1. Businesses commonly project revenues under alternative economic scenarios.

For a stylized example,

inflation could be high or low and unemployment could be high or low. There are four possible scenarios,
with the assumed probabilities:

(a) What is the probability of high inflation?

To find probability of high inflation we observe that in Scenario 1 and 2 inflation is high. Now,
at a given time we can have either scenario 1 or Scenario 2 to get high inflation. Thus, total
probability of having high inflation is 0.16+0.24 = 0.40 . Mathematically this can be shown as:
P(A) = P (A ᴖ B) + P (A ᴖ BC) = 0.16+0.24 =0.40 . Here A: Event that inflation is high, B is event
that unemploymen is high.

(b) What is the probability of high inflation if unemployment is high?

This is known as conditional probability and thus we use mathematical formula for conditional
probability and note down corresponding values from table, in order to get the result.

P(A |B)= P(A ᴖB)/P(B) = P(A ᴖB)/[P(A ᴖ B) + P(AC ᴖB)] = 0.16/(0.16+0.36) = 0.16/0.52 = 0.307

(c) Are inflation and unemployment independent?

No, because, P(A) =.40 is not equal to P(A|B) which is 0.307 hence the two variables are not independent.

2. Let X and Y be continuous random variables with joint density function:

f(x,y) = {
x+ky 0≤x≤1,0≤y≤1,

0 elsewhere

(a) Identify the value of k.

(b) Find g(x) - the marginal distribution of X and h(y) - the marginal distribution of Y . Are X and Y
independent?

(c) What is the probability that X ≤ 1/2 and Y ≤ 3/4?

(d) What is the probability of X ≤ 1/2 given that Y = 3/4?

(e) Find the covariance of X and Y . (Cov(X, Y ))