University of the West Indies

Department of Economics
ECON2008 – Statistical Methods I

Problem Set 1: Linear Combinations of Random Variables

and Discrete Random Variables

ALL ANSWERS ARE TO BE GIVEN TO AT LEAST 3 DECIMAL PLACES

Tutorial Questions

1. A rating company calculates and publishes various statistics concerning car quality. The initial quality
score measures the number of problems per new car sold. For 2002 model cars, the top brand had 0.85
problems per car. Let the random variable X be equal to the number of problems with a newly purchased
Lexus.

a) What type of random variable is this? Give reasons for your answer. What assumption(s) do you need
to make? Is/are your assumption(s) reasonable?

b) If you purchase this type of car, what is the probability that it has two problems or less?

2. An author receives from a publisher a contract, according to which she is to be paid a fixed sum of $10,000
plus $1.50 for each copy of her book sold. Her uncertainty about total sales of the book can be represented
by a random variable with mean 30,000 and standard deviation 8,000.

a) Find the mean of the total payment she will receive.

b) Find the standard deviation of the total payment she will receive.

3. An insurance company holds fraud insurance policies on 8000 firms. In any given year, the probability that
any single policy will result in a claim is 0.0005.

a) What type of random variable is this? Give reasons for your answer.

b) What option could you use to make the calculations of the probabilities for this random variable easier?
Give reasons for your answer.

c) Using your answer in b) as a guide, find the probability that at least three claims are made in a given
year.

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PROBLEM SET 1
 4. A corporation produces packages of paper clips. The number of clips per package varies, as indicated in
the accompanying table.

Number of Clips 47 48 49 50 51 52 53

Proportion of
0.04 0.13 0.29 0.21 0.20 0.03 0.10
Packages

a) Find the mean of the number of paper clips per package.

b) Find the standard deviation of the number of paper clips per package.

c) The cost (in cents) of producing a package of clips is 17+3X, where X is the number of clips in the
package. The revenue from selling the package, however many clips it contains, $2.00. If profit is
defined as the difference between revenue and cost, find the mean and standard deviation of profit per
package.

5. A hospital finds that 30% of its bills are at least one month in arrears. A random sample of 500 bills was
taken.

a) What type of random variable is this? Give reasons for your answer.

b) What is the probability that less than 200 bills in the sample were at least one month in arrears?

c) What is the probability that the number of bills in the sample at least one month in arrears was between
140 and 175 (inclusive)?

Extra Questions

1. The probability that a voter will believe a rumour about a politician is 0.25. Nineteen (19) voters are told
individually a rumour about a certain politician.

a) What type of random variable is this? Give reasons for your answer.

b) Three or more persons believe the rumour.

c) Determine the mean and standard deviation of the number who believe the rumour.

d) What is the probability that more than 18 do not believe the rumour.

2. Mamma Temte bakes six pies each day at a cost of $5 each. On 16% of the days she sells only two pies. On
32% of the days, she sells 4 pies, and on the remaining 52% of the days, she sells all six pies. If Mama
Temte sells her pies for $7 each, what is her expected profit for a day’s worth of pies? [Assume that any
leftover pies are given away.]

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PROBLEM SET 1
3. In a large city, some commuters are finding that taking registered taxis to be a convenient, time-saving less
stressful alternative to taking the bus. While it is generally perceived as a safe mode of transportation, the
average number of deaths per week due to deaths from accidents involving registered taxis is 12, which is
surprisingly high.

a) What type of random variable is this? Give reasons for your answer.

b) How likely is it that 5 or less deaths due to accidents involving registered taxis will occur next week?

4. George Severn, a senior vice president, is responsible for production and sale of Nougy 93 Fruity Cereal.
Daily production has an average of 200 boxes with a variance of 625 boxes. On the other hand, total sales
has a mean of 200 boxes with a variance of 81 boxes. Sales and production are not independent and have a
correlation of 0.6. The selling price per box is $15. The variable production per box is $7 and the fixed
production costs total $250.

a) Calculate the expected profit for this company.

b) Calculate the standard deviation of the profit for this company.

5. A large manufacturing plant has 3,400 LED lightbulbs illuminating a factory floor. The mean rate of
failure for these bulbs is 4 bulbs per hour.

a) What type of random variable is this? Give reasons for your answer.

b) We want to find the probability that in an 8-hour shift no more than 15 bulbs will fail. What option
could you use to make the calculations of the probabilities for this random variable easier? Give
reasons for your answer.

c) Using your answer in b) as a guide, find the probability that in an 8-hour shift no more than 15 bulbs
will fail.

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PROBLEM SET 1