ISOM 2500 Business Statistics

Practice 1

1. A survey of banks revealed the following distribution for the interest rate being
charged on a home loan (based on a 30-year mortgage with a 10% down
payment).

Interest Rate 4.90% to 5.00% to 5.10% to 5.20% to 5.30% and

4.99% 5.09% 5.19% 5.29% above
Probability 0.12 0.23 0.24 0.35 0.06

If a bank is selected at random from this distribution, what is the chance that the
interest rate charged on a home loan will exceed 5.19%?
ANS: 0.35+0.06= 0.41 (Select the probability that is over 5.19%. (5.20% above)

[Q2-Q4]
In October 2003, Consumer Reports evaluated the price and performance of cordless
phones by selecting a sample of 23 models. Computer output gives these summaries
for the prices ($):

2. Based on the summary statistics, which distribution would be look like?

Ans: Median < Mean, thus the distribution is skewed to the right.

3. Ans: IQR=Q3-Q1=110-30=80
4. Ans: The mean will decrease
5. Suppose that events A and B have probabilities 0.5 and 0.6 respectively.
Is it possible that A and B are mutually exclusive? True or False? Why?

Ans: False.
Mutually exclusive means the intersection is empty.
Mutually exclusive mans the total probability of 𝑃(𝐴 ∪ 𝐵) = P(A) + P(B) - 𝑃(𝐴 ∩ 𝐵) =
0.5+0.6 – 0 =1.1 >1. The total probability can be bigger than 1, so it’s not mutually
exclusive.
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6. A company has 2 machines that produce widgets. An older machine produces 23%
defective widgets, while the new machine produces only 8% defective widgets.
In addition, the new machine produces 3 times as many widgets as the older
machine does. What is the probability that a randomly chosen widget produced
by the company is defective?
Ans:
P(new machine) = 75%, P(old machine) = 25%. Applying the law of total probability,
P(defective) = .25*.23 + .75*.08= 0.1175

7. Each camper at the park is asked to fill out a survey which reads as follows:
“We are interested in knowing your return status. Are you planning to return to
this park for camping next summer? Circle the number corresponding to your
response.” Campers are also asked to supply their Zip Code. The camper will
circle one of the numbers below, depending on their status.

NO UNLIKELY UNSURE LIKELY YES

1 2 3 4 5

The summary of the data from the responses consists of the “Zip Code,” and the
“Return Status” of the camper. “Which best describes the type of `Return
Status`?” What about the type of “Zip Code”?

ANS:
The numbers in “Return Status” describes the preference level of campers returning to
the park, so it is categorical and ordinal. “Zip Code” looks like numbers, however,
there is no numerical meaning associated with them: they cannot add or subtract and
there is no order among the zip codes, therefore, “Zip Code” is categorical and
nominal.

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8. The following data points represent the number of animal crackers in each kid’s
lunch box:
4, 4, 10, 11,15,7,14,12,6

Find the mean, median, mode, interquartile range (IQR)

and range of the data set.

ANS:

Ø Mean is defined as the population average.

Mean= ( 4+ 4+ 10+ 11+15+7+14+12+6 )/9= 9.222

If we would like to calculate Median, Rang and Interquartile Range, we need to

reorder our data as 4,4,6,7,10,11,12,14,15

Ø Median is the value of the middle point of the ordered measurements. It is the
“middle” number (50% above, 50% below)
Median= 10 (The number of measurement n is odd number 9, so the median is
the middle number)

Ø Mode is the most frequent value.

Mode= 4. In this case only 4 appears twice.

Ø Interquartile Range (IQR)

Quartiles split the ranked data into 4 segments with an equal number of values
per segment.
First quartile position: (n+1)/4=(9+1)/4= 2.5th Position, so Q1=5
Third quartile position: 3(n+1)/4=3(9+1)/4=7.5th Position, so Q3 = 13
IQR=Q3-Q1=13-5=8

Ø Range: Largest minus the smallest measurement

Range= Max-Min= 15-4=11

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9. If you roll two fair dice, what is the probability that the sum on the two dice
equals 6? What is the probability that at least one of them is greater than 2?

