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226 CHAPTER 7

EXERCISES
7.1 The number of accidents that occur on a busy a. Develop the probability distribution of X, the
stretch of highway is a random variable. number of color televisions per household.
a. What are the possible values of this random b. Determine the following probabilities.
variable?
P(X … 2)
b. Are the values countable? Explain.
c. Is there a finite number of values? Explain. P(X ⬎ 2)
d. Is the random variable discrete or continuous? P(X Ú 4)
Explain. 7.8 Using historical records, the personnel manager of a
7.2 The distance a car travels on a tank of gasoline is a plant has determined the probability distribution of
random variable. X, the number of employees absent per day. It is
a. What are the possible values of this random x 0 1 2 3 4 5 6 7
variable?
b. Are the values countable? Explain. P (x) .005 .025 .310 .340 .220 .080 .019 .001
c. Is there a finite number of values? Explain. a. Find the following probabilities.
d. Is the random variable discrete or continuous?
Explain. P(2 … X … 5)
P(X ⬎ 5)
7.3 The amount of money students earn on their sum- P(X ⬍ 4)
mer jobs is a random variable.
a. What are the possible values of this random variable? b. Calculate the mean of the population.
b. Are the values countable? Explain. c. Calculate the standard deviation of the population.
c. Is there a finite number of values? Explain.
7.9 Second-year business students at many universities
d. Is the random variable discrete or continuous?
are required to take 10 one-semester courses. The
Explain.
number of courses that result in a grade of A is a dis-
7.4 The mark on a statistics exam that consists of 100 crete random variable. Suppose that each value of
multiple-choice questions is a random variable. this random variable has the same probability.
a. What are the possible values of this random variable? Determine the probability distribution.
b. Are the values countable? Explain.
7.10 The random variable X has the following probability
c. Is there a finite number of values? Explain.
distribution.
d. Is the random variable discrete or continuous?
Explain. x ⫺3 2 6 8
7.5 Determine whether each of the following is a valid P (x) .2 .3 .4 .1
probability distribution. Find the following probabilities.
a. x 0 1 2 3 a. P(X ⬎ 0)
P (x) .1 .3 .4 .1 b. P(X Ú 1)
c. P(X Ú 2)
b. x 5 ⫺6 10 0
d. P(2 … X … 5)
P (x) .01 .01 .01 .97
c. x 14 12 ⫺7 13 7.11 An Internet pharmacy advertises that it will
P (x) .25 .46 .04 .24 deliver the over-the-counter products that cus-
tomers purchase in 3 to 6 days. The manager of
7.6 Let X be the random variable designating the num- the company wanted to be more precise in its
ber of spots that turn up when a balanced die is advertising. Accordingly, she recorded the num-
rolled. What is the probability distribution of X? ber of days it took to deliver to customers. From
7.7 In a recent census the number of color televisions the data, the following probability distribution
per household was recorded was developed.
Number of
Number of color days 0 1 2 3 4 5 6 7 8
televisions 0 1 2 3 4 5
Probability 0 0 .01 .04 .28 .42 .21 .02 .02
Number of
households a. What is the probability that a delivery will be
(thousands)1,218 32,379 37,961 19,387 7,714 2,842 made within the advertised 3- to 6-day period?

