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K5 - 6.54

The owner of a small firm has just purchased a personal computer which she expects will serve

her for the next 2 years. The owner has been told that she “must” buy a surge suppressor to

provide protection for her new hardware against surges in the electrical current. Her son David,

who recently took Data Analysis, advises that an inexpensive suppressor could be purchased. It

would provide protection against one surge only. He notes that the amount of damage without a

suppressor would depend on the extent of the surge. David conservatively estimates that, during

the next two years, there is a 1% chance of incurring $400 damage and a 2% chance of incurring

$200 damage. But the probability of incurring $100 damage is 0.1.

a. How much should the owner be willing to pay for a surge suppressor?

b. Determine the standard deviation of the possible amount of damage.

K5 - 6.87

An auditor is preparing for a physical count of inventory as a means of verifying its value. Items

counted are reconciled with a list prepared by the storeroom supervisor. Normally, 20% of the

items counted cannot be reconciled without reviewing invoices. The auditor selects 10 items.

a. Find the probability of each of the following

i. Up to 4 items cannot be reconciled.

ii. At least 6 items cannot be reconciled.

iii. Between 4 and 6 items (inclusive) cannot be reconciled.

b. If it normally takes 20 minutes to review the invoice for an item that cannot be reconciled

and one hour for the balance of the count, how long should the auditor expect the

physical count to take?

K5 – 7.15

Empirical studies have provided support for the belief that a common stock’s annual rate of

return is approximately normally distributed. Suppose that you have invested in the stock of a

company for which the annual return has an expected value of 16% and a standard deviation of

10%.

a. Find the probability that your one-year return will exceed 30%.

b. Find the probability that your one-year return will be negative.

c. Suppose this company embarks on a new high risk but potentially highly profitable

venture. As a result, the return on the stock now has an expected value of 25% and a

MBA 5300 LAB WEEK 5 2

standard deviation of 20%. Answer parts (a) and (b) in light of the revised estimates

regarding the stock’s return.

d. As an investor, would you approve of the company’s decision to embark on the new

venture?

K5 – 7.17

Mensa is an organization whose members possess IQs in the top 2% of the population.

a. If IQs are normally distributed, with a mean of 100 and a standard deviation of 16, what

is the minimum IQ necessary for admission?

b. If three individuals are chosen at random from the general population, what is the

probability that all three satisfy the minimum requirement for admission to Mensa?

c. If three individuals are chosen at random from the general population, what is the

probability that at least one of them satisfy the minimum requirement for admission to

Mensa?

K5 – 6.89

Flight delays at major US airports are an increasing source of exasperation to executives.

According to Fortune Magazine, about 290,000 flights were delayed by more than 15 minutes

during the first six months of this year with many of the delays lasting hours. During this period,

13% of all arrivals and departures at New York’s LaGuardia Airport experienced delays of at

least 15 minutes. The corresponding level of delays at Denver’s Stapleton Airport was about 5%.

Suppose an executive made three round trips from Denver and New York during this period.

a. Find the probability that the executive experienced at least four delays of 15 minutes or

more at Stapleton Airport during arrival or departure.

b. Find the probability that the executive experienced no delays of 15 minutes or more upon

arrival or at departure from LaGuardia Airport during the three trips.

c. Find the probability that the executive experienced no delays of 15 minutes or more

during the three round trips.

d. What assumptions have you made in solving the first three parts of this exercise?

K5 – 7.19

The maintenance department of a city’s electric power company finds that it is cost-efficient to

replace all streetlight bulbs at once, rather than replacing the bulbs individually as they burn out.

Assume that the lifetime of a bulb is normally distributed, with a mean of 3,000 hours and a

standard deviation of 200 hours.

a. If the department wants no more than 1% of the bulbs to burn before they are replaced,

after how many hours should all the bulbs be replaced?

MBA 5300 LAB WEEK 5 3

b. If two bulbs are selected at random from among those having been replaced, what is the

probability that at least one of them has burned out?

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