
For mathematical simplicity, the ri "ancestors" of the consumers at period

1 (labelled by (i, t), 1 ~ i ~ rand 1 - i ~ t ~ 0) will be assumed to be present
in the model. Their initial endowments are of the form
1 - i ~ t ~ 0; 1 ~ i ~ r.
The commodity bundles of these consumers are also of the from
Xi,t -- (Xi,t,
I 2
Xi,t'···, lH , 0 , 0 , ... ) ,
Xi,t 1 - i ~ t ~ 0; 1 ~ i ~ r.
The letter E will denote the Riesz space consisting of all eventually zero
sequences of the product Riesz space n:1
E t . Each consumer (i, t) with t 2: 1
has a utility function Ui,t: Et X Et+l X •.. X Ei+l -+ 1R which is
1. quasi-concave,
2. strictly monotone, i.e., (X, Xl,'" ,Xl) > (Y,YI,'" ,Yl) in Et x ... X Ei+l
implies Ui,t(X, Xl, ... , Xl) > Ui,t(Y, YI, ... , Yl), and
3. weakly continuous on every order bounded subset of Et x ... x Et+l'
Also, the utility functions Ui,t with 1 - i ~ t ~ 0 are real functions defined on
Et x ... x Et+l satisfying the above three properties.
As usual, the vector
t r
9t = 2: 2: w!J E E t
j=t-l i=l
represents the total endowment at period t 2: 1. An allocation for the general
OLG model is any sequence {(Xl,t,X2,t, ... ,Xr,t)}~l_l' written simply as (xi,d,
satisfying
t r t r
~ ~ x~ .
~ ~ 'J
=~
~ ~
~ w~ .
'J
=Ot
j=t-li=l j=t-li=1
for each t 2:: 1.

An allocation (Xi,t) is said to be a competitive equilibrium if there exists
a price 0 < p = (P1,P2, ... ) E E' = 11~1 E; such that each Xi,t is a maximal
element in the (i, t)th consumer's budget set
Bi,t(p) = {x E E+: p. x ~ p .Wi,t}.
The ideal generated by ()t in E t is denoted by 8 t . As before, the ideal of
11:18t consisting of all eventually zero sequences is denoted by 0. We also
let 0' = 11:1 8~. Clearly, {0,0') is a Riesz dual system. This is the Riesz
dual system which is associated with the existence of asymptotic limits. The
existence of asymptotic limits is established by a series of steps. From now on
we assume that each Riesz dual system {E t , E;} is symmetric.
We start by letting An denote the ideal generated in the product Riesz space
n:1 Et by the vector
n r
Wn = L LWi,t=«()1, ... '()n,b~, ... ,bl,0,0, ... ),

t=1-li=1
where b~ = 2:~=n-l+k 2:;=1 w~tk for 1 ~ k ~ i. Subsequently, £n will denote
the exchange economy having Riesz dual system {An, A~} and set of agents
{( i, t): 1 ~ i ~ r; 1 - i ~ t ~ n} with their original characteristics .
• Each economy £n has a Walrasian equilibrium {(Xl,t, ... ,Xr,t)}~=l_l of
the form
. -- (0 , ... , 0, Xi,t'
X"t t t+1 , ... , Xi,t
Xi,t t+l , 0 , 0,... ) Jor
r. t 2:: 1
and
Xi,t = (x;,t,X;,t,· .. ,x:1l,O,O, ... ) for 1- i ~ t ~ O.
Moreover, every non-zero price
p = (pl,p2, ... ,pn, ... ,pn+l,o,o, ... ) E A~
that supports {(Xl,t, ... ,xr,d: 1- i ~ t ~ n} as a Walrasian equilibrium

is strictly positive on An. In particular, we have
p . Wi,t >0 for each 1- i ~ t ~ nand 1~i ~ r.
We know that An is an AM-space with unit W n . Also, we know that every

utility function is 1I·lloo-continuous on An 3 and [3, Theorem 3.2.4, p. 118] guar-
antees that all preferences are uniformly 1I·lIoo-proper on An. In addition,rwe
claim that the exchange economy £n satisfies the closedness condition.
3This follows from the fact that the nonn topology on An is the finest locally solid topology
on An; see [1, Corollary 7.8, p. 248].
To see this, let {(xl,tl ... , X~,t): 1 - £ :::; t :::; n}:;';l be a sequence of feasible
allocations for the exchange economy En satisfying xiiI !:it Xi,t for all v, all
1 - £ :::; t :::; n and all 1 :::; i :::; r. Let '
00
y = II[O, Ot] .
t=l
If each interval [0, Ot] is equipped with the weak topology (i.e., with the topology
cr(Et , Em, then Y is compact. Since {(xl,t, ... ,X~,t): 1- £:::; t :::; n} E (yr)l+n
holds for each v, it follows that there is a subnet {( x~~, ... , x~~): 1-£:::; t :::; n} of
the sequence offeasible allocations {(xl,t, ... ,X~,t): 1- £ :::; t ~ n }~=l satisfying
{(x~~, ... ,x~~): 1- £ ~ t ~ n} -;;;-+ {(XI,t, ... ,xr;e): 1- £:::; t ~ n}
in (yr)l+n. Clearly, {(XI,t, ... ,xr,t): 1-£:::; t :::; n} is a feasible allocation