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227

b. What is the probability that a delivery will be a. Find the mean and variance for the probability
late? distribution below.
c. What is the probability that a delivery will be b. Determine the probability distribution of Y
early? where Y ⫽ 5X.
c. Use the probability distribution in part (b) to
7.12 A gambler believes that a strategy called “doubling compute the mean and variance of Y.
up” is an effective way to gamble. The method d. Use the laws of expected value and variance to
requires the gambler to double the stake after each find the expected value and variance of Y from
loss. Thus, if the initial bet is $1, after losing he the parameters of X.
will double the bet until he wins. After a win, he
resorts back to a $1 bet. The result is that he will 7.19 We are given the following probability distribution.
net $1 for every win. The problem however, is that
he will eventually run out of money or bump up x 0 1 2 3
against the table limit. Suppose that for a certain P (x) .4 .3 .2 .1
game the probability of winning is .5 and that los-
ing six in a row will result in bankrupting the gam- a. Calculate the mean, variance, and standard
bler. Find the probability of losing six times in a deviation.
row. b. Suppose that Y ⫽ 3X ⫹ 2. For each value of X,
determine the value of Y. What is the probability
7.13 The probability that a university graduate will be distribution of Y?
offered no jobs within a month of graduation is esti- c. Calculate the mean, variance, and standard devi-
mated to be 5%. The probability of receiving one, ation from the probability distribution of Y.
two, and three job offers has similarly been esti- d. Use the laws of expected value and variance to
mated to be 43%, 31%, and 21%, respectively. calculate the mean, variance, and standard devi-
Determine the following probabilities. ation of Y from the mean, variance, and stan-
a. A graduate is offered fewer than two jobs. dard deviation of X. Compare your answers in
b. A graduate is offered more than one job. parts (c) and (d). Are they the same (except for
rounding)?
7.14 Use a probability tree to compute the probability
of the following events when flipping two fair 7.20 The number of pizzas delivered to university stu-
coins. dents each month is a random variable with the
a. Heads on the first coin and heads on the second following probability distribution.
coin
b. Heads on the first coin and tails on the second x 0 1 2 3
coin P (X) .1 .3 .4 .2
c. Tails on the first coin and heads on the second
coin a. Find the probability that a student has received
d. Tails on the first coin and tails on the second coin delivery of two or more pizzas this month.
b. Determine the mean and variance of the number
7.15 Refer to Exercise 7.14. Find the following prob- of pizzas delivered to students each month.
abilities.
a. No heads 7.21 Refer to Exercise 7.20. If the pizzeria makes a profit
b. One head of $3 per pizza, determine the mean and variance of
c. Two heads the profits per student.
d. At least one head
7.22 After watching a number of children playing games
7.16 Draw a probability tree to describe the flipping of at a video arcade, a statistics practitioner estimated
three fair coins. the following probability distribution of X, the num-
ber of games per visit.
7.17 Refer to Exercise 7.16. Find the following
probabilities. x 1 2 3 4 5 6 7
a. Two heads P (x) .05 .15 .15 .25 .20 .10 .10
b. One head
c. At least one head a. What is the probability that a child will play
d. At least two heads more than four games?
b. What is the probability that a child will play at
7.18 The random variable X has the following distribution. least two games?
x ⫺2 5 7 8 7.23 Refer to Exercise 7.22. Determine the mean and
P (x) .59 .15 .25 .01 variance of the number of games played.

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228 CHAPTER 7

7.24 Refer to Exercise 7.23. Suppose that each game costs of flu and colds. A 6-month study was undertaken to
the player 25 cents. Use the laws of expected value determine whether the remedy works. From this
and variance to determine the expected value and study, the following probability distribution of the
variance of the amount of money the arcade takes in. number of respiratory infections per year (X) for
echinacea users was produced.
7.25 Refer to Exercise 7.22.
a. Determine the probability distribution of the x 0 1 2 3 4
amount of money the arcade takes in per child. P (x) .45 .31 .17 .06 .01
b. Use the probability distribution to calculate the
mean and variance of the amount of money the Find the following probabilities.
arcade takes in. a. An echinacea user has more than one infection
c. Compare the answers in part (b) with those of per year.
Exercise 7.24. Are they identical (except for b. An echinacea user has no infections per year.
rounding errors)? c. An echinacea user has between one and three
(inclusive) infections per year.
7.26 A survey of Amazon.com shoppers reveals the fol-
lowing probability distribution of the number of 7.30 A shopping mall estimates the probability distribu-
books purchased per hit. tion of the number of stores mall customers actually
enter, as shown in the table.
x 0 1 2 3 4 5 6 7
P (x) .35 .25 .20 .08 .06 .03 .02 .01 x 0 1 2 3 4 5 6
P (x) .04 .19 .22 .28 .12 .09 .06
a. What is the probability that an Amazon.com
visitor will buy four books? Find the mean and standard deviation of the number
b. What is the probability that an Amazon.com of stores entered.
visitor will buy eight books?
c. What is the probability that an Amazon.com 7.31 Refer to Exercise 7.30. Suppose that, on average,
visitor will not buy any books? customers spend 10 minutes in each store they enter.
d. What is the probability that an Amazon.com Find the mean and standard deviation of the total
visitor will buy at least one book? amount of time customers spend in stores.

