Hand out No.

2 Probability Theory
1. A salesperson finds that the probability of selling a insurance policy to a prospective buyer on the first
contact is 0.30 but improves to 0.60 on the second contact. The salesperson will not contact a prospective
buyer more than twice. If the salesperson contacts a prospective buyer, determine the probability that the
buyer will buy the policy?
2.A picnic party of 40 contains 3 doctors and 6 engineers.
a. What is the probability that a person chosen at random from this party will be either a doctor or an engineer?
b. If two persons are chosen at random what is the probability that
i. Both are engineer
ii. one is doctor and another is engineer
iii. neither of them is a doctor or an engineer
iv. at least one of them is a doctor or an engineer
c.
If a person is chosen at random and it is given that he is not a doctor, what is the probability that he is an
engineer?
3. A student has applied for admission to two Management Institutes A and B in a management Programme. He
has assessed the chance of getting admission in A as 0.4, and in B as 0.6. He also believes that the chance
of getting admission in both as 0.2. Find the probabilities of the following events;
( a ) He will get admission in A or B;
( b ) He will be successful in getting admission to the programme;
( c ) He will get admission in only one of the two Institutes;
( d ) He will get admission in B , given that he has been admitted in A ;
( e ) He will not get admission in A , given that he has not been admitted in B.
4. A machine has two independent parts. The probability of failure of these parts are p1 and p2 respectively.
find the probability that
i.
neither part fails
ii.
at least one part fails
iii.
only one part fails
iv.
both parts fail
5. Given that 4 airlines provide service between Delhi & Mumbai. In how many distinct ways can a person
select airlines for a trip Delhi-Mumbai-Delhi if
i. He must travel both ways by same airlines
ii. He must travel both ways by different airlines
6. The chairman of a company asks the Data Processing manager whether a certain job can be taken as priority
basis and completed before 4.0 pm. on the same day. Even though the job can be completed if everything
runs smoothly, the DP manager considers following possibilities before giving any commitment.
i.
There may be power failure.
ii.
The computer may develop some mal function
iii.
The engineer may not be available to set right the computer in case of malfunction.
Taking these probabilities as 0.25,0.1 and 0.3, calculate the probability that the job is not completed in time.

7. There are 5000 employees in a company. The following classification shows the aggregate results of this
opinion on a proposal to emphasize fringe benefits rather than wage increase in an impending contract
discussion:

Employee
In Favour
Opinion Neutral
Opposed
Total
---------------------------------------------------------------------------------------------------------------------Male
1800
400
800
3000
Female
600
200
1200
2000
---------------------------------------------------------------------------------------------------------------------Total
2400
600
2000
5000
Calculate the probability that an employee, selected at random, from this group will be:
( a ) a female opposed to the proposal
( b ) neutral
(c ) opposed to the proposal, given that the employee selected is a female
( d ) either a male or opposed to the proposal
8.
(a)
(b)
(c)
(d)

A survey of engineering firms reveals that 80% have their own mainframe computer (M), 10% anticipate
purchasing a mainframe computer in the near future (B), and 5% have a mainframe computer and
anticipate buying another in the near future. Find the probability that a randomly selected firm:
has a mainframe computer or anticipates purchasing one in the near future
does not have a mainframe computer and does not anticipate purchasing one in the near future.
anticipates purchasing a mainframe computer given that it does not currently have one
has a mainframe computer given that it anticipates purchasing one in the near future.

9. GMAC MBA new-matriculates survey provided the following data for 2015 students.
Applied to more than one school
Age group
yes
no
23 and under
207
201
24-26
299
379
27-30
182
268
31-35
66
193
36 and over
51
169
For a randomly selected MBA student,
a. What is the probability that a person is 24-26 years old or applied to more than one school?
b. Given that the person had applied to more than one school, what is the probability that he is 31 and above?
10. The probability that a contractor will win a bid for contract A is 0.45; the probability that the contractor will
win a bid for contract B is 0.25. The two bids are believed to be independent of each other. What is the
probability that the contractor will win at least one of the two bids?
11. Identifying managerial prospects who are both talented and motivated is difficult. A personnel manager
constructed the Table, shown here to define nine combinations of talent- motivation levels. The numbers
in the Table are the managers estimates of the probabilities that a managerial prospect will be classified in
the respective categories.
Talent