and xi,i ~Xi,t holds for each (i, t). The weak continuity of Ui,t on the order
bounded sets implies Ui,t(Xi,t) = lima U;,t(xi,i) for each (i, t). The latter easily
implies Xi,t !:it xi,t for each v and each (i, t), and so the economy En satisfies
the closedness condition.
So, there exists a quasiequilibrium {(XI,t, ... , xr,e): 1-£ ~ t ~ n} supported
by a price 0 0 must hold for some (i,t). We claim that P ·wi,s > 0
actually holds for each 1- £ ~ s ~ n. To see this, assume that P . wi,. = 0 holds
for some 1-£ ~ s ~ n. Then there exist two consecutive integers 1-£ :::; v, J.l :::; n
such that p. wi,1I > 0 and p. wi,/l = o. Clearly, Xi,1I is a maximal element
in the budget set of consumer (i, v). However, this conclusion is contrary to
Xi,1I +Wi,/l >-ill Xi,1I and p.(Xi,1I +Wi,/l) = P . xi,1I = P . wi,lI· Similarly, P . Wj,s > 0
for each 1 :::; j :::; r. Therefore, P . Wi,t > 0 holds for each 1 - £ :::; t :::; n and all
1 :::; i ~ r and so {(XI,t, ... ,Xr,t): 1- £ ~ t :::; n} is a Walrasian equilibrium with
respect to the price p.
To see that p is strictly positive, let 0 < x E An. Then for some (i, t) we
must have Xi t + X >-it Xi t· This implies p. Xi t + p. x > p. Wi t = P . Xi t or
p . x > O. By the special ~ature of the utility f~nctions, it should be also ~lear
that the vectors Xi,t of the Walrasian equilibrium are of the form
and
• For each n let (((x?,t, ... ,x~,t): 1- £ < t ~ n};Pn) be a Walrasian

equilibrium for the exchange economy En. Then for each pair (k, m) of
natural numbers there exists a constant M > 0 (depending on k and m)

such that
0< Pn'Wk ~ Mpn,w m
holds for all n 2: max{k,m} and aliI ~ i ~ r,
Fix m and suppose by way of contradiction that there exist some non-negative
integer k and some I ~ i ~ r satisfying liminfn~kl ~:',:i:,: 0, where kl= =
max{k, m}, Thus, the sets
{ J'IN
E : I'ImlD'
' f Pn 'Wi ,j
n-oo Pn 'Wi,k
> o} and { J. E IN : I'ImlD
. f Pn 'Wi 'J'
n-oo Pn 'Wi,k
= o}
are both non-empty since k belongs to the first set and m to the second. It
follows that there exist two consecutive integers sand t such that
liminf Pn'Wi" >0 and · . f Pn 'Wi,t = 0 ,

IImlD
n_oo Pn 'Wi,k n-+oo Pn 'Wi,k
By passing to a subsequence, we can assume that
liminf Pn'Wi,' >0 and lim Pn 'Wi,t =O.

n-+oo Pn 'Wi,k n-+oo Pn 'Wi,k
In view of xf, E Y and the compactness of y, we see that the sequence

{xf,: n = 1,2, ...'} has a weakly convergent subnet {Ya}, say Ya ~ y.
'From Y + Wi,t >-i, Y and the weak continuity of the utility function Ui" on
the order bounded sets, there exists some 0 < 6 < 1 such that 6(y + Wi,t) >-i, y.
Using the weak continuity of Ui" on the order bounded sets again, we see that
there is some ao satisfying 6(Ya + Wi,t) >-i, Ya for all a 2: ao. Consequently,
there exists a strictly increasing sequence {k n } of natural numbers satisfying
6(x:'~ + wi,d >-i, x~,~, Since (*) remains true if we replace Pn by Pk", we can
assume without loss of generality that 6(x~, + Wi,t) >-i, x~, holds for all n
sufficiently large. Therefore, the supportability from Pn implies
6pn '(Wi" + Wi,t) = Pn ,[6(x~, + Wi,t)] 2: Pn 'Wi"

for all n sufficiently large. Now note that
u'I'ImlD
' f Pn 'Wi"
n-oo Pn 'Wi,k
which is impossible, and our claim follows.

Now for each n let {(x~,t' ... , X~,t): 1-£ ~ t ~ n} be a Walrasian equilibrium
for the exchange economy en supported by a strictly positive price Pn E A~.
=
Normalizing the prices, we can assume Pn 'W1 1 for each n. Now consider the
compact topological space
X = yIXZ,
= =
where y n~dO, Ot], I {I, 2, ... , r} and.z = {1-i, -i, ... , -1,0,1,2,3, ... }.
Now for each n define fn E X via the formula
if 1-£ ~ t ~ n
if t> n.
Letting m = 1 in the preceding claim and taking into account that Pn 'W1 = 1
for each n, we see that for each k there exists some M" such that
0< Pn'W" ~ M"

holds for all n ? k. In particular, if for each n > k the linear functional Pn is
restricted to A", then the sequence {Pn: n > k} is a norm bounded sequence of
A~. Let C" be a closed ball of A~ with center at zero that contains the sequence
{Pn: n > k}. Clearly, by Alaoglu's Compactness Theorem, the ball C" is a
w· -compact subset of A~.
Now for each k = 1,2, ... consider the sequence {q~} of positive linear
=
functionals on Ai: defined by q~ 0 if 1 ~ n ~ k and q~ = Pn (the restriction
of Pn to A k ) for n > k. Note that {q~} is a sequence of the w· -compact set C".
Next, consider the product topological space (with the product topology)
C= X X C1 X C2 X C3 X '" ,
and note that by Tychonoff's classical compactness theorem C is a compact

topological space. Clearly,
(fn, q~, q~, q~, ... ) E C
holds for all n. Therefore, there exists a sub net {n.d of the sequence of natural
numbers {n} such that
1
(~An). , qn). 2
, qn). 3
, qn). , .)
" --+ (
x,1 2
q ,q ,q3 )
, ...
holds in C. Notice that q~). = Pn). holds on A" for all >. sufficiently large. The
latter implies that for each Y E e the value Pn).·Y is eventually well defined and,
in addition, lim). Pn).·Y exists in R. Therefore, a positive linear functional (i.e.,
a price) p: e -+ R can be defined via the formula
p. Y =limpn).· y,
).
YE e.
The pair (x,p) will be referred to as an asymptotic limit for the sequence
({(xi,t, ... ,X~,t): 1-£ ~ t ~ n};Pn):=1 ofWalrasian equilibria. Note that x is
a vector of the form {(XI,t,XZ,t, ... ,Xr,t)}~l_l and, in fact, it is an allocation
for the OLG model. Moreover, observe that pEe'. The preceding discussion
guarantees, of course, that in an overlapping generations model with symmetric
Riesz dual systems asymptotic limits always exist. Prices associated with asymp-
totic limits are necessarily non-zero positive prices-indeed from Pn 'WI = 1 for
each n it follows that p . WI = limA Pn~' WI = 1.
• If (x, p) is an asymptotic limit, then the price p is non-zero, positive and
order continu·ous on the ideal e.
Suppose that (x, p) is an asymptotic limit for a sequence of equilibria cor-

