Notes on ECON3032

Distribution of functions of random variable

Introduction
Given a set of random variables X i , the (joint) probability distribution/density function of a random variable
Y =u ( X i ) can be found with the method of distribution functions, the method of transformation, or the method of
MGFs. All methods will work for most functions, but, depending on the circumstances, one may be more useful than
another.

Method of distribution functions

First, find the distribution function and then the probability density by differentiation.
1. Note the probability density function
2. State the region G( y )=P(Y ≤ y)
3. Using u(X i) , find the equivalent region P(u( X i)≤ y)
4. Solve for X i within the region
5. Integrate the PDF within the bounds of (4)
6. Differentiate (5) to find the PDF of Y

Example 1.1:

f (x)= 6 x (1−x ), 0< x <1 ,Y =X

{ 0 elsewhere
3
}
G( y )=P(Y ≤ y )
G( y )=P( X 3≤ y )
G( y)=P (x≤ y 1/ 3)
1/3
y
G( y )=∫ 6 x(1−x)dx
0
1/3

G( y )=[3 x 2−2 x3 ]0y

G( y )=3 y 2/ 3−2 y
g( y )=G '( y )=2 y−1 /3−2=2( y 1 /3−1)

Example 1.2:
A process for refining sugar yields up to 1 ton of pure sugar per day. However, the actual amount produced per day,
Y , is a random variable due to unforeseen production issues. Suppose Y has the following density function
f ( y)= 2 y , 0≤ y ≤1
{
0elsewhere }
The company is paid at a rate of US$300 per ton for refined sugar but has a fixed overhead cost of US$100 per day.
Hence, the daily profit (in US$’00) is 3 Y − 1 . Find the pdf of the profit function.

G( π )=P (Π≤ π )=G( π )=P (3 Y −1≤ π )

π +1
G( π )=P Y ≤
3 ( )
( π +1)/3

G( π )= ∫ 2 y dy=G( π )=[ y 2 ](0π +1)/3

0
2
1
G( π )= [
( π +1)
3
= ( π +1)2
9 ]
2
g ( π )=g ' ( π )= (π + 1)
9
Method of transformation
Method of moment generating functions

Appendix with other useful information