Consider the infinite-horizon model with IID returns and no labor income.

Denote the investor’s utility function by u(c).

(a) Case B: Assume there is a constant K such that −K ≤ u

(c) ≤ K for each

c. Show that the transversality condition (9.36) holds.

(b) Case N: Assume u

(c) ≤ 0 for each c and J(w) > −∞ for each w. Show that the transversality condition (9.36) holds. Hint: Use (9.38) and the definition of a value function to deduce that the limit in (9.36) is nonnegative.