Sample Questions and Answers

Summer 2022

Note: These are some of the kind of questions that you may see on the midterm.
However, you are expected to know everything that we have discussed so far in class
and the exam may not have a single computation question.

The answers to the questions are at the end of this document

1) Let Y be normally distributed with mean 20 and let X be normally distributed with mean
20. It is known that the variance of the distribution of Y is greater than the variance of the
distribution of X. Then

(i) P(18<Y<20) > P(18<X<20) (ii) P(18<Y<20) < P(18<X<20) (iii) P(18<Y<20) =
P(18<X<20) (iv) Not enough information to answer the question

2) Consumer advocates frequently complain about the large variation in the prices charged
by different pharmacies for the same prescription. A survey of pharmacies in Chicago by
one such advocate revealed that the prices charged for a small bottle of tablets of Tylenol
were normally distributed with a mean price of $9.75 and 90% of the prices were between
$8.25 and $11.25. What proportion of the pharmacies charged over $10.25 for the
prescription?

3) The French nobleman and gambler Antoine Gombaud, Chevalier de Mere had won a
considerable amount of money betting that he could roll at least one six in four consecutive
throws of a single die. But he was losing a packet of money betting that he could roll at
least one double six in twenty four throws of a pair of dice. Calculate the probabilities of
these two events. { i.e. calculate P(at least one six in four throws of a single die) and P(at
least one double six in twenty four throws of a pair of die)}. Assuming that Antoine was
betting even money in these games (i.e. if the game went in his favour, he won $1 and he
lost $1 if the game went against him), can you now explain why he was losing money in
the second bet? (Gombaud contacted the French mathematician/physicist/philosopher
Blaise Pascal about this problem and other games of chance. Pascal discussed these
problems with Pierre Fermat (of ‘Fermat’s Last Theorem’ fame) and these discussions led
to some of the first books on probability theory).

4) Consider a fair game where a biased coin (i.e. P(H) is not 0.5) is tossed twice,
independently. If both tosses are Heads, the player wins $8. Otherwise, the player loses $1.
If the coin has probability p of coming up heads on any given toss, what is the value of p?
(Justify your answer briefly)
i) 1/9 ii) 1/3 iii) 8/9 iv) 2/3 v) None of the Above.
5) The Rent-n-Drive car rental company knows from experience that the number of miles
that customers drive a rental car upon renting it is normally distributed with a mean of 400
miles. The company also knows that only 2.5% of the times are their rental cars driven less
than 204 miles upon renting.
What is the probability that a rental car is driven more than 440 miles?

6) At a local airport, the probability that a passenger is flying on a major airline is 0.6. The
probability that a passenger is traveling for business reasons is 0.66. Given that a passenger
is flying on a major airline, the probability that he is traveling for business reasons is 0.5
(i) What is the probability that a passenger is traveling for business reasons and is flying
on a major airline?
(ii) What is the probability that a passenger is flying on a major airline, given that he is
traveling for business reasons?
(iii) What is the probability that a passenger is not flying on a major airline, given that he
is not traveling for business reasons?

7) An analyst states that the variable “salary of an individual” has a log-normal

distribution.

i) If you were to make a histogram on a large data set of values of salaries of individuals,
what would be the shape that you would observe? (Describe this in a sentence or two)

ii) If you were to make a histogram on a large data set of values of log(salaries) of
individuals (so now each value in the data set would be the logarithm of the salary of an
individual), what would be the shape that you would observe? (Describe this precisely in
a sentence or two)

8) The Bureau of Labour Statistics (BLS) in the U.S. regularly publishes the Current
Economic Statistics (CES), or the "employer survey", which produces the estimated
"change in nonfarm payrolls" number. This is the most common measure of jobs
gained/lost across all sectors (a breakdown by sector is also published).

This estimate, which is released every month, is subsequently revised twice, once each in
the two months following the initial report. (The major reason for these revisions is that
the data for the nonfarm payroll numbers are obtained from firms and their data are not
always fully available due to the short time cycle before each initial monthly report)

Researchers at the Federal Reserve Bank of St Louis were interested in how these monthly
revisions behave. To study this, they collected data on the first revision to nonfarm payroll
employment numbers for every month, starting from January 1980, and created a
histogram of this data, which is shown below:
In their study, referring to this histogram, the researchers stated that “While there are a
few large outliers, the distribution appears normal, with a mean of 12.7, which shows that
the initial numbers underestimate the change in employment by an average of 12,700
jobs.”

Do you agree with the researchers’ assessment that the distribution of the first revision
to the monthly nonfarm payroll employments numbers is normally distributed? (You
must, briefly but clearly, provide justification for your choice)

(i) Yes (ii) No

Solutions

1) (ii) Since the X distribution has a smaller variance, it will have a greater proportion of
observations within the same interval around the mean. To see this more precisely, let σ y
be the standard deviation of Y and σ x that of X. Then P(18<Y<20) = P( − 2 / σ y < Z < 0)
while P(18<X<20) = P( − 2 / σ x < Z < 0) . Since σ y > σ x , we must have P( − 2 / σ y < Z < 0)
<P( − 2 / σ x < Z < 0) .
2) We must have (11.25-9.75) = 1.645 σ and thus σ =0.91. Thus, P(Y>10.25) = P(Z>
(10.25-9.75)/0.91) = P(Z>0.55) = 0.2912

3)
P(At least one six in 4 rolls)=1-P(no six in 4 rolls)=1- (5 / 6) 4 =0.517747

Now let X = Profit from playing the game. Since the game is played with a bet of even
money (i.e. you win a $1 or lose a $1, depending on whether you get at least one 6 in four
throws or not), we have E(X) = 1*(0.517747) – 1*(0.482253) = $ 0.035494. Thus, this
bet is favourable to the Chevalier.

Next, P(At least one double six in 24 rolls)=1-P(No double six in 24 rolls)=1- (35 / 36) 24
=0.491404

If X = Profit from playing the game when betting even money, a calculation similar to the
one above shows that E(X) = - $ 0.017192

Hence, if the Chevalier were playing even money, he would have a positive expected
profit in the first bet but a negative expected profit in the second.

4) P(Two heads in a row) = p*p= p 2 (because the two tosses are independent)

Thus, you win $8 with probability p 2 and lose $1 with probability 1- p 2

E(Profit) = 8 p 2 - 1*(1- p 2 ). Since the game is fair, E(Profit) = 0

Thus, 8 p 2 - 1*(1- p 2 ). = 0. Solving for p gives p=1/3 and the answer is (ii)

5) Y = number of miles driven in rental car

Y is normally distributed with mean µ = 400
The standard deviation σ is not given but can be found since P(Y<204) = 0.025, which
204 − 400
implies P(Z< ) = 0.025
σ
204 − 400
Thus, = -1.96 giving σ =100
σ

440 − 400
Hence, P(Y>440) = P(Z> ) = P(Z>0.4) = 0.5-0.1554 = 0.344
100
6)
(i) P(B and M) = 0.3
(ii) P(M / B) = 0.3/0.66 = 0.45
(iii) P(not M / not B) = 0.04/0.34 = 0.118

7) i) The histogram of salaries would be right skewed

ii) The histogram of log(salaries) would be normally distributed

8) (ii) No. Every normal curve is bell shaped, however every bell shaped curve is not
normal. Just a visual inspection is not enough as we cannot tell if the variable has a thick
tailed distribution. The way to check this is via the kurtosis check.