7.27 A university librarian produced the following proba- 7.32 When parking a car in a downtown parking lot, dri-
bility distribution of the number of times a student vers pay according to the number of hours or parts
walks into the library over the period of a semester. thereof. The probability distribution of the number of
hours cars are parked has been estimated as follows.
x 0 5 10 15 20 25 30 40 50 75 100 x 1 2 3 4 5 6 7 8
P (x) .22 .29 .12 .09 .08 .05 .04 .04 .03 .03 .01 P (x) .24 .18 .13 .10 .07 .04 .04 .20
Find the following probabilities. Find the mean and standard deviation of the number
a. P(X Ú 20) of hours cars are parked in the lot.
b. P(X ⫽ 60)
c. P(X ⬎ 50) 7.33 Refer to Exercise 7.32. The cost of parking is $2.50
d. P(X ⬎ 100) per hour. Calculate the mean and standard deviation
of the amount of revenue each car generates.
7.28 After analyzing the frequency with which cross-
country skiers participate in their sport, a sports- 7.34 You have been given the choice of receiving $500 in
writer created the following probability distribution cash or receiving a gold coin that has a face value of
for X ⫽ number of times per year cross-country $100. However, the actual value of the gold coin
skiers ski. depends on its gold content. You are told that the
coin has a 40% probability of being worth $400, a
x 0 1 2 3 4 5 6 7 8 30% probability of being worth $900, and a 30%
P (x) .04 .09 .19 .21 .16 .12 .08 .06 .05 probability of being worth its face value. Basing your
decision on expected value, should you choose the
Find the following. coin?
a. P(3)
7.35 The manager of a bookstore recorded the number of
b. P(X Ú 5)
customers who arrive at a checkout counter every
c. P(5 … X … 7)
5 minutes from which the following distribution was
7.29 The natural remedy echinacea is reputed to boost calculated. Calculate the mean and standard devia-
the immune system, which will reduce the number tion of the random variable.

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229

x 0 1 2 3 4 Compute the mean and variance of the number of

P (x) .10 .20 .25 .25 .20 pages per fax.

7.36 The owner of a small firm has just purchased a per- 7.39 Refer to Exercise 7.38. Further analysis by the man-
sonal computer, which she expects will serve her for ager revealed that the cost of processing each page
the next 2 years. The owner has been told that she of a fax is $.25. Determine the mean and variance of
“must” buy a surge suppressor to provide protection the cost per fax.
for her new hardware against possible surges or vari- 7.40 To examine the effectiveness of its four annual adver-
ations in the electrical current, which have the tising promotions, a mail-order company has sent a
capacity to damage the computer. The amount of questionnaire to each of its customers, asking how
damage to the computer depends on the strength of many of the previous year’s promotions prompted
the surge. It has been estimated that there is a 1% orders that would not otherwise have been made.
chance of incurring $400 damage, a 2% chance of The table lists the probabilities that were derived
incurring $200 damage, and 10% chance of $100 from the questionnaire, where X is the random vari-
damage. An inexpensive suppressor, which would able representing the number of promotions that
provide protection for only one surge can be pur- prompted orders. If we assume that overall customer
chased. How much should the owner be willing to behavior next year will be the same as last year, what
pay if she makes decisions on the basis of expected is the expected number of promotions that each cus-
value? tomer will take advantage of next year by ordering
7.37 It cost one dollar to buy a lottery ticket, which has goods that otherwise would not be purchased?
five prizes. The prizes and the probability that a x 0 1 2 3 4
player wins the prize are listed here. Calculate the
expected value of the payoff. P (x) .10 .25 .40 .20 .05