Motivation
High
Medium Low
High
0.05
0.16
0.05
Medium
0.19
0.32
0.05
0.11
Low
0.05
0.02
Suppose, the personnel manger has decided to hire a new manager. Find the following probabilities:
a. Prospect places in the high motivation category
b. Prospect places in the high talent category
c. Prospect rates medium or better in both categories
d. Prospect rates low in at least one of the categories
e. Prospect places high in both categories

f. Prospect places low in talent given that he is low in motivation

g. Prospect places medium in talent given that he is high in motivation
h. Prospect places low in motivation given that he is low in talent
12. A speaks truth in 60% and B in 75% of the cases. In what percentage of the cases, they are likely to
contradict each other stating the same fact.
13. A salesman is known to sell a product in 3 out of 5 attempts while another salesman in 2 out of 5 attempts.
Find the probability that
(i)
No sale will take place when they both try to sell the product
(ii)
Either of them will succeed in selling the product.
14. Three firms A B & C bid for a project. Firm A is twice as likely to win the bid as B, and Firm B is twice as
likely to win the bid as C. What are the respective probabilities of the firms winning the bid.
15. Bill Borde, top advertising executive for Grapevine Concepts, has just launched a publicity campaign for a
new restaurant in town, The Black Angus. Bill has just installed four billboards on a highway outside of town,
and he knows from experience the probabilities that each will be noticed by a randomly chosen motorist. The
probability of the first billboards being noticed by a motorist is 0.75. The probability of the seconds being
noticed is 0.82, the third has a probability of 0.87 of being noticed, and the probability of the fourth signs being
noticed is 0.9. Assuming that the event that a motorist notices any particular billboard is independent of whether
or not he notices the others, what is the probability that
(a) All four billboards will be noticed by a randomly chosen motorist?
(b) The first and fourth, but not the second and third, billboards will be noticed?
(c) Exactly one of the billboards will be noticed?
The third and fourth billboards wont be noticed?

Hand out No. 3 Bayes Theorem and applications

1. A consulting firm has submitted a bid for a large research project. The firms management initially felt they
had a 50-50 chance of getting the project. However, the agency to which the bid was submitted has
subsequently requested for additional information on the bid. Past experience indicates that on 75% of the
successful bids and 40% of the unsuccessful bids the agency requested additional information.
What is the conditional probability of a request for additional information given that the bid will be ultimately
be successful? Compute a posterior probability that the bid will be successful given that a request for
additional information has been received.
2.

A car gets involved in an accident 80% of the time if it is defective. If it is not defective, the probability
reduces to 40%. 30% of all cars are defective. If a car is involved in an accident, what is the probability that it
was defective?
3. Consider a population of consumers consisting of two types of consumers. The upper class of consumers
comprises 35% of the population and each member has a probability of 0.8 purchasing of brand A of a product.
Each member of the rest of the population has a probability of 0.3 of purchasing brand A of the product. A
consumer is chosen at random and found to be buyer of the brand A. What is the probability that the buyer
belongs to middle and lower class of consumers?
4. The southeast regional manager of General Express, a private parcel delivery firm, it worried about the
likelihood of strikes by some of his employees. He has learned that the probability of strike by his pilot is 0.75
and the probability of a strike by his drivers is 0.65. Further, he knows that if the drivers strike, there is 90%
chance that the pilots will strike in sympathy.
What is the probability of both groups striking?
If the pilots strike, what is the probability that the drivers will also strike in sympathy?
5. A public-interest group was planning to make a court challenge to auto insurance rates in one of the three
cities: Atlanta, Baltimore, and Cleveland. The probability that it would choose Atlanta was 0.40; Baltimore,
0.35; and Cleveland, 0.25. The group also new that, it had 60% chance of favorable ruling if it chose Baltimore,
45% if it chose Atlanta, and 35% if it chose Cleveland. If the group did receive a favorable ruling, which city
did it most likely choose?
6. The health department routinely conducts two independent inspections of each restaurant, with the restaurant
passing only if both inspectors pass it. Inspector A is very experienced, and hence, passes only 2 percent of
restaurants that actually do have health code violations. Inspector B is less experienced and passes 7 percent of
restaurants with violations. What is the probability that
(a)
Inspector A passes a restaurant with violation, given that inspector B has found a violation?
(b)
Inspector B passes a restaurant with a violation, given that inspector A passes it?
(c)
A restaurant with a violation is passed by the health department.
7. Martin Coleman, credit manager for Becks knows that the company uses three methods to encourage
collection of delinquent accounts. From past collection records, he learns that 70 percent of the accounts are
called on personally, 20 percent are phoned, and 10 percent are sent a letter. The probabilities of collecting an
overdue amount from an account with the three methods are 0.75,0.6, 0.65 respectively. Mr. Coleman had just
received payment from a past-due account. What is the probability that this account
(a)
Was called on personally?
(b)
Received a phone call?
(c)
Received a letter?
8. A doctor has decided to prescribe two new drugs to 200 heart patients, as follows: 50 get drug A, 50 get drug
B, and 100 get both. Drug A reduces the probability of a heart attack by 35 percent, drug B reduces the
probability by 20 percent, and the two drugs, when taken together, work independently. The 200 patients were

