In general equilibrium we search for a price vector that clears all markets
simultaneously. An allocation xx = (xx 1, ... , xx N) together with a price vector p* is a Walrasian (or competitive) equilibrium of the exchange economy if:
To guarantee the existence of a Walrasian equilbrium, we assume that the
consumers preferences are: 1. Strictly convex: Strict convexity implies that for any price vector p > 0, consumer is utility maximization problem has a unique optimal solution that we denote by xi (p) (=Marshallian D). i) When preferences are strictly convex, p* is a Walrasian equilibrium price only if zx (p*) = 0. i.e If price vector clears even one market, it clears all the markets in the economy. 2. Monotone: Monotonicty implies that p xi (p) = p wi , or that p zi (p) = 0 (the consumer uses his entire budget). A typical lottery will be denoted by L = (x1, ... , xn ; p1, ... , pn) &