Econ 250 Fall 2010

Due at November 16
Assignment 2: Binomial Distribution, Continuous Random Variables and
Sampling

1. Suppose a firm wishes to raise funds and there are a large number of independent
financial lenders who might lend from 0 to $10 million dollars each. The total amount
raised follows a uniform distribution from 0 to $10n million dollars, where n is the
number of lenders. If the firm is to have at least 80% chance of raising at least $100
million dollars what is the minimum number of lenders that should be contacted?
Solution: This is a uniform distribution question. Let X be the total amount raised.
X is distributed uniformly on [0,10n].
1
The density function is: f (x) = 10n
The probability of raising more than $100 is at least 80%
P (X > 100) = 1 P (X < 100) = 1

100
80%
10n

n 50
At least 50 lenders should be contracted.
2. The probability that a person catches a cold during the cold and flu season is 0.4.
Assume that 10 people are chosen at random.
Solution: This is a binomial question. A success occurs when a person catches a
cold during the cold and flu season. The probability of a success is 0.4. Let X be the
number of successes in 10 people.
(a) What is the probability that exactly 4 people have the flu?
P (X = 4) = (

10
)(0.4)4 (0.6)6 = 0.2508
4

(b) What is the probability that between 2 and 5 people inclusive have the flu?
P (2 X 5) = P (X 5) P (X 1) = 0.834 0.046 = 0.788
(c) What is the expected number of people with the flu and what is its variance?
E[X] = = np = 10 0.4 = 4
V [X] = 2 = np(1 p) = 2.4
1

(d) Approximate your answer in (b) using the normal approximation with and without
continuity corrections.
Without continuity correction:
24
54
X
P (2 X 5) P (
)

2.4
2.4
= P (1.2910 Z 0.6455)
= F (0.6455) (1 F (1.2910))
= 0.7406 (1 0.9015) = 0.6421
With continuity correction:
5.5 4
X
1.5 4

)
P (2 X 5) P (

2.4
2.4
= P (1.6137 Z 0.9682)
= F (0.9682) (1 F (1.6137))
= 0.834 (1 0.9463) = 0.7803
3. The following table displays the joint probability distribution of X and Y.
X/Y
0
1
2

0
.13
.16
.07

1
2
.08 .02
.14 .23
.04 .13

Solution:
(a) What is the covariance and correlation between the X and Y? Are these variables
independent? Explain.
X
E[X] = X =
xP (x) = 1.01
X
E[Y ] = Y =
yP (y) = 1.02
X
V [X] = X 2 =
(X X )2 P (x) = 0.4699
X
V [Y ] = Y 2 =
(Y Y )2 P (y) = 0.7396
XX
Cov(X, Y ) = E(XY ) X Y =
xyP (x, y) X Y = 0.1698
X

0.1698
Cov(X, Y )

=
= 0.2880
Corr =
X Y
0.4699 0.7396

(b) Calculate the mean and variance of D

D = 2 + 4X 2Y
E(D) = 2 + 4E(X) 2E(Y ) = 2 + 4(1.01) 2(1.02) = 4
V [D] = 42 V [X] + 22 V [Y ] 2(4)(2)Cov(X, Y )
= 16(0.4699) + 4(0.7396) 16(0.1698) = 7.76
(c) Write out the joint cumulative distribution.
F(X,Y) F(X,0) F(X,1) F(X,2)
F(0,Y)
0.13
0.21
0.23
F(1,Y)
0.29
0.51
0.76
F(2,Y)
0.36
0.62
1
4. Suppose we know the number of sales X by any sales person follows a normal distribution with a mean of 61.7 and a standard deviation of 5.2.
Solution: X N (61.7, 5.22 )
(a) What is P (62.5 < X < 64)?
64 61.7
62.5 61.7
<Z<
) = P (0.1538 < Z < 0.4423)
5.2
5.2
= F (0.44) F (0.15) = 0.67 0.5596 = 0.1104

P (62.5 < X < 64) = P (

3 < 64) where X

3 is the average sales from three (inde(b) What is the P (62.5 < X
pendent) sales persons?
61.7
3 < 64) = P ( 62.5 61.7 < Z < 64
P (62.5 < X
) = P (0.2665 < Z < 0.7661)
5.2/ 3
5.2/ 3
= F (0.77) F (0.27) = 0.7794 0.6064 = 0.173
(c) What is the value of k such that P (X > k) = 0.63?
F (0.33) 1 0.63
X = Z + = 0.33(5.2) + 61.7 = 59.984
(d) What is the value of k such that P (59 < X < k) = 0.54?
59 61.7
< Z < Zk ) = P (0.52 < Z < Zk )
5.2
= F (Zk ) (1 F (0.52)) = 0.54
F (Zk ) = 0.54 + 1 F (0.52) = 1.54 0.6985 = 0.8415
Zk 1

