Conditional Probability and Bayes Theorem

227. If a large competitor will buy a small firm, the firms stock will rise with probability
0.85. The purchase of the company has a 0.40 probability. What is the probability that the
purchase will take place and the firms stock will rise?
228. A financial analyst believes that if interest rates decrease in a given period, then the
probability that the stock market will go up is 0.80. The analyst further believes that interest
rates have a 0.40 chance of decreasing during the period in question. Given the above
information, what is the probability that the market will go up and interest rates will go down
during the period in question?
229. A bank loan officer knows that 12% of the banks mortgage holders lose their jobs and
default on the loan in the course of 5 years. She also knows that 20% of the banks mortgage
holders lose their jobs during this period. Given that one of her mortgage holders just lost his
job, what is the probability that he will now default on the loan?
230. An express delivery service promises overnight delivery of all packages checked in
before 5 P.M. The delivery service is not perfect, however, and sometimes delays do occur.
Management knows that if delays occur in the evening flight to a major city from which
distribution is made, then a package will not arrive on time with probability 0.25. It is also
known that 10% of the evening flights to the major city are delayed. What percentage of the
packages arrive late? (Assume that all packages are sent out on the evening flight to the major
city and that all packages arrive on time if the evening flight is not delayed.)
231. The following table gives numbers of claims at a large insurance company by kind and
by geographic region.
East South Midwest

West

Hospitalization

75

128

29

52

Physicians visit

233

514

104

251

Outpatient treatment

100

326

65

99

Compute column totals and row totals. What do they mean?

a. If a bill is chosen at random, what is the probability that it is from the Midwest?
b. What is the probability that a randomly chosen bill is from the East?
c. What is the probability that a randomly chosen bill is either from the Midwest?
or from the South? What is the relation between these two events?

d. What is the probability that a randomly chosen bill is for hospitalization?

e. Given that a bill is for hospitalization, what is the probability that it is from the
South?
f. Given that a bill is from the East, what is the probability that it is for a physicians
visit?
g. Given that a bill is for outpatient treatment, what is the probability that it is from
the West?
h. What is the probability that a randomly chosen bill is either from the East or for
outpatient treatment (or both)?
i. What is the probability that a randomly selected bill is either for hospitalization or
from the South (or both)?
232. One of the greatest problems in marketing research and other survey fields is the
problem of nonresponse to surveys. In home interviews the problem arises when the
respondent is not home at the time of the visit or, sometimes, simply refuses to answer
questions. A market researcher believes that a respondent will answer all questions with
probability 0.94 if found at home. He further believes that the probability that a given person
will be found at home is 0.65. Given this information, what percentage of the interviews will
be successfully completed?

233. An investment analyst collects data on stocks and notes whether or not dividends were
paid and whether or not the stocks increased in price over a given period. Data are presented
in the following table.

Dividends paid

Price

No Price

Increase

Increase

34

No dividends paid 85
Total

119

127

Total

78

112

49

134

246

a. If a stock is selected at random out of the analysts list of 246 stocks, what is the
probability that it increased in price?
b. If a stock is selected at random, what is the probability that it paid dividends?
c. If a stock is randomly selected, what is the probability that it both increased in price and
paid dividends?
d. What is the probability that a randomly selected stock neither paid dividends nor increased
in price?

e. Given that a stock increased in price, what is the probability that it also paid dividends?
f. If a stock is known not to have paid dividends, what is the probability that it increased in
price?
g. What is the probability that a randomly selected stock was worth holding during the period
in question; that is, what is the probability that it increased in price or paid dividends or did
both?
234. The following table lists the number of firms where the top executive officer made over
$1 million per year. The table also lists firms according to whether shareholder return was
positive during the period in question.
Top Executive

Top Executive

Made More

Made Less

than $1 Million

than $1 Million Total

Shareholders made money

Shareholders lost money

Total

10

a. If a firm is randomly chosen from the list of 10 firms studied, what is the probability that
its top executive made over $1 million per year?
b. If a firm is randomly chosen from the list, what is the probability that its shareholders lost
money during the period studied?
c. Given that one of the firms in this group had negative shareholder return, what is the
probability that its top executive made over $1 million?
d. Given that a firms top executive made over $1 million, what is the probability that the
firms shareholder return was positive?
235. According to Fortune, 90% of endangered species depend on forests for the habitat
they provide.7 If 30% of endangered species are in critical danger and depend on forests for
their habitat, what is the probability that an endangered species that depends on forests is in
critical danger?

Independence

236. According to USA Today, 65% of Americans are overweight or obese.8 If five
Americans are chosen at random, what is the probability that at least one of them is
overweight or obese?