chosen so that each has an 80 percent chance of having a heart attack. If a randomly selected patient has a heart
attack, what is the probability that the patient was given both drugs?
9. EconOcon is planning its company picnic. The only thing that will cancel the picnic is a thunderstorm. The
weather service has predicted dry conditions with probability 0.2, moist conditions with probability 0.45, and
wet conditions with probability 0.35. If the probability of a thunderstorm given dry conditions is 0.3 given moist
conditions is 0.6, and given wet conditions is 0.8, what is the probability of a thunderstorm? If we know that the
picnic was indeed cancelled, what is the probability moist conditions were in effect?
10. A box contains 4 fair dice and one crooked die with a leaded face that makes the six-face appear on two
thirds of all tosses. You are asked to select one die at random and toss it. If the crooked die is indistinguishable
from the fair dice and the result of your toss is six face, what is the probability that you crooked die?
11. Bowl A contains 2 red chips; bowl B contains 2 white chips; and C contains 1 red and 1 while chip. A bowl
is selected at random and one chip is taken at random from the bowl.
(a)
Compute the probability of selecting while chip
(b)
If selected chip is white, compute the conditional probability the other chip in the bowl is red.
12. The physical therapist knows that the football team will play 40% of its games on artificial turf this season.
He also knows that football players chances of incurring a knee injury are 50% higher on artificial turf instead
of grass. If a players probability of knee injury on artificial turf is 0.42, what is the probability that
1. A randomly selected football player incurs a knee injury?
2. A randomly selected football player with a knee injury incurred the injury, playing on grass?
13. A company has two production lines for plastic bottles, A and B producing in equal capacity. Two percent
of the bottles coming off of line A are defective, and 8% of those off of line B are defective. If a bottle is
selected at random and found to be defective, what is the probability that it came from line A?
14. Assume that the probability that a woman of age 40 in a given population has breast cancer (the prevalence
of breast cancer) is 0.5%. The probability that the disease is detected by a mammogram (the sensitivity of the
mammogram) is 80%. The probability that a woman without breast cancer will have a negative mammogram
(the specificity of the mammogram) is 92%. When asked for the probability of breast cancer in a woman of age
40 from the general population who has a positive mammogram, Dr. Smith estimated a probability of about
80%. Would you agree with Dr. Smith? Why or why not? Support your answer with respective probabilities.

Hand out 4

Distributions, Binomial and Poisson

Q. 1 Following data gives the prospects about EPS of a company for the year 2006-07.
Economic condition
Average
Good
Very Good

EPS
1.2
1.5
2.0

Probability
0.2
0.5
0.3

What is the expected value of EPS for the company for the year 2006-07?
Q. 2 A large shipment of computer chips is known to contain 10% defective chips. If 10 chips are randomly
selected, what is the expected number of defective ones? What is the standard deviation of the number of
defective chips?
Q. 3 A new treatment for baldness is known to be effective in 70% of the cases treated. Four bald members of
the same family are treated; let X be the number of successfully treated members of the family. Is X a
binomial random variable? Find the probability that at least one will be cured.
Q. 4 An MBA graduate is applying for nine jobs, and believes that she has in each of the nine cases a constant
and independent 0.48 probability of getting an offer. What is the probability that she will have at least
three offers?
Q 5 The probability that a worker in a factory has a disease induced by the chemical is 0.6. If a group of 5
workers is taken. Find the probability that

1. No worker has the disease

2. One worker has the disease
3. More than 2 workers have the disease
4. At least three have disease
5. At the most 2 have the disease
Q. 6 The mean of binomial distribution is 6 and the standard deviation is
success., probability of at lease one success and at the most 2 successes.

2 , calculate the probability of

Q. 7 Given that in a given population 40% of the people have O+ blood group. If 6 persons are chosen at
random what is the probability that
1.
All will have O+ blood group
2.
None of them have O+ blood group
3.
At least 3 have the O+ blood group
Q. 8 A car hire firm has two cars which it hires out day by day. The number of demands for a car on each
day is distributed as poisson variate with mean 1.5. Calculate the proportion of days on which (i) neither car
is used (ii) some demand is refused
Q. 9 On the average, one in 400 items is defective. If the items are packed in boxes of 100, what is the
probability that any given box of items will contains
No defectives
Less than two defectives
One or more defective
More than three defectives
Q. 10 The book 100% American by Daniel Evan Weiss reports over 1000 statistical facts about the United
States and its people. One fact reported is that 60% of the people live in the state where they have born.