responding to a sub net {nA} of the sequence of natural numbers {n}, and let
y Ot ! 0 hold in e. We must show that p . y Ot ! O.
Without loss of generality, we can assume that for some k > £ we have y Ot
in A"-l for each a and p'W" = 1. Moreover, by scaling appropriately, we can
suppose that YOt ~ E~=l-l E~=l x~~ holds for each a and each A. Thus, by
.. Property, we can wrIte
t he Ri esz Decomposltion . YOt = ",,, ",r Ot A h
L.."t=l-l L.."i=l Yi,t , were
o~ yr,t A ~ x~~. From 0 ~ yr,i A ~ Ya ! 0 and the fact that each Riesz dual
system (Et , ED is symmetric, it follows that yr,tA-;;;. O.
Now fix € > 0 and note that Xi,t +€Wi,t >-it Xi,t holds for each (i,t). From
x~~ ~ Xi,t, 0 ~ x~~ - yr,i A-;;;. Xi,t and the weak continuity of the utility func-
tions on the order bounded sets, we can assume (by passing to a sub net if nec-
essary) that there exist ao and Ao such that
and nA ~ k
for a ~ ao, A ~ Ao, 1 :5 i:5 rand 1-£:5 t :5 k. By the supportability from the
prIce
•
Pn~, we IDler
• & th at Pn~'Xi,t
n~ a,A > n~
+€Pn~'Wi,t -Pn~'Yi,t _ Pn~'Wi,t = Pn~'Xi,t' an
d
so 0 :5 Pn~ . yr,iA :5 €Pn~ . Wi,t holds for all a ~ ao all A ~ Ao, each 1 -£ :5 t :5 k
and each 1 ~ i :5 r. Therefore,
k r k r
o ~ Pn~' YOt = L LPn~' yr,t A ~ €Pn~' ( L LWi,t)

t=l-ti=l t=l-ti=l
for all a ~ ao and all A ~ Ao. Taking limits with respect to A, we get
k r
O~p·yOt ~€p.( L LWi,t) =€P,wk =€

t=l-li=1
for all a ~ ao. Hence, P . Ya ! 0 and so the price P is order continuous on e.

• If (x, p) is an arbitrary asymptotic limit, then y bt Xi,t in e+ implies

P' Y ~ P . Wi,t·
Let (x, p) be an asymptotic limit of a sequence {«x1,t l " " X~,t)~=l-l; Pn)}
of Walrasian equilibria. Pick a subnet {n,x} of the sequence of natural numbers
such that
a. x?,~ ~Xi,t for all t ~ 1 - i and each 1 ~ i ~ r; and
b. p. y =lim>. PnA' Y for all y E e.
Now let y tit Xi,t hold in e+. Fix some k ~ i with y E Ak and let c > O.
Clearly, y + cWi,t >--it Xi,t. Using the weak continuity of the utility functions on
the order bounded sets once more, we can assume that there exists some Ao such
that
y + cWi,t >--it x?,~ and n>. ~ k
hold for all A ~ Ao. The supportability from the price PnA yields
for all A ~ Ao. Passing to the limit, we obtain P . Y + cp . Wi,t ~ P . Wi,t for all
c > 0, and so P . Y ~ p' Wi,t, and the solution is finished. _
Problem 5.4.5. For each k ~ 1 let Pk: E -+ E be the projection defined by
Also, let Qk: E -+ E denote the complementary projection defined by
If (Xi,t) is an allocation for the general overlapping generations model (see

Problem 5...1.4), then for each k ~ 1 show that
(1)
(2)
(3)
5.4 Existence of competitive equilibria. 233
Solution: (1) Note that

Ie r Ie r
Pie ( L LXi,t) = (/1 1, ... ,/11e,0,0, ... ) = Pie ( L LWi,t).

t=l-li=l t=l-li=l
(2) Assume t :5 k -i. Then from the expressions
and
Xi,t = (x;,t, x?,t, ... , X~)l, 0, 0, ... ) for 1 -£ :5 t :5 0,
we see that the components of Xi, t (and of Wi, t) with indices strictly greater than
k are all zero. Hence, QIe(Xi,t) = Q1c(Wi,t) O. =
(3) Note that the vectors 2::=l-t 2:~=1 Xi,t and 2::=k-t 2:~=1 Xi,t have the
same coordinates with indices strictly greater than k. So, the definition of QIe
implies QIe(2::=l-l 2:~=1 Xi,t) = Qk(2::=Ie-l 2:~=1 Xi,t) . •
Problem 5.4.6. Let (x, p) be an asymptotic limit for a general overlapping

generations model, where x = {(X1,t, X2,t, ... , xr,t}}~1-l' Show that:
1. p. Xi,t =P . Wi,t for each (i, t), and
2. p is strictly positive on 0.
Solution: (1) Let (x, p) be an asymptotic limit for a general overlapping gener-
ations model, where x = {(X1,t, X2,t, .. ·, Xr,t)}~l_l' Part (ii) of Problem 5.4.4
implies p . Xi,t ~ P . Wi,t for each (i, t). We claim that
Ie r Ie r
L LP'
t=1-li=1
Xi,t = L LP' Wi,t
t=l-li=l
(t)
for each k ~ 1. If the validity of (t) is established, then it should be clear that
P . Xi,t = p. Wi,t for each (i, t). So, in order to verify (t), let k ~ 1 be fixed. We
shall verify (t) by steps.
First, recall that the "ancestors" of the consumers at period 1 (labelled by
(i, t), 1 :5 i :5 rand 1 - £ :5 t :5 0) are present in the model. Their initial
endowments are of the form
Wi,t = 1 2
( Wi,t,Wi,tJ'" Hl 0 0 )
,Wi,t , , , ... , 1 -£ :5 t :5 0; 1:5 i :5 r.
The trading bundles of these consumers are also of the form
1 - £ :5 t :5 0; 1:5 i :5 r.
Recall that for each k ~ 1, we denote by PA:: E -+ E the projection defined