ANS:
Ø The events we see are {1,5},{2,4},{3,3},{4,2},{5,1}. Each of them has
probability of 1/6*1/6 = 1/36 due to the multiplication rule. So the probability
that the sum on the two dice equals 6 will be 5/36.
Ø To calculate the probability that the events that at least one of them is greater
than 2, we check its complement: the probability that NONE of them is greater
than 2 is the probability of events {1,1}, {1,2},{2,1}, {2,2}: (1/36)*4= 1/9. The
probability that the events that at least one of them is greater than 2 is then:
1- 1/9 = 8/9.

10. A student is questioned on 3 multiple choice (single correct answer) questions

that he has no idea about. Each question has 4 possible answers. On each
question he chooses an answer at random, independent of how he answered the
other questions. The chance that among these three questions he gets at least one
question wrong is closest to:

ANS:
P(at least one question wrong) = 1-P(all the questions are correct) =1-.25^3=0.98.

11. A software can successfully filter a junk email with probability 0.9. A regular
email will be mistakenly filtered by the software with probability 0.1. If 30% of
the emails are junk, what is the conditional probability that a filtered email is
junk?

ANS:
We know that P(F|J) = 0.9, P(F|Jc)=0.1, P(J) = 0.3, so P(J|F)= .3*.9/(.3*.9+.7*.1) =
0.79

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 [Q12-13]
An appliance manufacturer maintains a repair center for its customers. Based on past
experience, 30% of all appliances sent in for repair have a mechanical problem (M),
and 70% have an electrical problem (E). If the problem is mechanical, 90% of the
appliances can be repaired and returned to the customer (RR); in the remaining 10%
of the cases the appliance must be replaced (REP) with a new unit. If the problem is
electrical, 60% can be repaired and returned to the customer, with the remaining 40%
being replaced with a new unit.

12. What percentage of all appliances sent to the repair center are replaced (REP)
with a new unit?

ANS:
In the question, we are given P(M)= 0.3, P(E)= 0.7. P(RR|M) =0.9, P(REP|M)=0.1.
P(RR|E)=0.6, P(REP|E)=0.4.
So P(REP)= P(REP|M)*P(M)+P(RR|M)*P(M)= .3*.1+.7*.4 = 31%, using the law of
total probability and the multiplication rule for conditional probability.

13. If an appliance at the repair center is selected at random and it needs to be

replaced with a new unit, what is the probability that the appliance has an
electrical problem?

ANS:
P(E|REP)= .7*.4/(.3*.1+.7*.4)=0.9032=90.32%, using the Bayes Rule.

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14.
After the collapse of the stock market in October 1987, Business Week polled its
readers and asked whether they expected another big drop in the market during
the next 12 months. The data table for this question has two variables. One
indicates whether the reader owns stock and the others gives the anticipated
chance for another drop.

Check this contingency table defined by stock ownership and the anticipated
chances for a big drop in the market.

Stockholders Non stockholders

Very 18 26
likely

Somewhat 41 65
likely

Not very 52 68
likely

Not likely 19 31
at all

Unsure 8 13

(a)What is the proportion of stockholders who think that a drop was either somewhat
likely or very likely?

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ANS:
First we need to find the marginal distributions:

Stockholders Non Total

stockholders

Very likely 18 26 44

Somewhat 41 65 106
likely

Not very likely 52 68 120

Not likely at 19 31 50
all

Unsure 8 13 21

Total 138 203 341

(18+41)/138 = 42.75% of stockholders anticipated another drop.

(b) What is the proportion of non-stockholders who think that a drop was either
somewhat likely or very likely?
ANS:
Among non-stockholders, the percentage expecting another drop is slightly
higher, (26+65)/203 = 44.83%

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15. The human resource manager at a company has classified applicants according to
whether or not they have any computer skills (Yes or No), and whether or not
they have previous work experience (Yes or No). The results are summarized
below:

(a) If an applicant is randomly selected and the applicant has previous work
experience, then what is the probability that the applicant has computer
skills?