237. The chancellor of a state university is applying for a new position. At a certain point in
his application process, he is being considered by seven universities. At three of the seven he
is a finalist, which means that (at each of the three universities) he is in the final group of
three applicants, one of which will be chosen for the position. At two of the seven universities
he is a semifinalist, that is, one of six candidates (in each of the
two universities). In two universities he is at an early stage of his application and believes
there is a pool of about 20 candidates for each of the two positions. Assuming that there is no
exchange of information, or influence, across universities as to their hiring decisions, and that
the chancellor is as likely to be chosen as any other applicant, what is the chancellors
probability of getting at least one job offer?
238. A package of documents needs to be sent to a given destination, and delivery within
one day is important. To maximize the chances of on-time delivery, three copies of the
documents are sent via three different delivery services. Service A is known to have a 90%
on-time delivery record, service B has an 88% on-time delivery
record, and service C has a 91% on-time delivery record. What is the probability that at least
one copy of the documents will arrive at its destination on time?
239. The projected probability of increase in online holiday sales from 2004 to 2005 is 95%
in the United States, 90% in Australia, and 85% in Japan. Assume these probabilities are
independent. What is the probability that holiday sales will increase in all three countries
from 2004 to 2005?
240. An electronic device is made up of two components A and B such that the device
would work satisfactorily as long as at least one of the components works. The probability of
failure of component A is 0.02 and that of B is 0.1 in some fixed period of time. If the
components work independently, find the probability that the device
will work satisfactorily during the period.
241. A recent survey conducted by Towers Perrin and published in the Financial Times
showed that among 460 organizations in 13 European countries, 93% have bonus plans, 55%
have cafeteria-style benefits, and 70% employ home-based workers. If the types of benefits
are independent, what is the probability that an organization
selected at random will have at least one of the three types of benefits?
242. Credit derivatives are a new kind of investment instrument: they protect investors from
risk.9 If such an investment offered by ABN Amro has a 90% chance of making money,
another by AXA has a 75% chance of success, and one by the ING Group has a 60% chance

of being profitable, and the three are independent of each other, what is the chance that at
least one investment will make money?
243. In problem 242, suppose that American investment institutions enter this new market,
and that their probabilities for successful instruments are:
Goldman Sachs 70%
Salomon Brothers 82%
Fidelity 80%
Smith Barney 90%
What is the probability that at least one of these four instruments is successful? Assume
independence.

Mixed problems on conditional probability:

271. AT&T was running commercials in 1990 aimed at luring back customers who had
switched to one of the other long-distance phone service providers. One such commercial
shows a businessman trying to reach Phoenix and mistakenly getting Fiji, where a half-naked
native on a beach responds incomprehensibly in Polynesian. When asked about this
advertisement, AT&T admitted that the portrayed incident did not actually take place but
added that this was an enactment of something that could happen.12 Suppose that one in
200 long-distance telephone calls is misdirected. What is the probability that at least one in
five attempted telephone calls reaches the wrong number? (Assume independence of
attempts.)

272. Refer to the information in the previous problem. Given that your longdistance
telephone call is misdirected, there is a 2% chance that you will reach a foreign country (such
as Fiji). Suppose that I am now going to dial a single long-distance number. What is the
probability that I will erroneously reach a foreign country?
273. The probability that a builder of airport terminals will win a contract for construction of
terminals in country A is 0.40, and the probability that it will win a contract in country B is
0.30. The company has a 0.10 chance of winning the contracts in both countries. What is the
probability that the company will win at least one of these
two prospective contracts?
274. According to BusinessWeek, 50% of top managers leave their jobs within 5 years.13 If
25 top managers are followed over 5 years after they assume their positions, what is the

probability that none will have left their jobs? All of them will have left their jobs? At least
one will have left the position? What implicit assumption are
you making and how do you justify it?

275. The probability that a consumer entering a retail outlet for microcomputers and
software packages will buy a computer of a certain type is 0.15. The probability that the
consumer will buy a particular software package is 0.10. There is a 0.05 probability that the
consumer will buy both the computer and the software package. What
is the probability that the consumer will buy the computer or the software package or both?
276. The probability that a graduating senior will pass the certified public accountant (CPA)
examination is 0.60. The probability that the graduating senior will both pass the CPA
examination and get a job offer is 0.40. Suppose that the student just found out that she
passed the CPA examination. What is the probability that she will be offered a job?
277. Two stocks A and B are known to be related in that both are in the same industry. The
probability that stock A will go up in price tomorrow is 0.20, and the probability that both
stocks A and B will go up tomorrow is 0.12. Suppose that tomorrow you find that stock A did
go up in price. What is the probability that stock B went up
as well?
278. The probability that production will increase if interest rates decline more than 0.5
percentage point for a given period is 0.72. The probability that interest rates will decline by
more than 0.5 percentage point in the period in question is 0.25. What is the probability that,
for the period in question, both the interest rate will decline
and production will increase?