Solution

ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2012/iii/paper-44/4/c/solution

Use the usual normalization , finite deterministic initial wealth , positive state-price density, and nonnegative consumption. The deflated asset prices are local martingales, so predictable stochastic integrability makes a zero-starting local martingale. Integrating part (b) gives
A nonnegative local martingale is a supermartingale: localize to martingales, apply Conditional Fatou lemma, and obtain the conditional expectation inequality and integrability. Therefore , and hence , are supermartingales. In particular,
This is supermartingale control of deflated consumption gains. Nonnegative consumption is essential to the lower bound; it is the ordinary meaning of a consumption rate here. Wealth nonnegativity alone would not supply that bound if arbitrary signed cash flows were allowed.

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