Q. 11
a.
b.
c.

a. What is the probability that in a random sample of 10 people at least 8 will be living in the state
where they were born?
b.Whatis the probability that in a random sample of 5 people exactly 1 person will not be living where
she or he was born?
Based on past experience, the main printer in a university computer center is operating properly 90% of
the time. Suppose inspections are made at 10 randomly selected times.
What is the probability that the main printer is operating properly for exactly 9 of the inspections?
What is the probability that the main printer is not operating properly on more than 1 inspection?
What is the expected number of inspections in which the main printer is operating properly?

Q.12 The probability that a patient fails to recover from a particular operation is 0.1. Suppose that eight patients
having this operation are selected at random. Answer the following questions.
a. What is the probability that at most one patient will not recover?
b. What is the probability that at least 2 but no more than 3 patients will not recover?
c. What is the probability that all patients will not recover?
d. What is the expected number of patients that will not recover?
Q. 13 An insurance company states that 10% of all fire insurance claims are fraudulent. Suppose the company is
correct, and that it receives 120 claims.
a. What's the probability that at least 3 claims are fraudulent?
b. What's the probability that less than 1 claims are fraudulent?
Q.14 A company estimates that there is an 80% chance of an order arriving on time from a supplier. Suppose 5
orders are placed this week.
a. What is the probability that at least 4 orders arrive on time?
b. What is the probability that none of the orders arrive on time?
c. How many orders would you expect to arrive on time?
Q.15 A natural gas exploration company averages four strikes (that is, natural gas is found) per 100 holes
drilled. If 20 holes are to be drilled,
a. what is the probability that no strikes will be made?
b. What is the probability that at least one strike will be made?
Q.16 A new type of missile is to be tested. It has been estimated that the probability of a successful missile
launch is 80%. Each launch has been prepared by a different team of technicians, so each launch can be
considered independent of the other. If four launches are made, what is the probability of zero (0)
successful launches?
Q.17 A mail-order business has six telephone lines. Let X denote the number of lines in use at a specified time.
Suppose that the p.m.f of X is given in the following table.
X
0
1
2
3
4
5
6
p(x) .10
.15
.20
0.25 0.20 0.06 0.04
Calculate and sketch the c.d.f. of X and use it to calculate the probabilities of each of the following events:
a) At most 3 lines are in use
b) Fewer than 3 lines are in use
c) At least 3 lines are in use
d) Between 2 and 5 lines (inclusive) are in use
e) Between 2 and 4 lines (inclusive) are not in use
Q.18 A chemical supply company has in stock 100lb of a certain chemical, which it sells to customers in 5-lb
lots. Let X denote the number of lots ordered by a randomly chosen
customer, where X has p.m.f
x
1
2
3
4
p(x) 0.2
0.4
0.3
0.1

Compute E(X) and V (X).