by
PA:(XI, X2, X3, ... ) = (Xl, X2, ... , XA:, 0, 0, ... ).
Also, we denote by QA: the complementary projection of PA: defined by
Clearly, PA: + QA: = I, the identity operator on E.

• For each k ~ 1 we have
To see this, note first that from p. xi.t ~ P . wi.t, we see that
A: r A: r
p.( L LXi.t) ~ p.( L LWi.t). (5)
t=l-li=l t=l-li=l
Also, from the identity (1) of Problem 5.4.5, we have
A: r A: r
PA:( L LXi.f) = PA:( L LWi.t) ,

t=l-li=l t=l-li=l
and so
To obtain the desired inequality subtract the latter equation from (5) and take
=
into consideration that Qk(Z) Z - PA:(z) for each Z E E.
• For each k ~ 1 we have
k r k r
p.[P L LXi.t)] ~
k( P·[Pk( L LWi.t)].(6)
i=l t=k-l t=k-l i=l
To see this, assume that x is the limit of a sequence of Walrasian equilibria

({(x~.t"" ,x~.t): 1 - i ~ t ~ n};Pn):=l' So, there exists a sub net nA of the
sequence natural numbers {n} such that
a. x~: ~Xi.t for each (i, t), and
b. p. Z =limA PnA' Z for each Z E E.
Now fix c > O. Then Pk(Xi,t)+Qk(Xi,t)+cWi,t = Xi,t+cWi,t >-it Xi,t for each
(i, t). From Qk(X?,~) ~Qk(Xi,t) and the weak continuity of the utility functions
on the order bounded sets, there exists some AO such that A ~ AO implies n A > k
and
Pk(Xi,t) + Qk(X?,~) + cWi,t >-it x?,~
for aUk -£ $ t $ k and each 1 $ i $ r. Now the supportability from Pn~ yields
Pn): [Pk(xi,d + Qk (x?,;) + cWi,tl > Pn~· x?,~ = Pn~· Wi,t
for aUk -£ ~ t $ Ie and each 1 ~ i ~ r. Hence,
k r k r k r
Pn~· [Pk ( L LXi,t) +Qk ( L LX~~) +cv] > Pn~· ( L LWi,t), (7)
t=k-li=1 t=k-li=1 t=k-li=1
where v = E~=k-l E~=1 Wi,t· Since Qk(Xi,t) th= xi,t holds for each t > k and
£....t=k-l £""i=1 Wi,t = £....t=k-l £""i=1 Xi,t , we see a
",n~ ",r ",n~ ",r t n~
Pn~· [Qk ( f tx~~)]

t=k-li=1
k r n~ r
Pn~· [Qk( L LX?'~) + L LWi,t].
t=k-li=1 t=k+1i=1
Adding Pn~· (E~~k+l L:;=1 Wi,t) to both sides of (7), we get
k r n~ r
Pn~· [Pk( L LXi,t) +Qk( L LX~~) +cv]

t=k-li=1 t=k-li=l
r
E EWi,t) ,
n~
> Pn~· (
t=k-li=1
and taking into account that Pk(Z) = Z - Qk(Z), we obtain
Pn~· [Pk ( f:
k r
Pn~· [Pk ( L L Xi,t) + cv] > tWi,t)]

t=k-l i=1 t=k-l i=1
k r
= Pn~· [Pk( L LWi,t)].

t=k-li=l
Taking the limit with respect to A, we get
for all e > 0 and the validity of (6) follows.

• For each k 2: 1 we have
k+l+1 r Ie r
Pk+l+1( L LXi,t) +Qk( L LXi,t)

t=k+1 i=1 t=k-li=1
k+l+1 r k r
PHl+1( L LWi,t) +Qk( L LWi,t). (8)
t=k+1 ;=1 t=k-l i=1
To see this, first note that
k+l+l r k r
PHl+1( L LXi,t) +QI:( L LXi,t)
t=k+1.=1 t=k-l ;=1
k+l+1 r I: r l: r
Pl:+l+1 ( L LXi,t) + L LXi,t - Pl:( L LXi,t)

t=I:+1i=1 t=k-li=1 t=l:-l;=1
k+l+l r l: r
Pk+l+1 ( L LXi,f) -
Pk ( L LXi,t)
1=k-l.=1 t::k-li=1
l:+l+1 r k-l-1 r k r k-l-1 r
= [PHl+1 ( L LXi,t)+
L LXi,t]-[Pk( L LXi,t)+ L
LXi,t]
t=k-li=1 1=1-li=1 f=k-li=1 t::1-l'::1
k+l+1 r k r
= PI:+l+1 ( L LXi,f) - Pi: ( L EXi,t).
t=1-l ;=1 t=1-l ;::1
A similar formula holds true if in the preceding identity we replace the Xi,t by
the Wi,t. Now from the identity (1) of Problem 5.4.5 we have
k+l+1 r l:+l+1 r
PHl+1 ( L LXi.t) = Pk+l+1 ( t=1-l;=1

1::1-l;::1
L LWi,t)
and
and the identity (8) follows.

