In a pure exchange economy, there are J agents, and d goods. Agent j initially holds an endowment xj∈Rd of the d different goods, j=1,…,J. Agent j has preferences given by a concave utility function Uj:Rd→R which is strictly increasing in each of its arguments, and is twice continuously differentiable. Thus agent j prefers y∈Rd to x∈Rd if and only if Uj(y)⩾Uj(x).
The agents meet and engage in mutually beneficial trades. Thus if agent i holding zi meets agent j holding zj, then the amounts zi′ held by agent i and zj′ held by agent j after trading must satisfy Ui(zi′)⩾Ui(zi),Uj(zj′)⩾Uj(zj), and zi′+zj′=zi+zj. Meeting and trading continues until, finally, agent j holds yj∈Rd, where
j∑xj=j∑yj
and there are no further mutually beneficial trades available to any pair of agents. Prove that there must exist a vector v∈Rd and positive scalars λ1,…,λJ such that
∇Uj(yj)=λjv
for all j. Show that for some positive a1,…,aJ the final allocations yj are what would be achieved by a social planner, whose objective is to obtain
maxj∑ajUj(yj) subject to j∑yj=j∑xj