Q. 19. A k-out-of-n system is one that will function if and only if at least k of the n individual components in
the system function. If the individual components function independently of one another, each with
probability 0:9, what is the probability that a 3-out of-5 system functions?
Q.20 A company that produces a fine crystal knows from experience that 10% of its goblets have cosmetic aws
and must be classified as seconds".
a) Among six randomly selected goblets, how likely is it that only one seconds is selected?
b) Among six randomly selected goblets, what is the probability that at least two are seconds?
Q.21 A toll bridge charges $1.00 for passenger cars and $2.50 for other vehicles. Suppose that during daytime
hours, 60% of all vehicles are passenger cars. If 25 vehicles cross the bridge during a particular daytime period,
what is the resulting expected toll revenue?
Q.22 Corporate raider Asher Adelman, teaching a course at HBS, made following proposal to its students. He
would pay $100000 to any student who gave him name of an undervalued company, which Adelman would
then buy. Suppose that he has 15 students in his class, and that 5% of the companies in the country are
undervalued. Suppose also that due to liquidity problems he can give award to at most three students. Finally
suppose if each student considers a single company at random without consulting others. What is the probability
that Adelman would be able to make good on his promise?
Q. 23 Suppose that a manufactured product has 2 defects per unit of product inspected. Using Poisson
distribution, calculate the probabilities of finding a product without any defect, 3 defects, and 4 defects. (Given
e-2 = 0.135)
Q.24 A factory produces blades in packets of 10. The probability of a blade to be defective is 0.2 per cent. Find
the number of packets having two defective blades in a consignment of 10,000 packets.
Q. 25 In a certain factory manufacturing razor blades, there is a small chance of 1/50 for any blade to be
defective. The blades are placed in packets, each containing 10 blades. Using the Poisson distribution, calculate
the approximate number of packets containing not more than 2 defective blades in a consignment of
10,000packets.
Q. 26 In a town 10 accidents took place in a span of 50 days. Assuming that the number of accidents per day
follows the Poisson distribution, find the probability that there will be three or more accidents in a day.
Q. 27 The monthly demand for transistors is known to have the following probability distribution
Demand
1
2
3
4
5
6
Probability
.1
.15
.2
.25
.18
.12
Determine the expected demand of the transistors. Also obtain cost ( C ) of producing n transistors is given by
the following relationship C=10000+500 n, where n is the demand, determine the expected cost.
Q.28 A statistician had studied the number of telephone calls in an office during a 1 minute interval and
summerised that the frequencies are confirmatory with the Poisson distribution. The data sheets were accidently
destroyed in a minor fire and she could salvage only final summary sheet. All the entries on this sheet were not
legible except for a few entries. The sheet is shown below, where *** indicates missing figures
No
of 0
1
2
3
4
5
& Total
incoming calls
above
Probability
***
0.271
***
0.181
***
***
1.0
No
of ***
***
***
***
90
***
***
occurrences
Using the available figures, Develop the complete table.

Hand out 5 Normal distribution.

2. GeneralHospital's patient account division has compiled data on the age of accounts receivables. The
data collected indicate that the age of the accounts follows a normal distribution with mean 28 days and
standard deviation 8 days.
a. What proportion of the accounts are between 20 and 40 days old?
b. What proportion of the accounts are less than 30 days old?
c. What is the number of days above which 75% of the accounts lie?
3. The length of time of long-distance telephone calls has mean of 18 minutes and standard deviation of 4
minutes. Suppose a sample of 50 telephone calls is used to reflect on the population of all long-distance
calls. What is the chance that the average of the 50 calls is between 16 and 17 minutes?
4. The time required to complete a final examination in a particular college course is normally distributed,
with mean of 80 minutes and a standard deviation of 10 minutes. Answer the following questions.
a. What is the probability of completing the exam in one hour or less?
b. What is the probability a student will complete the exam in a time between 60 and 75 minutes?
c. What is the inter quartile range for completion times?
5. Assume that the dividends of electric utility stocks as of a given date have a normal distribution with
mean of 8.5 percent and standard deviation of 2.5 percent. Find the probability that the average dividend
of 25 such stocks will exceed 10 percent.
5. The Carmate automobile batteries have average length of useful life as 48 months. However, the
guarantee stipulated is only 36 months. The company, in order to assure customers about the quality,
also stipulates that if a battery fails in less than 24 months, it will pay a goodwill compensation of Rs.
1,000 in addition to the replacement of the battery. Assuming that the s.d. of the life is 8 months, and
that the distribution is normal, find
(i) What percentage of batteries would have to be replaced free of cost?
(ii) What amount of compensation would have to be paid, if the total number of
batteries sold in a year are expected to be 12,000 ?
6. A test is normally distributed with a mean of 40 and a standard deviation of 7. (a) What score would be
needed to be in the 85th percentile? (b) What score would be needed to be in the 22nd percentile?
7. Assume a normal distribution with a mean of 90 and a standard deviation of 7. What limits would
include the middle 65% of the cases.
8. Reclaimed phosphate land in Polk County, Florida, has been found to emit a higher mean radiation level
than other non mining land in the county. Suppose that the radiation level for the reclaimed land has a
distribution with mean 5.0 working levels (WL) and a standard deviation of 0.5 WL. Suppose further
that 20 houses built on reclaimed land are randomly selected and the radiation level is measured in each.
a. What is the probability that the sample mean for the 20 houses exceeds 4.7 WL?
b. What is the probability that the sample mean is less than 4.8 WL?
9. The reaction time to a certain psychological experiment is considered to be normally distributed with a
mean of 20 seconds and a standard deviation of 4 seconds.
a. What proportion of subjects take between 15 and 30 seconds to react?
b. What proportion of subjects take longer than 30 seconds to react?
c. What is the reaction time such that only 10% of subjects are faster?
10. Wages for workers in a particular industry average $11.90 per hour with a standard deviation of 40
cents. The wages are considered to be normally distributed.
a. Suppose you are employed in this industry. What would your wage have to be if 75% of all
workers earn more than you?
b. What proportion of workers receive wages less than $11 per hour?