P (59 < X < k) = P (

Thus
k = Zk + = 1(5.2) + 61.7 = 66.9
3

5. Sales at a local electrical wholesaler consist of both over-the-counter sales as well as

deliveries. During the course of a month, over-the-counter sales have a mean of $96,780
with a standard deviation of $12,520. Over the same time period, deliveries average
$229,620 with a standard deviation of $234,100. Assume that over-the-counter sales
and deliveries have a correlation of .2.
Solution:
Let SC denote over-the-counter sales and SD denote deliveries.
SC N (96780, 125202 ) and SD N (229620, 2341002 )
Corr(SC , SD ) = 0.2
(a) What is the mean, variance and distribution of all sales S?
All sales S = SC + SD
E[S] = S = E[SC ] + E[SD ] = 96780 + 229620 = 326400
p
p
V [S] = s 2 = V [SC ] + V [SD ] + 2(Corr)( V (SC ))( V (SD ))
= 125202 + 2341002 + 2(0.2)(12520)(234100) = 5.613 1010
Now we can see that S N (326400, 5.613 1010 )
(b) What is the P (222, 900 < S < 240, 400)?
240, 400 326400
222, 900 326400
<Z<
)
P (222, 900 < S < 240, 400) = P (
10
5.613 10
5.613 1010
= P (0.4369 < Z < 0.3630)
= F (0.4369) F (0.363) = 0.0294
6. Suppose X is uniform distribution over the interval 0 to 150.
(a) Find the mean and variance.
150 + 0
a+b
=
= 75
2
2
(b a)2
1502
=
=
= 1875
12
12

X =
2

(b) Find the value that leaves .05 in the lower tail and also the value that leaves .05
in the upper tail.
XL 0
XL = 7.5
150
150 XU
0.05 =
XU = 142.5
150
0.05 =

(c) Suppose that you do not know that the variable is uniform but are given the mean
and variance from (a). Calculate the same magnitudes for (b).

F (ZL = 1.645) = 0.05 XL = (1.645) 1875 + 75 = 3.7694

1 F (ZU = 1.645) = 0.05 XU = (1.645) 1875 + 75 = 146.2306

(d) Draw the two distributions to explain these results.
7. Two classes of statistics have grades that are normally and independently distributed
with C1 N (75, 12) and C2 N (80, 22).
(a) What is the expected difference and its variance?
C = C1 C2
The expected difference and its variance:
E[C] = C = E[C1 ] E[C2 ] = 75 80 = 5
V [C] = C 2 = V [C1 ] + V [C2 ] = 12 + 22 = 34
(b) What is the probability that the difference from picking 1 student from each class
is between -1 and 1?
1 (5)
1 (5)

<Z<
)
34
34
= P (0.6860 < Z < 1.0290) = F (1.03) F (0.69) = 0.0936

P (1 < C < 1) = P (

(c) To give the class the same mean as the second class, the professor adds 5 to all
grades. Explain why this does not leave the two classes equivalent. Which class
would you prefer to be in?
8. A car company says their car gets a mean of 45km per liter with a standard deviation
of 6. Suppose we assume a normal distribution.
Solution:
(a) Suppose some sales representative claims you will get at least 47 80% of the time,
what can you tell him?
1
47 45
) = P (Z ) = 1 F (0.333) = 0.3707
6
3
4 < 46).
(b) If we have 4 cars and take the average, calculate the P (44 < X
P (X 47) = P (Z

45
46 45
4 < 46) = P ( 44
<Z<
)
P (44 < X
6/ 4
6/ 4
= P (0.3333 < Z < 0.3333) = F (0.33) (1 F (0.33))
= 2(0.6293) 1 = 0.2586
5

9. Suppose you wish to drive across a country that is 2625 km wide and you intend to
rent a series of cars from Rent-A-Wreck. The distance that the first car they give you
is normally distributed with a mean distance of 1500km and a variance of 500km. Each
subsequent car you rent gets 50% less km on average than the previous one with a 75%
reduction in the variance.
(a) Try to formulize this problem.
(b) What is the probability that the trip can be done using exactly 2 cars?
(c) What is the probability that you do the trip with more than 3 cars?
(d) If each car costs $100 what is the expected cost of the trip?
(e) Approximate the expected length of the farthest trip that can be taken.
Let Xi be the distance travelled by car i
X1 N (1500, 500)
X2 N (750, 125)
X3 N (375, 31.5)
...
and so on
Consider the first car
1
>
P (X1 > 2625) = P ( X1
1

26251500

)
500

P (Z > 50.3) 0

Consider the distance traveled by the first car and then the second car
2 (1 +2 ) >
P (X1 + X2 > 2625) = P ( X1 +X
2
2
1 + 2

2625(1500+750)

)
500+125

P (Z > 15) 0

Now the third car:

P (X1 + X2 + X3 > 2625)
2 +X3 (1 +2 +3 ) >
= P ( X1 +X
2
2
2
1 + 2 + 3

2625(1500+750+375)

)
500+125+31.5

P (Z > 0) = 0.5

So
n=3
Expected cost of the trip is $300.
Farthest trip possible T (geometric series)
T = X1 + X2 + X3 + ... =

1
X1
1 0.5

E[T ] = 2 1500 = 3000