We are now ready to prove (t). Replacing k by k +.e + 1 in (6), we get
Now a glance at (4) and (8) guarantees that (4) and (9) are, in fact, both
equalities. In particular, from identity (3) of Problem 5.4.5, we obtain
k r
P'[Qk( L LWi.t)]
t=k-l i=1
k r
p. [Qk ( L LXi.t)]
t=k-li=1
k r
p. [Qk ( L LWi.t)] .
t=1-li=1
Now using (1) from Problem 5.4.5, we see that
k r k r k r
L LXi.1 Pk( L LXi.t) +Qk( L LXi.,)

t=1-li=1 t=1-li=1 t=I-1i=1
k r k r
Pk(L LWi.t)+Qk(L LXi.t).

t=l-li=1 t=l-li=1
Consequently,
k r k r k r
L LP·Xi.t p.[Pk ( L LWi.t)] + p. [Qk ( L LXi.t)]

t=I-1i=1 t=I-1i=1 t=l-li=1
k r k r
P·[Pk( L LWi.t)] +P'[Qk( L LWi.t))

t=1-1i=1 t=l-li=1
k r
p.( L LWi.t)
t=l-li=1
k r
L LP·Wi.t
t=I-1i=1
holds for each k 2: I, and the validity of (t) has been established.
(2) We claim that P . xi.t > 0 for all 1 ~ i ~ r and all t 2: 1 - £. To see
this, note first that p. WI = 1 implies that P . xi.t
> 0 for some 1 ~ i ~ r
and some 1 - £ ~ t ~ 1. Then, we claim that P . xi._ > 0 for all s 2: 1 - £.
If this is not the case, then there exist two consecutive integers J.L, 1I 2: 1 - £
such that p. Xi.1' > 0 and P . xi.v =
O. But then Xi.1' is a maximal element
in the budget set of consumer (i,J.L), which contradicts Xi.1' + Xi." >-il' Xi.1' and
° °
P'(Xi,I' +Xi,v) = P . xi,I' = P . wi,/" Hence, P . x i ,_ > for all s 2:: I-f. Similarly,
P . xi,' > for all 1 :::; j :::; r and from the above, we easily infer that indeed
°
P . Xi,t > for all (i, t).
Now let 0 < Y = (Yl,Y2, ... ) E e. Pick some t 2:: 1 such that Yt > 0.
Then Xl,' + Y >-l,t Xl,t and so p. XI,t + p. Y > p. WI,t = p. Xl," This implies
p . Y > 0, and consequently P is strictly positive on e .•
Problem 5.4.7. Consider the one-consumer two-period OLC model, and let
(x, p) be an asymptotic limit. Then
Yt = (O,oo.,O,x~,O,O,oo.) and Zt = (O,oo.,O,x:+I,O,O,oo.)
represent the allocations that consumer t receives at periods t and t + I, while
et = (O,oo.,O,w!,O,O,oo.) and ft = (O,oo.,O,W!+I,Q,O,oo.),

are her initial endowments at periods t and t + 1, respectively. Show that
P . Yt =P . e t and p. Zt = P . ft·
Solution: Let X = (XO,Xl,X2, ... ), where
Xo = (x~, 0, 0,00') and Xt = (O,oo.,O,x~,x:H,O,O,oo.) for t 2:: 1.
= =
Note that Xt Yt + Zt and w, et + f, for each t 2:: 1. Since p . x, = p . w, for
each t = 0,1, ... , it follows that
P . Yt + p. z, = p. e t + p. f, for t = 1,2, ....
Also, from 0, = X~_l + x~ = w:_ 1 + w:, we see that Yt + Z,-l = e, + f'-l and so
Now we shall use induction on t. Note first that Xo + Yl = Wo + el implies

= =
p . Xo + p . Y1 p. Wo + p . e1' From p. Xo P . Wo, we get p. YI P . el' But =
then it follows from (*) that p' Zl = p. fl' So, our identities are true for t = 1.
For the inductive step, assume p . Yt = P . e, and p. Zt = P . f t for some
t 2:: 1. Replacing t by t + 1 in (**), we get p . YtH + P . Zt = P . e H 1 + p . f" and
so p. YH1 = p. eHl' Now a glance at (*) guarantees that p. z'H = p. f tH ,
=
and the induction is complete. Hence, p . y, p. e t and p. Z, p. f, hold true =
for each t = 1,2, ....•
characteristics.
Commodity Spaces: E t = JR for each t.
Utility Functions: uo{zO) = zO 'and Ut{zt, zH1) = zt + zH1 for t ~ 1.
i,
Initial Endowments: Wt = (0, ... ,0, ~,O, 0, ... ) for each t ~ 2, where the
numbers ~ and ~ occupy the t and t + 1 positions, Wo = (~, 0, 0, ... ) and W1 =
(~,~,O,O, ... ).
Establish the following properties:
1. 9 = the vector space of all real sequences that are eventually zero;
2. 9' = IRoo = the vector space of all real sequences;
3. The allocation (XO,X1.X2, ... ), where Xt = (0, ... ,O,~, ~,o,o, ...) for each
t ~ 1 and Xo = (!, 0, 0, ... ), is not a competitive equilibrium.
Also, find a competitive equilibrium (whose existence is guaranteed by Theo-

rem 5.4.1) for this overlapping generations model.
Solution: (1) The initial endowment allocation (Wt) is given by the infinite
matrix
o
° °00
1
¥ 3 o
o o
"2
1 3 o
°° °
4 I
4 ~ °
Clearly, Ot = 1 for each t = 1,2,... . Hence, the ideal 9 t generated by Of in
E t = JR coincides with JR. This easily implies that the ideal 9 of all eventually
zero sequences in 9 1 x 9 2 X ••• coincides with the vector space of all real sequences
that are eventually zero.
(2) This is part (3) of Problem 5.2.3.
(3) Notice that the allocation (Xt) is given by the matrix
1
o o o 0
¥
"2
1 o o 0
o ~
"2
1
¥
o 0
o
° "2
~ °
Assume by way of contradiction that (xt) is a competitive equilibrium. This

means that there exists a price p =
(pI, p2 , ... ) > 0 such that each Xt is a
maximal element in the budget set Bt (p) of consumer t. In particular, from [3,
Theorem 5.15, p. 235], we must have the budget equalities
a . P l. 12 -- pl. 12'
b. pl. ~ + p2 . ~ = pI . ~ + p2 . ~ , and
c. pt. ~ + pHI . ~ = pt . ~ + pt+l . ~ for t ~ 2.