c. What proportion of workers make between $12 and $13 per hour?
11. A passenger lift Swift has rated capacity of 1000 kg load. Passengers using the lift may be assumed to
have weights that are normally distributed with mean 75 kg and s.d. 10 kg. If the company is planning to
put the stipulation of the maximum 12 passengers, what is the probability that the load on the lift will
exceed the capacity?
12. If scores are normally distributed with a mean of 30 and a standard deviation of 5, what percent of the
scores is: (a) greater than 30? (b) greater than 37? (c) between 28 and 34?
13. Daily fluctuations of French CAC-40 stock index from March to June in 1997 seem to follow a normal
distribution with mean of 2600 and a standard deviation of 50. Find the probability that the CAC-40 will
be (i) between 2520 and 2670 (ii) below 2730 and not less than 2450?
14. The mean cost for employee alcohol rehabilitation programs involving hospitalization is $10,000 ((USA
Today, September 12, 1991). Assume that rehabilitation program cost has a normal distribution with a
standard deviation of $2,200
i.
What is the probability that a rehabilitation program will cost at least $12,000?
ii.
What is the cost range for the 10% most expensive rehabilitation programs?
15. The grade point averages of a large population of cadets in MA206 are approximately normally
distributed with a mean of 2.4 and a standard deviation of 0.8.
a) What fraction of the students will possess a grade point average in excess of 3.0?
b) If cadets possessing a grade point average equal to or less than 1.9 are dropped from USMA, what
percentage of the cadets will be dropped?
c) What grade point average would you need to be in the 90th percentile? The 45th percentile?
16.

The time, in hours, that a copying machine may work without breaking down is a normally
distributed random variable with mean 549 and standard deviation 68. Find the probability that the
machine will work for at least 500 hours without breaking down.

17.

Scores on a management aptitude examination are believed to be normally distributed with mean
650 (out of a total of 800 possible points) and standard deviation 50. What is the probability that a
randomly chosen manager will achieve a score above 700? What is the probability that the score will
be below 750?

18.

Assume that the price of a share of TWA stock is normally distributed with mean 48 and standard
deviation 6. What is the probability that on a randomly chosen day in the period for which our
assumptions are made, the price of the stock will be more than $60 per share? Less than $60 per
share? More than $40 per share? Between $40 and $50 per share?

19.

The amount of oil pumped daily at Standard Oils facilities in Prudhoe Bay is normally distributed
with mean 800,000 barrels and standard deviation 10,000. In determining the amount of oil the
company must report as its lower limit of daily production, the company wants to choose an amount
such that for 80% of the days, at least the reported amount x is produced. Determine the value of the
lower limit x.

20.

Models of the pricing of stock options make the assumption of a normal distribution. An analyst
believes that the price of an IBM stock option is a normally distributed random variable with mean
$8.95 and variance 4. The analyst would like to determine a value such that there is a 0.90
probability that the price of the option will be greater than that value. Find the required value.

21.

The number of people responding to a mailed information brochure on cruises of the Royal Viking
Line through an agency in San Francisco is approximately normally distributed. The agency found
that 10% of the time, over 1,000 people respond immediately after a mailing, and 50% of the time, at
least 650 people respond right after the mailing. Find the mean and the standard deviation of the
number of people who respond following a mailing.

22. The National Bank has found that the average daily balance in its customers savings accounts is Rs.
8000 with a s.d. of Rs. 2000. Further, the average daily balances have been found to be normally
distributed.
( a ) What percentage of the banks savings account holders carry average daily balances in excess of
Rs. 11000 ?
( b ) The bank is considering issuing free drafts up to Rs. 10,000 to customers carrying average daily
balances in excess of a certain amount. If the bank does not want to give this facility to more than 5 %
of its customers, what is the minimum average daily balance it should prescribe ?
23. The speeds of all cars traveling on a stretch of interstate highway 1-95 are normally distributed with a
mean of 68 miles per hour and a standard deviation of 3 miles. Find the percentage of travelers who
are violating the 65 miles speed limit.
24. The weekly food expenditure for large families ( families at least 2 children) in London is known to be
Normally distributed with mean 155 and a standard deviation of 32.
1. What is the probability that a randomly selected large family spends less than 110
2. What is the probability that a randomly selected large family spends more than 225 on food per
week?
3. What is the probability that a randomly selected large family spends between 115 and 210 per
week?
4. In a random sample of 420 large families in London how many families spent in the above cases.
25. The lifetime of a certain kind of battery is a random variable having a normal distribution with a =300
hours and 35hours. Find the probability that one of those batteries will have a life time more than 320
hours. Also find the value above which we can expect to find the best 25% of these batteries?
26. The I.Q. of the MBA graduates of a management Institute is distributed normally with mean 120 and
s.d. as 5. The Bright consulting company wants to interview only 10 out of the 120 graduates. What is
the minimum I.Q. they should prescribe for a graduate to be called for interview?

