ECON 1203 Tutorial Sample Solutions

Semester 1 2016
Weeks 3 and 4
1. (a) Explain what it means to say that two probabilistic events in a sample space are mutually
exclusive of one another.
If two events lets call them A and B are mutually exclusive, then it means that they do not
have any simple events in common: i.e., that the simple events that combine to make up A
have no elements in common with those that make up B.
(b) Explain what it means to say that two probabilistic events in a sample space are independent
of one another.
When two events are independent of one another, it means that the effect of conditioning on
the occurrence of one of them has no effect of the marginal probability of the other: i.e.,
Pr(A/B) = Pr(A).
(c)

Why can two events not at the same time be both mutually exclusive and independent of one
another?
Because if A and B are mutually exclusive, then Pr(A and B) = 0, whereas if they are
independent, Pr(A and B) = Pr(A)*Pr(B) 0.

2. A department store wants to study the relationship between the way customers pay for an item and
the price of the item. 250 transactions are recorded and the following table is formed.
Price category
Payment
Cash
Credit card
Debit card
Under $20
15
9
18
$20-$100
11
53
52
Over $100
6
38
48
Convert the table to a joint distribution. Express each of the following questions in terms of
probability statements, and then solve:
Joint distribution:
Price category
Means of Payment
Cash

Credit card

Debit card

Marginal

Under $20

0.06

0.036

0.072

0.168

$20-$100

0.044

0.212

0.208

0.464

Over $100

0.024

0.152

0.192

0.368

Marginal

0.128

0.4

0.472

(a) What is the probability that an item is under $20?

P(Under $20) = 0.168
(b) What is the probability that an item with a price tag of $43 is paid for in cash?
P($20-$100 and cash) = 0.044
(c) What is the probability that people pay for an item that is at least $20 by credit?
P($20 and credit) = 0.212 + 0.152 = 0.364
(d) If somebody used a debit card to pay for an item, what is the probability that the item was less
than $100?
P(<$100|debit) = (0.072+0.208)/0.472 = 0.593
(e) Are price and means of payment independent?
One way to check is to compare the marginal distribution of price with the conditional
distribution of price given a particular payment type (say, cash):
P($20-$100|cash) = 0.344
This implies dependence.

P(($20-$100) = 0.464

3. In a small batch of 20 manufactured widgets, there are, in fact, 3 defective ones. You, as quality
control officer for the company making the widgets, decide to examine a sample of 3 widgets,
selected without replacement, to see how many defective ones are selected.
(a) Use a probability tree to evaluate the probability distribution of the number of defectives
sampled.

The tree is of the obvious kind with the first branch from a branch where the probability of
defective is 0.15 and not defective is 0.85. From the upper of these branches at the next node the
probability of defective being selected is 2/19 and non-defective is 17/19. From the lower first
branch, the probability of a defective is 3/19 and of a non-defective is 16/19. From the nodes at
the end of the 4 second branches, the 8 probabilities of defective and non-defective are,
respectively, 1/18, 17/18, 2/18, 16/18, 2/18, 16/18, 3/18 and 15/18.
Since draws are made independently each time, the relevant probability distribution of X, the
number of defectives drawn in a sample of 3 without replacement, is
x

P(X = x)

680/1140

408/1140

51/1140

1/1140

P(X=x) = 1

(b) How would your answer change if the sampling were done with replacement?
The resultant probability distribution is now
x

P(X = x)

4913/8000

2601/8000

459/8000

27/8000

P(X=x) = 1

4. Work through problem 16 on page 200 of Sharpe (Chapter 5).

5. Work through problem 18 on page 200 of Sharpe (Chapter 5).
(b) The radio announced is referring to the so-called law of averages, which is a mistaken
belief that probability will compensate in the short term for odd occurrences in the past. At
face value, the weather is not more likely to be bad in the winter because of a few sunny days
in autumn. The only way that such a statement could be justified would be with reference to
some type of global weather event that affects weather patterns in both winter and summer,
such as El Nino/La Nina.
(c) Standard statistics says that there is no such thing as being due for a hit (the statement
being based on the so-called law of averages): the batters chance for a hit should not
change based on recent successes or failures. The only way that such a statement could be
justified would be through some sort of psychological or physiological process that causes
repeated performances to be correlated in some way (e.g., the players frustration grows when
his performance starts to streak poorly, causing him to work harder to get a hit the next
time).
6. Work through problem 44 on page 203 of Sharpe (Chapter 5).
(b) Her thinking is correct. There are 14 boxes left, of which 10 are mens bikes and only 4 are
womens bikes.
(c) This is not an example of the Law of Large Numbers. The box selections are not independent
of each other: the boxes are not put back into the choice set once they are opened.
7. The manager of a factory has determined from past experience that X, the number of repairs required
to machines in her factory on any one day, has the following probability distribution:
x
P(X = x)