=
From (b), we see that p2 0 and from (c), we get pHI =
pt for all t ~ 2. So,
the price p must be of the form p = (p, 0, q, q, q, .. .).
Now notice that the bundle z =
(~, 1,0,0,0, ... ) belongs to the budget set
of the first consumer and satisfies z >-1 Xl, proving that Xl is not a maximal
element in B1 (p). Hence, (Xt) cannot be a competitive equilibrium.
(4) The allocation (wt} itself is a competitive equilibrium. The supporting
= =
price is the price p (1, 1, 1, ... ). Indeed, notice that if a vector X (Xl, x2, ... )
satisfies X >-t w"~ then Ut{x) > Ut(Wt) or
00 00
p·x Lpixi = Lxi ~ xt +x t +1 = Ut(x)

i=O i=O
> Ut(wd =w: +w:+ =p ·w t .
1
This establishes that (Wt) is a competitive equilibrium.•
Problem 5.4.9. Show that the Riesz dual system (E, E') is symmetric if and
only if every Riesz dual system (Et, ED is symmetric.
Solution: It should be noticed first that E.... = El x E'2 x ... and therefore
E' = E~ x E~ x ... is an ideal of E .... separating the points of E. In other words,
(E, E') is a Riesz dual system. The important thing to keep in mind is that
the Riesz space E is Dedekind complete if and only if each Riesz space Et is
likewise Dedekind complete. To see this, assume first that each Riesz space E t
is Dedekind complete and let 0 $ Ya = (yr, y~, . .. ) 1$ Y = (Ylt Y2, ... ) in E.
This is equivalent to 0 $ yf 1a $ Yt in E t for each t. Since each E t is Dedekind
complete, there exists some Xt E E t satisfying Xt $ Yt and yf 1a Xt· It follows
=
that X (X1,X2, •.. ) E E and Ya1 x in E. For the converse, assume that E is a
Dedekind complete Riesz space and assume 0 ::; Xa 1$ x in Et for some t. If
---......-
t-1
---......-
xa = (O, ... ,0, X a , 0, 0, ... ) and x = (0, ... ,0, X, 0, 0, ... ),
t-1
then 0 :5 x'" i:5 x in E. The Dedekind completeness of E implies
-----
x", i y = (0, ... ,0, y, 0, 0, ... ) in E,
t-l
and from this it easily follows that x'" i yin E t , proving that E t is Dedekind
complete for each t.
Recall that for a Riesz dual system (E, E') the following statements are
equivalent.
1. The Riesz space E is Dedekind complete and the weak topology u(E, E')
is order continuous (i.e. x'" ! 0 in E implies x'" '-:::"'0).
2. The Riesz space E is Dedekind complete and every consistent locally convex-
solid topology on E is order continuous.
3. The Riesz space E is Dedekind complete and E' ~ E;;', where E;;' denotes
the order continuous dual of E.
4. Every order interval of E is weakly compact.
5. The Riesz space E is an ideal of(E');;, (and hence, an ideal of (E')'" too).
For a proof of this important result see [5, pp. 168-170]. Any Riesz dual system
satisfying anyone of these equivalent statements is called a symmetric Riesz
dual system.
Next, assume that each {Et, ED is a symmetric Riesz dual system, and let
y", ! 0 in E. By the above discussion, E is a Dedekind complete Riesz space.
If we write y", = (yf, y~ , ... ), then we can assume without loss of generality
that there exists some k such that yf = 0 for all i > k and all a, i.e., y", =
(yf,Y2,··.,Yk,0,0, ... ). From y",! 0, it easily follows that yf ! 0 for each i.
Now let 0 i .y,/ ! 0 ,
i=l
which shows that p is order continuous on E. Therefore, {E, E'} is a symmetric

Riesz dual system.
For the converse, assume that (E, E') is a symmetric Riesz dual system,
and let y", ! 0 in some E t . Notice first that from our discussion above, we
know that Et is a Dedekind complete Riesz space. Now if 0 :5 Pt E E;, then
p = (O, ... ,O,Pt,O,O, ... ) E E'. Also, ify", = (O, ... ,O,y""O,O, ... ), then y",! 0
in E and so Pt' Ycr = P . Y cr ! O. This shows that E; ~ (Ed;;', and hence {Et , E;}
is a symmetric Riesz dual system for each t . •
Problem 5.4.10. Show that in an OLG model every competitive equilibrium

with respect to the Riesz dual system (0,0') is Malinvaud optimal. Conclude
that in an OLG model with symmetric Riesz dual systems, Malinvaud optimal
allocations exist.
Solution: Let (xt} be a competitive equilibrium in an overlapping generations
model supported by a price 0 < p = (pi, p2 , ... ) E E'. Also, assume by way
of contradiction that (xt) is not Malinvaud optimal. So, there exists another
allocation (y t) satisfying
a. Yt =Xt for all but a finite number of t,
b. Yt !:t Xt for all t, and
c. Yt >-t Xt for at least one t.
From (a), it follows that there exists some k such that Yt =
Xt for every
t > k. Since
2::0 Yt = 2::0 Xt, we see (as in the footnote in the solution to
Problem 5.3.2) that
Ie Ie
LYt = LXt.
t::O t::O
From (b) and (c), we see that p. Yt ~ P . W t for each t and p . Yt > P . W t for some
o ~ t ~ k. Since (according to [3, Theorem 5.15, p. 235]) we have p . X t = P . W t
for each t, it follows that p. Yt ~ p. Xl for each t and p . Yl > p . X t for some
o ~ t ~ k. Hence
which contradicts (*). Thus, every OLG competitive equilibrium is Malinvaud

