1.

An analyst expects that 10% of all publicly traded companies will experience a
decline in earnings next year. The analyst has developed a ratio to help forecast this
decline. If the company is headed for a decline, there is a 70% chance that this ratio
will be negative. If the company is not headed for a decline, there is only a 20%
chance that the ratio will be negative. The analyst randomly selects a company and its
ratio is negative. Based on Bayes' theorem, the posterior probability that the company
will experience a decline is ________.

2. Romi, a production manager, is trying to improve the efficiency of his assembly line.
He knows that the machine is set up correctly only 60% of the time. He also knows
that if the machine is set up correctly, it will produce good parts 80% of the time, but
if set up incorrectly, it will produce good parts only 20% of the time. Romi starts the
machine and produces one part before he begins the production run. He finds the first
part to be good. What is the revised probability that the machine was set up correctly?

3. A certain weightlifter is prone to back injury. He finds that he has a 20% chance of
hurting his back if he uses the proper form of bending at the hips and keeping his
spine locked. The probability that he will hurt his back with bad form is 95%. The
probability that he uses proper form is 75%. What is the probability he hurts his back?

4. An investor in Apple is worried the latest management earnings forecast is too

aggressive and the company will fall short. His favorite analyst that covers Apple is
going to release his report on Apple the week before the earnings announcement.
Report stands for the analyst's report, and Forecast stands for the earnings
announcement. What is the probability the earnings announcement is below the
forecast?

Prior Probabilities Conditional Probabilities

P(Good Report) = 0.2 P(Below Forecast | Good Report) = 0.1
P(Medium Report) = 0.5 P(Below Forecast | Medium Report) = 0.4
P(Bad Report) = 0.3 P(Below Forecast | Bad Report) = 0.9

5. Approximately 70% of the state of Pennsylvania sits on a shale formation from which
natural gas may be extracted. If a geological test is positive, it has an 80% accuracy
rate in correctly identifying a productive drilling site (shale is under the ground). If
there is no shale under the ground, geological testing is falsely positive with a
probability of 20%. Suppose the result of the geological test comes back positive (the
test says there is shale under the ground). It is most important for us to know the
probability that there is indeed shale under the ground given a positive geological test
result. Find this probability. 
6. Restaurants in London, Paris, and New York want diners to experience eating in pitch
darkness to heighten their senses of taste and smell (Vanity Fair, December 2011).
Suppose 400 people were asked, "If given the opportunity, would you eat at one of
these restaurants?" The accompanying contingency table, cross-classified by age,
would be produced.
   18–29 30–44 45–64 65+
Yes 50 39 76 65
No 50 61 24 35

a. What is the probability that a respondent would eat at one of these restaurants?
b. What is the probability that a respondent would eat at one of these restaurants or is in
the 30–44 age bracket?
c. Given that the respondent would eat at one of these restaurants, what is the probability
that he or she is in the 30–44 age bracket?
d. Is whether a respondent would eat at one of these restaurants independent of one's age?
Explain using probabilities.