0.41

0.25

0.18

0.10

0.06

Calculate the following:

(a)

P(1 < X < 4)

P(1 < X < 4) = P(X=2)+P(X=3) = 0.18+0.10 = 0.28

(b)

P(0 X 3)

P(0 X 3) = P(X=0)+P(X=1)+P(X=2)+P(X=3) = 1-P(X=4) = 0.94

(c)

E(X)

() = = ( = )

(d)

= 0 0.41 + 1 0.25 + 2 0.18 + 3 0.1 + 4 0.06 = 1.15

Var(X)

() = ( )2 = 2 = ( )2 ( = )

= (0 1.15)2 0.41 + (1 1.15)2 0.25 + (2 1.15)2 0.18 + (3 1.15)2 0.10 + (4 1.15)2

0.06 = 1.5075
(e)

What is the conditional probability distribution of X, conditional on some positive number of

repairs taking place?
x

P(X = x|x>0)
(f)

0.42

0.31

0.17

0.10

Describe at least one business decision the manager might face that would be impacted by the
information in the original table of unconditional probabilities.
Many different ideas are plausible here. Decisions to do with how many spare parts to have
in stock, and how many repair technicians to have on call at any one time, are obvious ones.

(g)

Describe at least one business decision the manage might face that would be impacted by the
information in the table of conditional probabilities.
Again, many different ideas are plausible, with the key aspect that the decisions affected must
have to do with a response to information about a repair call being observed (since these are
conditional probabilities): for example, whether additional spare parts or additional
technicians must be sourced immediately once it becomes known that a repair call has been
made.

8. Suppose that the daily number of errors a randomly-selected bank teller makes is denoted by X and
follows the distribution given in the table below. A human resource manager records the daily
numbers of errors of two randomly selected tellers. Denote the associated random variables by X1
and X2. As the selection is random, X1 and X2 are independent and follow the same distribution as X.
+
The manager then computes the sample mean = 1 2 2 where the sample size is n = 2.
X

P(X = x)

0.6

0.2

0.2

(b) Find the mean and variance of X1. Explain why we do not need to find the mean and variance of
X2 once we know those of X1.
(1 ) = 0.6; (1 ) = 0.64

The mean and variance of X2 are the same because they have identical distributions.
(c) Since X1 and X2 are random, so is . Find the mean and variance of the random variable .
Compare these with the result from (a) and comment. Hint: you will find it useful to note that
(1 , 2 ) = 0 because X1 and X2 are independent. This simplifies the evaluation of the

variance of the random variable .

+
1
1
() = 1 2 2 = 2 (1 ) + 2 (2 ) = 0.6

() =

1 + 2
1
1
= (1 ) + (2 ) = 0.32
2
4
4

The means of and X are the same, and the variance of is the variance of X divided by 2 (the sample
size).
(d)

Find the possible values that may take. Hence list the probability distribution of for
samples of size 2. (This is known as the sampling distribution of ).

If n=2 then the possible values for the mean are 0, , 1, 3/2, 2.

We know the possible values for the mean are 0, , 1, 3/2, 2. Now we need to assign probabilities to each
outcome to produce the probability distribution for the sample mean.
For example, ( = 0) = (1 = 0, 2 = 0) = 0.6 0.6 = 0.36

The following table lists all possible outcomes and their associated probabilities:
1 , 2

Probability

0,0

0.36

0,1

0.12

0,2

0.12

1,0

0.12

1,1

0.04

1,2

3/2

0.04

2,0

0.12

2,1

3/2

0.04

2,2

0.04

The required probability distribution is therefore:

( = )
(e)

1/2

3/2

0.36

0.24

0.28

0.08

0.04

Examine briefly what would happen if n =3, 4, ? For this last sub-question, you will need
to use the idea of a factorial of an integer n, labelled !, which means n multiplied by every
positive integer smaller than itself. So, for example, 3! = 3 2 1 = 6. Also recall the
combinatorial formula for the number of ways of selecting x from n distinct objects (Sharpe
page 193): Cxn = !/( )! !.