Prize ($) 1 million 200,000 50,000 7.41 Refer to Exercise 7.40. A previous analysis of histor-
ical records found that the mean value of orders for
Probability 1/10 million 1/1 million 1/500,000 promotional goods is $20, with the company earn-
Prize ($) 10,000 1,000 ing a gross profit of 20% on each order. Calculate
the expected value of the profit contribution next
Probability 1/50,000 1/10,000
year.
7.38 After an analysis of incoming faxes the manager of
7.42 Refer to Exercises 7.40 and 7.41. The fixed cost of
an accounting firm determined the probability dis-
conducting the four promotions is estimated to be
tribution of the number of pages per facsimile as
$15,000, with a variable cost of $3.00 per customer
follows:
for mailing and handling costs. How large a cus-
x 1 2 3 4 5 6 7 tomer base does the company need to cover the cost
P (x) .05 .12 .20 .30 .15 .10 .08 of promotions?

7. 2 B I VA R I AT E D I S T R I B U T I O N S
Thus far, we have dealt with the distribution of a single variable. However, there are cir-
cumstances where we need to know about the relationship between two variables.
Recall that we have addressed this problem statistically in Chapter 3 by drawing the
scatter diagram and in Chapter 4 by calculating the covariance and the coefficient of
correlation. In this section, we present the bivariate distribution, which provides
probabilities of combinations of two variables. Incidentally, when we need to distin-
guish between the bivariate distributions and the distributions of one variable, we’ll
refer to the latter as univariate distributions.
The joint probability that two variables will assume the values x and y is denoted
P(x, y). A bivariate (or joint) probability distribution of X and Y is a table or formula that
lists the joint probabilities for all pairs of values of x and y. As was the case with univari-
ate distributions, the joint probability must satisfy two requirements.

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230 CHAPTER 7

Requirements for a Discrete Bivariate Distribution

1. 0 … P(x, y) … 1 for all pairs of values (x, y)
2. a a P(x, y) = 1
all x all y

EXAMPLE 7. 5 Bivariate Distribution of the Number of House Sales

Xavier and Yvette are real estate agents. Let X denote the number of houses that Xavier
will sell in a month and let Y denote the number of houses Yvette will sell in a month.
An analysis of their past monthly performances has the following joint probabilities.

Bivariate Probability Distribution

X
0 1 2
0 .12 .42 .06
Y 1 .21 .06 .03
2 .07 .02 .01

We interpret these joint probabilities in the same way we did in Chapter 6. For
example, the probability that Xavier sells 0 houses and Yvette sells 1 house in the month
is P(0, 1) ⫽ .21.

Marginal Probabilities
As we did in Chapter 6, we can calculate the marginal probabilities by summing across
rows or down columns.

Marginal Probability Distribution of X in Example 7.5

P(X = 0) = P(0, 0) + P(0, 1) + P(0, 2) = .12 + .21 + .07 = .4
P(X = 1) = P(1, 0) + P(1, 1) + P(1, 2) = .42 + .06 + .02 = .5
P(X = 2) = P(2, 0) + P(2, 1) + P(2, 2) = .06 + .03 + .01 = .1
The marginal probability distribution of X is
x P (x)
0 .4
1 .5
2 .1

Marginal Probability Distribution of Y in Example 7.5

P(Y = 0) = P(0, 0) + P(1, 0) + P(2, 0) = .12 + .42 + .06 = .6
P(Y = 1) = P(0, 1) + P(1, 1) + P(2, 1) = .21 + .06 + .03 = .3
P(Y = 2) = P(0, 2) + P(1, 2) + P(2, 2) = .07 + .02 + .01 = .1

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231

The marginal probability distribution of Y is

y P (y)
0 .6
1 .3
2 .1

Notice that both marginal probability distributions meet the requirements; the proba-
bilities are between 0 and 1, and they add to 1.