0.00

Standard Normal Probabilities The values in the table are the areas
between zero and the z-score. That is, P(0<Z<z-score)
0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.0

0.0000

0.0040

0.0080

0.0120

0.0160

0.0199

0.0239

0.0279

0.0319

0.0359

0.2

0.0793

0.0832

0.0871

0.0910

0.0948

0.0987

0.1026

0.1064

0.1103

0.1141

0.1
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0

0.0398
0.1179
0.1554
0.1915
0.2257
0.2580
0.2881
0.3159
0.3413
0.3643
0.3849
0.4032
0.4192
0.4332
0.4452
0.4554
0.4641
0.4713
0.4772
0.4821
0.4861
0.4893
0.4918
0.4938
0.4953
0.4965
0.4974
0.4981
0.4987

0.0438
0.1217
0.1591
0.1950
0.2291
0.2611
0.2910
0.3186
0.3438
0.3665
0.3869
0.4049
0.4207
0.4345
0.4463
0.4564
0.4649
0.4719
0.4778
0.4826
0.4864
0.4896
0.4920
0.4940
0.4955
0.4966
0.4975
0.4982
0.4987

0.0478
0.1255
0.1628
0.1985
0.2324
0.2642
0.2939
0.3212
0.3461
0.3686
0.3888
0.4066
0.4222
0.4357
0.4474
0.4573
0.4656
0.4726
0.4783
0.4830
0.4868
0.4898
0.4922
0.4941
0.4956
0.4967
0.4976
0.4982
0.4987

0.0517
0.1293
0.1664
0.2019
0.2357
0.2673
0.2967
0.3238
0.3485
0.3708
0.3907
0.4082
0.4236
0.4370
0.4484
0.4582
0.4664
0.4732
0.4788
0.4834
0.4871
0.4901
0.4925
0.4943
0.4957
0.4968
0.4977
0.4983
0.4988

0.0557
0.1331
0.1700
0.2054
0.2389
0.2704
0.2995
0.3264
0.3508
0.3729
0.3925
0.4099
0.4251
0.4382
0.4495
0.4591
0.4671
0.4738
0.4793
0.4838
0.4875
0.4904
0.4927
0.4945
0.4959
0.4969
0.4977
0.4984
0.4988

0.0596
0.1368
0.1736
0.2088
0.2422
0.2734
0.3023
0.3289
0.3531
0.3749
0.3944
0.4115
0.4265
0.4394
0.4505
0.4599
0.4678
0.4744
0.4798
0.4842
0.4878
0.4906
0.4929
0.4946
0.4960
0.4970
0.4978
0.4984
0.4989

0.0636
0.1406
0.1772
0.2123
0.2454
0.2764
0.3051
0.3315
0.3554
0.3770
0.3962
0.4131
0.4279
0.4406
0.4515
0.4608
0.4686
0.4750
0.4803
0.4846
0.4881
0.4909
0.4931
0.4948
0.4961
0.4971
0.4979
0.4985
0.4989

0.0675
0.1443
0.1808
0.2157
0.2486
0.2794
0.3078
0.3340
0.3577
0.3790
0.3980
0.4147
0.4292
0.4418
0.4525
0.4616
0.4693
0.4756
0.4808
0.4850
0.4884
0.4911
0.4932
0.4949
0.4962
0.4972
0.4979
0.4985
0.4989

0.0714
0.1480
0.1844
0.2190
0.2517
0.2823
0.3106
0.3365
0.3599
0.3810
0.3997
0.4162
0.4306
0.4429
0.4535
0.4625
0.4699
0.4761
0.4812
0.4854
0.4887
0.4913
0.4934
0.4951
0.4963
0.4973
0.4980
0.4986
0.4990

0.0753
0.1517
0.1879
0.2224
0.2549
0.2852
0.3133
0.3389
0.3621
0.3830
0.4015
0.4177
0.4319
0.4441
0.4545
0.4633
0.4706
0.4767
0.4817
0.4857
0.4890
0.4916
0.4936
0.4952
0.4964
0.4974
0.4981
0.4986
0.4990