optimal.
Since every OLG model with symmetric Riesz dual systems has a competitive
equilibrium, the above conclusion shows that every OLG model with symmetric
Riesz dual systems also admits a Malinvaud optimal allocation .•
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Index
absolute value of vector, 81 compact production economy, 174

absolute weak topology, 100 competitive allocation, 127
absorbing set, 209 competitive equilibrium, 127, 227
aggregate production set, 77, 169 comprehensive from above set, 132
algebraic operations, 94 comprehensive from below set, 132
allocation, 169, 205, 226 cone, 77
approximately supported, 184 open, 117
competitive, 127 continuous set, 179
core, 127, 170 convex combination
feasible, 191 proper, 7
individually rational, 127 core, 49, 170
Malinvaud optimal, 214 finite, 221
OLG,I99 of game, 49
Pareto optimal, 127, 186 core allocation, 127, 170
Pareto optimal in OLG, 214 correspondence
quasiequilibrium, 55 excess demand, 44, 72
Walrasian, 127
wea.kly Pareto optimal, 127, 186 Decomposition Property, 91
wea.kly Pareto optimal in OLG, 216 decreasing net, 93
approximate quasiequilibrium, 133 Dedekind complete Riesz space, 89
approximate Walrasian equilibrium, 182 demand
approximately supported allocation, 184 correspondence, 38
associative law, 81 demand correspondence, 38
asymptotic limit, 231 disjoint complement of set, 95
atom, 92 distributive laws, 83, 88
B-Iattice with order continuous norm, 109 economy

balanced family, 52 exchange, 116
balanced game, 52 private ownership production, 168
balanced set, 209 production, 168
Banach lattice, 84 pure exchange, 116
Banach space replica, 176
reflexive, 109 Edgeworth equilibrium, 62, 177, 221
band,95 element
maximal,29
Cantor set, 122 equal treatment property, 222
carrier of functional, 98 equilibrium, 127
Cauchy-SchWaN inequality, 23 approximate, 182
chain, 147 competitive, 127
circled set, 209 Edgeworth, 62, 177, 221
coalition improving upon, 221 OLG,2oo
coalition improving upon an allocation, 170 quasi,55
Cobb-Douglas utility function, 35 Walrasian, 127, 176, 200
246 Index
equilibrium price, 44 lattice operations, 94

excess demand correspondence, 44, 12 law
exchange economy, 116 associative, 81
pure, 116 distributive, 83
lexicographic ordering, 81
f-core, 221 lexicographic plane, 88
feasible allocation, 191 limit
feasible assignement, 110 asymptotic, 231
feasible consumption set, 169 linear functional
feasible production set, 169 posi ti ve, 84
finite core, 221 strictly positive, 84
Finite Dimensional Separation Theorem, 102 supporting preference, 22
Frechet lattice, 124 supporting set, 22
function linear topology
open, 106 order continuous, 119
order continuous, 94 locally non-satiated preference, 56
positively homogeneous, 98
~emacher, 155 Mackey topology, 152
Sgn, 155 Malinvaud optimal allocation, 214
social welfare, 16 matrix
subadditive, 98 negative definite, 3
sublinear, 98 negative semidefinite, 3
function space, 83 orthogonal, 3
functional supporting a set, 22 positive definite, 3
positive semidefinite, 3
game maximal element, 29
balanced, 52 Mean-Value Theorem, 4
translation, 52 monotone utility function, 115
general OLG model, 225
negative definite matrix, 3
Holder's inequality, 143 negative part of vector, 81
Hahn-Banach Theorem, 98 negative semidefinite matrix, 3
net
ideal,96 decreasing, 93
null,98 increasing, 93
income, 169 order convergent, 93
increasing net, 93 norm
individually rational allocation, 121 lattice, 83, 101
inductive limit topology, 209 order continuous, 109
inequality normed Riesz space, 84, 101
Cauchy-Schwarz, 23 null ideal of functional, 98
Holder's, 143
triangle, 81 OLG allocation, 199, 205
Infinite Dimensional Separation Theorem, supported by price, 200
106 OLG competitive equilibrium, 200, 221
infinite distributive laws, 88 OLG model, 191
input, 168 general, 225
interval, 93 OLG price, 199
open cone, 111
Lagrange's method, 1 open mapping, 106
Lagrange's multipliers, 1 operator
lattice isomorphic Riesz spaces, 83 strictly positive, 110
lattice norm, 83, 101 order complete Riesz space, 89
Index 247
order continuous function, 94 Riesz dual system, 100

order continuous topology, 119 symmetric, 158, 241
order convergent net, 93 Riesz space, 81
order dense Riesz subspace, 95 Dedekind complete, 89
order interval, 93 normed, 84, 107
ordering order complete, 89
lexicographic, 87 uniformly complete, 113
orthogonal matrix, 3 Riesz subspace
output, 168 order dense, 95
Pareto optimal allocation, 127, 186 Separation Theorem, 102, 106