1
If n=3, the possible values are 0, 1/3, 2/3, 1, 4/3, 5/3, 2. In combinatorial form, = 3 = 13 (0.6)2 . 0.2.
To understand this, note that the mean can only be 1/3 if two tellers make no errors and the remaining one
makes 1 error, and the combinatorial formula is used to account for the fact that the teller who makes 1
error can be the first, the second or the third sampled teller.

As n increases, we get a finer grid of values between the extremes of 0 and 2.

9. A student has enrolled in three courses in this semester. Lets call them courses A, B and C. Her
chances of passing each course are 0.8, 0.65, and 0.5, respectively. Passing each course is assumed
to be independent of passing other courses. Answer the following:
(b) Define a random variable for each course outcome.
A=0 (fail A) & A=1 (pass A)
B=0 (fail B) & B=1 (pass B)
C=0 (fail C) & C=1 (pass C)
(c) What is the probability that this student passes exactly two courses? Express this question in
terms of probability statements, and then solve.
P(passing two courses) = P(pass A & B but fail C)+ P(pass A & C but fail B)+ P(pass C & B but fail A)=0.8
0.65 (1 0.5) + 0.8 0.5 (1 0.65) + 0.65 0.5 (1 0.8) = 0.465

(d) What is the probability that this student fails at least one course? Express this question in terms
of probability statements, and then solve.

P(failing at least one course) = 1 P(passing all courses)

= 1 0.8 0.65 0.5 = 0.74
(e) How reasonable is the assumption of independence?

Independence is likely to be an unreasonable assumption. Results are likely to be dependent (strong positive
association) because most of the variability in course outcomes across students is due to idiosyncratic
factors about the student him/herself i.e., working hard, being motivated, being of high academic ability.
The importance of these factors means that there is strong within-student correlation of marks in different
courses.
10. Let X be the number of heads in 4 tosses of a fair coin.
(b) What is the probability distribution of X?

X can take on values 0, 1, 2, 3,or 4. Now we need all possible combinations that will produce each
of these outcomes.
possible combinations over n=4 tosses. (This is the notation used in Sharpe, e.g.,
on page 221. Equivalent notation that is sometimes used is .)
(TTTT) [4C0=1]
(HTTT) (THTT) (TTHT) (TTTH) [4C1=4]
(HHTT) (HTHT) (HTTH) (THHT) (THTH) (TTHH) [4C2=6]
(THHH) (HTHH) (HHTH) (HHHT) [4C3=4]
(HHHH) [4C4=1]
nCk

Value of X
0
1
2
3
4

Each of these combinations are equally likely because on any toss of a fair coin, P(H) = P(T) = 0.5 and
were assuming outcomes are independent
P(TTTT) = P(HTTT) = .= P(HHHH) = (0.5)4 = 0.0625
The required probability distribution becomes:

( = )

0.0625

0.25

0.375

0.25

0.0625

(c) What are the mean and variance of X?

E(X)
Var(X)

0 + 10.25 + 20.375 +30.25 +40.0625

(-2)20.0625+(-1)20.25+0+(1)20.25 +(2)20.0625

(d) Consider a game where you win $5 for every head but lose $3 for every tail that appears in 4 tosses
of a fair coin. Let the variable Y denote the winnings from this game. Formulate the probability
distribution of Y based on the probability distribution of X.
The general formula for determining Y from X is Y = 5X 3*(4-X). Plugging in, when X=0, you lose 12,
and so on. Hence:
y

- 12

P( Y = y)
(e)

0.0625

-4
0.25

4
0.375

12
0.25

20
0.0625

What is the expected value of Y? Would you like to play this game? If so, why? If not, why
not?

Directly from the formula given in part (c), we have:

E(Y)

5E(X) 3[4-E(X)]

10 12 +6 = 4

or
E(Y)

-120.0625 40.25 + 40.375 +12.025 +200.0625

4,

where the latter calculation comes directly from the probability distribution of Y given in the table
constructed in part (c). (The two evaluations, of course, give the same value!)
If you play the game enough times you would expect to win $4 per game on average. Thus, this is not a fair
game (since in a fair game, expected returns are zero) but it is biased towards the player. This is unlike
games in casinos where expected winnings are negative, meaning the game is biased towards the house.
Notice on any one play of the game you still might lose money and hence someone who is extremely risk
averse might not want to play the game even though on average, over many plays of the game, they should
win money.
11. Work through problem 41 on page 234 of Sharpe (Chapter 6).