Describing the Bivariate Distribution

As we did with the univariate distribution, we often describe the bivariate distribution
by computing the mean, variance, and standard deviation of each variable. We do so by
utilizing the marginal probabilities.

Expected Value, Variance, and Standard Deviation of X in Example 7.5

E(X) = mX = a x P(x) = 0(.4) + 1(.5) + 2(.1) = .7

V(X) = s2X = a (x - mX)2P(x) = (0 - .7)2(.4) + (1 - .7)2(.5) + (2 - .7)2(.1) = .41

sX = 2s2X = 2.41 = .64

Expected Value, Variance, and Standard Deviation of Y in Example 7.5

E(Y ) = mY = a y P(y) = 0(.6) + 1(.3) + 2(.1) = .5

V(Y) = s2Y = a (y - mY)2P(y) = (0 - .5)2(.6) + (1 - .5)2(.3) + (2 - .5)2(.1) = .45

sY = 2s2Y = 2.45 = .67

There are two more parameters we can and need to compute. Both deal with the rela-
tionship between the two variables. They are the covariance and the coefficient of cor-
relation. Recall that both were introduced in Chapter 4, where the formulas were based
on the assumption that we knew each of the N observations of the population. In this
chapter, we compute parameters like the covariance and the coefficient of correlation
from the bivariate distribution.

Covariance
The covariance of two discrete variables is defined as

COV(X,Y) = sxy = a a (x - mX)(y - mY)P(x, y)

all x all y

Notice that we multiply the deviations from the mean for both X and Y and then multi-
ply by the joint probability.
The calculations are simplified by the following shortcut method.

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232 CHAPTER 7

Shortcut Calculation for Covariance

COV(X,Y) = sxy = a a xyP(x, y) - mX mY

all x all y

The coefficient of correlation is calculated in the same way as in Chapter 4.

Coefficient of Correlation

sxy
r =
sxsy

EXAMPLE 7. 6 Describing the Bivariate Distribution

Compute the covariance and the coefficient of correlation between the numbers of
houses sold by the two agents in Example 7.5.

SOLUTION

We start by computing the covariance.

sxy = a a (x - mX)(y - mY)P(x, y)

all x all y
= (0 - .7)(0 - .5)(.12) + (1 - .7)(0 - .5)(.42) + (2 - .7)(0 - .5)(.06)
+ (0 - .7)(1 - .5)(.21) + (1 - .7)(1 - .5)(.06) + (2 - .7)(1 - .5)(03)
+ (0 - .7)(2 - .5)(.07) + (1 - .7)(2 - .5)(.02) + (2 - .7)(2 - .5)(.01)
= - .15
As we did with the shortcut method for the variance, we’ll recalculate the covari-
ance using its shortcut method.

a a xyP(x, y) = (0)(0)(.12) + (1)(0)(.42) + (2)(0)(.06)

all x all y + (0)(1)(.21) + (1)(1)(.06) + (2)(1)(.03)
+ (0)(2)(.07) + (1)(2)(.02) + (2)(2)(.01)
= .2

Using the expected values computed above we find

sxy = a a xyP(x, y) - mX mY = .2 - (.7)(.5) = - .15

all x all y

We also computed the standard deviations above. Thus, the coefficient of

correlation is

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RANDOM VARIABLES AND DISCRETE PROBABILITY DISTRIBUTIONS

233

sxy -.15
r = = = - .35
sX sY (.64)(.67)
There is a weak negative relationship between the two variables: the number of
houses Xavier will sell in a month (X ) and the number of houses Yvette will sell in a
month (Y ).