Cases on PROBABILITY DISTRIBUTIONS

A company sells precision grinding machines to four customers in four different countries. It has just signed a
contract to sell, two months from now, a batch of these machines to each customer. The following table show
the
number
of
machines
(batch quantity) to be delivered to the four customers. The selling price of the machine is fixed in the local
currency, and the company plans to convert the company plans to convert the local currency and its standard
deviation, expected at the time of delivery, as shown in the table. Assume that the exchange rates are normally
distributed and independent.
Customer
1
2
3
4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Batch
Quantity
12
8
5
2

Selling Price
57,810
8,640,540
97,800
R 4,015,000

Exchange Rate
Mean
Standard
Deviation
$1.41/
$0.041/
$0.00904/
$0.00045/
$0.824/
$0.0342/
$0.0211/R
$0.00083/R

Find the distribution of the uncertain revenue from the contract in U.S. dollars. Report the mean, the
variance, and the standard deviation.
What is the probability that the revenue will exceed $2,250,000?
What is the probability that the revenue will less than $2,150,000?
To remove the uncertainty in the revenue amount, the sales manager of the company looks for someone
who would assume the risk. An international bank offers to pay a sure sum of $2,150,000 in return for
the revenue in local currencies. What useful facts can you tell the sales manager about the offer, without
involving any of your personal judgment?
What is your recommendation to the sales manager, based on your personal judgment?
If the sales manager is willing to accept the banks offer but the CEO of the company is not, who is
more risk-averse?
Suppose the company accepts the banks offer. Now consider the banks risk, assuming that the bank
will convert all currencies into U.S. dollars at the prevailing exchange rates. What is the probability that
the bank will incur a loss?
The bank defines its value at risk as the loss that occurs at the 5 th percentile of the uncertain revenue.
What is the banks value at risk?
What is the banks expected profit?
Express the value at risk as a percentage of the expected profit. Based on this percentage, what is your
evaluation of the risk faced by the bank?
Suppose the bank does not plan to convert all currencies into U.S. dollars, but plans to spend or save
them as local currency or convert them into some other needed currency. Will this increase or decrease
the risk faced by the bank?
Based on the answer to part 11, is the assumption (made in parts 7 to 10) that the bank will convert all
currencies into U.S. dollars a good assumption?

Case 2
A business graduate very much wants to get a job in any one of the top 10 accounting firms. Applying to any of
these companies requires a lot of effort and paperwork and is therefore costly. She estimates the cost of
applying to each of the 10 companies and the probability of getting a job offer there. These data are tabulated
below. The tabulation is in the decreasing order of cost.
1.
2.

If the graduate applies to all 10 companies, what is the probability that she will get at least one offer?
If she can apply to only one company, base on cost and success probability criteria alone, should she
apply to company 5? Why or why not?

3.
4.
5.

If she applies to companies 2,5,8, and 9, what is the total cost? What is the probability that she will get
at least one offer?
If she wants to be at least 75% confident of getting at least one offer, to which companies should she
apply to minimize the total cost?
If she is willing to spend $1,500, to which companies should she apply to maximize her chances of
getting at least one job?

1
Company
Cost
$870
Probability 0.38

2
$600
0.35

3
$540
0.28

4
$500
0.20

5
$400
0.18

6
$320
0.18

7
$300
0.17

8
$230
0.14

9
$200
0.14

10
$170
0.08

Case 3
A company supplies pins in bulk to a customer. The company uses an automatic lathe to produce the
pins. Due to many causesvibration, temperatures, wear and tear, and the likethe lengths of the pins
made by the machine are normally distributed with a mean of 1,012 inches and a standard deviation of
0.018 inch. The customer will buy only those pins with the customer wants the length to be 1.00 0.02
inch. In other words, the customer wants the length to be 1.00 inch but will accept up to 0.02 inch
deviation on either side. This 0.02 inch is known as the tolerance.
1. What percentage of the pins will be acceptable to the consumer?
In order to improve percentage accepted, the production manager and the engineers discuss adjusting the
population mean and standard deviation of the length of the pins.
2. If the lathe can be adjusted to have the mean of the lengths to any desired value, what should it be
adjusted to? Why?
3. Suppose the mean cannot be adjusted, but the standard deviation can be reduced. What maximum
value of the standard deviation would make 90% of the parts acceptable to the consumer? (Assume
the mean to be 1.012)
4. Repeat question 3, with 95% and 99% of the pins acceptable.
5. In practice which one do you think is easier to adjust, the mean or the standard deviation? Why?