Review of Appendicies

Week 1

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 Appendix A: Summation notation

n
Sum 1: The sum of n values is x  x  x
i 1
i 1 2   xn
n n
Sum 2: If a is a constant then  axi  a xi
ni 1 i 1

Sum 3: If a is a constant then  a  a  a   a  na

i 1
n n n
Sum 4: If X and Y are two var., then  ( xi  yi )  xi   yi
i 1 i 1 i 1
 Appendix A: Summation notation
Sum 5: If X and Y are two var., then
n n n
 (axi  byi )  a xi  b yi
i 1 i 1 i 1

Sum 6: The arithmetic mean (average) of n values of X is:

n
 xi x1  x2   xn
x i 1

n n

Sum 7: A property of the average is that:

n n n n n n
 ( xi  x )   xi   x   xi  nx   xi   xi  0
i 1 i 1 i 1 i 1 i 1 i 1
Appendix A: Properties of Linear Functions
Appendix A: Properties of Linear Functions
Appendix A: Properties of Linear Functions
Appendix A: Differential Calculus
 Appendix A: Differential Calculus examples
y = a + bx1 + cx2, y = a + bx1 + cx2 + dx1x2, y = a + bx12 + cx2
Appendix A: Natural Logarithm
Appendix A: Natural Logarithm. Fact 6
Appendix A: Exponential function
Appendix B: Random Variables
X is a random variable if it represents a random
draw from some population

a discrete random variable can take on only

selected values
a continuous random variable can take on any
value in a real interval

associated with each random variable is a

probability distribution
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Random Variables – Examples
the outcome of a coin toss – a discrete
random variable with P(Heads)=.5 and
P(Tails)=.5

the height of a selected student – a

continuous random variable drawn from an
approximately normal distribution

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 P.1
Random Variables
Probability Distributions

In a large number of trials

X is the number in the cell, X = {1,2,3,4}
Y is the color, Y = {0 if white, 1 if blue}
 X = 3, 30% of the time

 Denote Probability as Prob(stuff) or P(stuff)

 P(X =3) = .3

 P(Y =1) = .4
 P.1
Random Variables Probability Distributions
We summarize the probabilities of possible
outcomes using a probability density function
(pdf )
 The pdf for a discrete random variable indicates

the probability of each possible value occurring

 For a discrete random variable X the value of

the pdf f(x) is the probability that X takes the

value x, f(x) = P(X = x)
 f(3) = P(X =3) = .3
 It must be true that 0 ≤ f(x) ≤ 1
f(x1) + f(x2) + … + f(xn) = 1
 P.1
Random Variables Probability Distributions
 P.1
Random Variables Probability Distributions
The cumulative distribution function (cdf ) is an alternative
way to represent probabilities
 The cdf of the random variable X, denoted F(x), gives the

probability that X is less than or equal to a specific value x:

F  x  P  X  x
 Example: Using the pdf f(x), we compute the probability
that X is less than or equal to 2 as:
F  2  P  X  2  P  X  1  P  X  2   0.1  0.2  0.3
 P.2
Probability
Distributions Probability Distributions
pdf, of a continuous random variable at a specific
point is zero

So for a pdf, areas under a curve represent

probabilities that X falls in an interval, such as:
P 100  X  200   F  200   F 100   0.90291  0.72747
Eq. P.3  0.17544
Remember that F(number) indicates the cdf
 P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities

Working with more than one random variable requires a joint

probability density function
– A joint probability is about the probability of two events
occurring simultaneously

• Example: the selection takes the value X = 2 and Y = 1 in

Table P.3 (Y=0 means white, Y=1 means blue)
• We can write this as:
P  X  2 and Y  1  P  X  2, Y  1  f  x  2, y  1  0.1
 P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities

Given a joint probability density function, we can

obtain the probability distributions of individual
random variables, which are also known as marginal
distributions
– The probability that Y = 1 is:

P Y  1  fY 1  0.1  0.1  0.1  0.1  0.4

 P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities

The conditional probability is the probability of the

outcome X = 2 given that Y = 1 has occurred
– The conditional probability that the random variable X
takes the value x given that Y = y is written P(X = x|Y =
y)
– This conditional probability is given by the conditional
pdf f(x|y):
P  X  x, Y  y  f  x, y 
f  x | y  P  X  x | Y  y  
P Y  y  fY  y 

Eq. P.4
 P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities

Statistical Independence: if the conditional probability

P.3.2
Conditional
that X = x given that Y = y is the same as the
Probability

unconditional probability that X = x

– This means, if X and Y are independent random
variables, then:

P  X  x | Y  y  P  X  x

Eq. P.4
Expected Value of X: E(X)
The expected value is really just a
probability weighted average of X
E(X) is the mean of the distribution of X,
denoted by mx
Let f(xi) be the probability that X=xi, then
n
m X  E ( X )   xi f ( xi )
i 1
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 Properties of Probability Distributions
Many economic questions are formulated in terms of
conditional expectation, or the conditional mean
– Example: ‘‘What is the mean (expected value) wage
of a person who has 16 years of education?’’
• In expected value notation, what is
E(WAGE|EDUCATION = 16)?

– For a discrete random variable the calculation of

conditional expected value uses the conditional
probability density function f(x|y) so that:
μ X |Y  E  X | Y  y    xf  x | y 
x
Properties of Expectations
E(a)=a, Var(a)=0
E(mX)=mX, i.e. E(E(X))=E(X)
E(aX+b)=aE(X)+b
E(X+Y)=E(X)+E(Y)
E(X-Y)=E(X)-E(Y)
E(X- mX)=0 or E(X)-E(X)=0
E((aX)2)= E(a2X2) = a2E(X2)
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Conditional Expectation
Key in this class will be to know what value of Y to
expect as a specific value of X
 Say what “wage” you would expect when education is at 16
years?
 E(Wage|Educ=16)
 Also called the Conditional Mean
If X and Y are independent, then
 E(Y|X) = E(Y), Cov(X,Y) = 0
 If E(wage|education) = E(wage), then there is no relationship
between wages and education level

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