Pareto optimal allocation in OLG, 214 Infinite Dimensional, 106
positive definite matrix, 3 sequence
positive linear functional, 84 uniformly Cauchy, 113
positive part of vector, 81 uniformly convergent, 113
positive semidefinite matrix, 3 set
positive vector e-Cantor, 122
strictly positive, 121 absorbing, 209
positively homogeneous function, 98 aggregate production, 169
pre-technology set, 189 balanced, 209
preference relation circled, 209
locally non-satiated, 56 comprehensive from above, 132
proper at a point, 117 comprehensive from below, 132
revealed, 78 cone, 77
strictly convex, 63 continuous, 179
supported by a price, 22 feasible consumption, 169
supported by functional, 22 feasible production, 169
uniformly proper, 116 pre-technology, 189
price solid,96
equilibrium, 44 Sgn function, 155
OLG,199 social welfare function, 16
supporting a function, 22 solid set, 96
supporting a preference, 22 space
Price supporting OLG allocation, 200 utility, 191
production economy, 168 strictly convex preference, 63
compact, 174 strictly positive linear functional, 84
production plan, 168 strictly positive operator, 110
production set strictly positive vector, 121
aggregate, 77 subadditive function, 98
uniformly proper, 190 sublinear function, 98
proper convex combination, 7 suportability of set by functional, 22
properness, 116 symmetric Riesz dual system, 158, 241
at. a point, 117
pure exchange economy, 116 Taylor's formula, 4
topology
quasi equilibrium, 55 inductive limit, 209
approximate, 133 Mackey, 152
translate of game, 52
Rademacher functions, 155 triangle inequality, 81
reflexive Banach space, 109
replica economy, 176 uniformly Cauchy sequence, 113
revealed preference relation, 78 uniformly complete Riesz space, 113
Riesz Decomposition Property, 91 uniformly convergent sequence, 113
248 Index
uniformly proper preference, 116

uniformly proper production sets, 190
utility function
Cobb-Douglas, 35
monotone, 115
utility space, 191
vector lattice, 81
Walrasian allocation, 121

Walrasian equilibrium, 121, 116, 200
approximate, 182
weak topology
absolute, 100
weakly Pareto optimal allocation, 121, 186
weakly Pareto optimal OLG allocation, 216
wealth,169
Studies in Economic Theory
Volume 4 Volume 2
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Professor Charalambos D. Aliprantis (Auth.) - Problems in Equilibrium Theory (1996, Springer)

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Professor Charalambos D. Aliprantis (Auth.) - Problems in Equilibrium Theory (1996, Springer)

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Problems in Equilibrium Theory

Springer-Verlag Berlin Heidelberg GmbH

Cataloging-in-Publication Data applied for

ISBN 978-3-642-08237-5 ISBN 978-3-662-03233-6 (eBook)

CSpringer-Verlag Berlin Heidelberg 1996

1. The Arrow-Debreu Model 1

2. Riesz Spaces of Commodities and Prices 81

3. Markets With Infinitely Many Commodities 115

4. Production With Infinitely Many Commodities 167

5. The Overlapping Generations Model 197

Bibliography . . . . . . . . . . . . . . . . . " 243

The Arrow-Debreu Model

Theorem (The Lagrange Multiplier Method) Let 0 be an open subset of

r = {x E 0: 9i(X) =0 for all i = 1, ... , m} .

1.1 Preferences and utility functions

Problem 1.1.1. Consider the relation t on 1R~ defined by x t y whenever

This shows that a symmetric matrix A is negative (resp. positive) semidefinite if

f'(x) = Vf(x) = (8~1~), ... , 8££~)) and f"(x) = [:~£~:]] .

Solution: Assume that C is a non-empty, open and convex subset of Rl and

f(x - h) - f(x) =-f'(x)· h + ~h!,,(x)ht + o{lIhIl 2),

f(x + h) - 2f(x) + f(x - h) = h!"(x)h' + o{lIhIl2) . (*)

Assume now that f is concave and fix x E C. Then

f(x + h) - 2f(x) + f(x - h) = 2[!f(x - h) + ~f(x + h) - f(x)] ~ O.

This combined with (*) shows that

Now if y E JRl satisfies lIyll = 1, then by letting h = AY in (**) and dividing by

a· [g(y) - g(x)] =a· [Dg(z)(y - x)t] ,

where Dg(z) is the m x n matrix Dg(z) = [Bt~~)].

af(x) + (1 - a)f(y) - fez) a [f(x) - fez)] + (1 - a)[f(y) - fez)]

af(x) + (1 - a)f(y) - fez) = a(1 - a)(A - J-l)(x - y)f"(t)(x - y)t :5 o.

According to the discussion preceding this problem, we may reformulate the

af(s) + (1- a)f(t) - f(r) = a[f(s) - f(r)] + (1- a)[f(t) - f(r)]

The Mean-Value Theorem guarantees once more the existence of some eE «, T)

af(s) + (1- a)f(t) - f(r) =a(l- a)(t - S)(T - ()!"(e) < 0.

Problem 1.1.4. Show that the function f: [0,00) -+ It defined by f(x) = x 2 is

f(~2 + ~4) = 9 < 10 = ~f(2) + ~f(4)

also shows that f is not concave.

j(ax + (1- a)y) [ax + (1 - a)y] 2 = a 2x 2 + 2a(l- a)xy + (1 _ a)2y2

shows that f is indeed a strictly quasi-concave function. _

Problem 1.1.5. For a utility function u: C - JR, where C is a convex subset

1. U is quasi-concave if and only if

u( L>~iXi) ~ min{ U(Xi): i = 1, ... , n}

holds for each convex combination E~1 Cl:iXi of C.

2. U is strictly quasi-concave if and only if

U(L:Cl:iXi) >min{u(xi): i=l, ... ,n}

holds for each proper convex combination E?=1 Cl:iXj of C.

3. U is concave if and only if

holds for each convex combination E~1 aiXi of C.

4. U is strictly concave if and only if

u(L:aixi) > L:aiu(Xi)

holds for each proper convex combination E?=1 ajXj of C.

Solution: Recall that a convex combination E~=l Cl:iXi is said to be a proper

is a convex combination of n elements of C. Therefore, the quasi-concavity of u

> min{ u(xn+1)' u(2: 1-~~+1 Xi)}

Problem 1.1.6. Let t be a preference relation defined on a topological space X.

hypothesis that ax + (1 - a)y ~ y. Therefore,

and so ay + (1 - a)z ~ x. This proves that t is strictly convex .•

Indifference curve passing through s

Put e = (1,1, ... ,1) and define u: JR.~ -+ JR. by

we are guaranteed that u(x) > O.

3) The utility function u represents t and is continuous.

Problem 1.1.9. Consider the five preference relations on R~ defined by the

U2 (ax + (1 - a)y) 2: min {U2(X), U2(y)}