Sum of Two Variables

The bivariate distribution allows us to develop the probability distribution of any com-
bination of the two variables. Of particular interest to us is the sum of two variables.
The analysis of this type of distribution leads to an important statistical application in
finance, which we present in the next section.
To see how to develop the probability distribution of the sum of two variables from
their bivariate distribution, return to Example 7.5. The sum of the two variables X and Y
is the total number of houses sold per month. The possible values of X ⫹ Y are 0, 1, 2, 3,
and 4. The probability that X ⫹ Y ⫽ 2, for example, is obtained by summing the joint
probabilities of all pairs of values of X and Y that sum to 2:
P(X + Y = 2) = P(0,2) + P(1,1) + P(2,0) = .07 + .06 + .06 = .19
We calculate the probabilities of the other values of X ⫹ Y similarly, producing the
following table.

Probability Distribution of X ⫹ Y in Example 7.5

x⫹y 0 1 2 3 4
P (x ⫹ y) .12 .63 .19 .05 .01

We can compute the expected value, variance, and standard deviation of X ⫹ Y in

the usual way.
E(X + Y) = 0(.12) + 1(.63) + 2(.19) + 3(.05) + 4(.01) = 1.2
V(X + Y) = s2X + Y = (0 - 1.2)2(.12) + (1 - 1.2)2(.63) + (2 - 1.2)2(.19)
+ (3 - 1.2)2(.05) + (4 - 1.2)2(.01)
= .56
sX + Y = 2.56 = .75

We can derive a number of laws that enable us to compute the expected value and
variance of the sum of two variables.

Laws of Expected Value and Variance of the Sum of Two Variables

1. E(X + Y ) = E(X ) + E(Y )
2. V(X + Y ) = V(X ) + V(Y ) + 2COV(X, Y )
If X and Y are independent, COV(X, Y ) = 0 and thus V(X + Y )
= V(X ) + V(Y )

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234 CHAPTER 7

EXAMPLE 7. 7 Describing the Population of the Total Number

of House Sales
Use the rules of expected value and variance of the sum of two variables to calculate the
mean and variance of the total number of houses sold per month in Example 7.5.

SOLUTION

Using law 1 we compute the expected value of X ⫹ Y:

E(X + Y ) = E(X ) + E(Y ) = .7 + .5 = 1.2
which is the same value we produced directly from the probability distribution of X ⫹ Y.
We apply law 3 to determine the variance:
V1X + Y2 = V1X2 + V1Y2 + 2COV1X,Y2 = .41 + .45 + 21-.152 = .56
This is the same value we obtained from the probability distribution of X ⫹ Y.

We will encounter several applications where we need the laws of expected

value and variance for the sum of two variables. Additionally, we will demonstrate
an important application in operations management where we need the formulas
for the expected value and variance of the sum of more than two variables. See
Exercises 7.57–7.60.

EXERCISES
7.43 The following table lists the bivariate distribution of 7.47 The bivariate distribution of X and Y is described here.
X and Y.
x
x
y 1 2
y 1 2
1 .28 .42
1 .5 .1 2 .12 .18
2 .1 .3
a. Find the marginal probability distribution of X.
a. Find the marginal probability distribution of X. b. Find the marginal probability distribution of Y.
b. Find the marginal probability distribution of Y. c. Compute the mean and variance of X.
c. Compute the mean and variance of X. d. Compute the mean and variance of Y.
d. Compute the mean and variance of Y.
7.48 Refer to Exercise 7.47. Compute the covariance and
7.44 Refer to Exercise 7.43. Compute the covariance and
the coefficient of correlation.
the coefficient of correlation.
7.45 Refer to Exercise 7.43. Use the laws of expected 7.49 Refer to Exercise 7.47. Use the laws of expected
value and variance of the sum of two variables to value and variance of the sum of two variables to
compute the mean and variance of X ⫹ Y. compute the mean and variance of X ⫹ Y.

7.46 Refer to Exercise 7.43. 7.50 Refer to Exercise 7.47.

a. Determine the distribution of X ⫹ Y. a. Determine the distribution of X ⫹ Y.
b. Determine the mean and variance of X ⫹ Y. b. Determine the mean and variance of X ⫹ Y.
c. Does your answer to part (b) equal the answer to c. Does your answer to part (b) equal the answer to
Exercise 7.45? Exercise 7.49?

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