(b) If an applicant is randomly selected, what is the probability that the

applicant has no previous work experience but has computer skills?

(c) Based on the data given above, is an applicant having computer skills
independent or dependent of the applicant having previous work
experience? (Choose one and Explain your answer).

ANS:
Denote that
A = event representing a candidate who has working experience,
B = event representing a candidate who has computer skills.
Checking:
(a) P(B|A) = 80/140 = 4/7 = 0.5714

(b) P(Ac and B) = 40/210 = 0.1905

(c) P(A and B) = 80/210 = 8/21

P(A) = 140/210 = 2/3

P(B) = 120/210 = 4/7

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 P(A)P(B) = 8/21 which is the same as P(A and B), so A and B are
independent.

16. The price-earnings ratios of a sample of stocks have a mean value of 13.5 and a
standard deviation of 2. If the ratios have a bell-shaped distribution, what will be
the proportion of ratios that fall between 11.5 and 15.5? What about the
proportion between 9.5 and 15.5? What rule are you applying?

ANS:
Ø Since x = 13.5 , s = 2 , 11.5 and 15.5 are actually x - s and x + s
respectively. According to the Empirical Rule, the interval ( x - s , x + s )
contains 68% of the ratios.
Ø For (9.5,15.5), it is 2s below and 1s above. According to the Empirical
rule, and we find that the interval between(𝑥̅ − 2𝑠, 𝑥̅ + 𝑠) contains
(95%/2)+(68%/2) = 81.5% of the ratio.

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17.
A consumer group has surveyed 1000 people who have purchased appliances and
electronic equipment at a large department store. Consumers were asked if they
bought the extended warranty offered with the item they purchased. The responses
were organized by the country in which the purchased item was manufactured – USA,
China, or Japan. The responses are summarized in the following table:

Product Country of
Origin
USA China Japan Total
Purchased Yes 100 150 200 450
Warranty No 250 100 200 550
Total 350 250 400 1000

(a) Is the responses of purchasing warranty associated with the product

country of Origin?
Ans:
Yes. 100/350=28.6 % of USA, 150/250=60% of China and 200/400
=50% of Japan were Yes.
The USA, China and Japan have different ratios of purchasing warranty.
So there is association with the product country of Origin.

(b) What are the chi-squared value and Cramer’s V from this table? How strong is the
association?
Ans:
Below are Calculations for Chi-Squared & Cramer’s V.

Chi-Square Statistics :
We calculated based on a comparison of the observed contingency
table to an artificial table with the same marginal totals but no
association.

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 Ø Observed
Product country of Origin
USA China Japan Total
Purchased Yes 100 150 200 450
Warranty No 250 100 200 550
Total 350 250 400 1000

Ø Artificial Table
To calculate the expected value in the artificial table corresponding to
USA & With Purchasing warranty, we find the marginals and do
350*450/1000 = 157.5. Similarly, we could fill in all the rest of the
cells as following.
Product country of Origin
USA China Japan Total
Purchased Yes 157.5 112.5 180 450
Warranty No 192.5 137.5 220 550
Total 350 250 400 1000

(100 − 157.5)! (250 − 192.5)! (150 − 112.5)!

𝑥! = + + +
157.5 192.5 112.5
(100 − 137.5)! (200 − 180)! (200 − 220)!
+ + +
137.5 180 220
= 64.935

In the contingency table, number of rows =2 and number of

"#.%&'
columns=3, so r=2, c=3, and Cramer’s V= 6())) *+,(!.(,&.() = 0.255

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 We get Chi-Squared is 64.935 and Cramer’s V=0.255.
V is between 0.1 and 0.3, so there is weak association between
Purchased warranty & product country of Origin.

(c) An analyst has suggested that there are a large number of extended warranties
purchased on items that are made in Japan because consumers believe that
Japanese products are generally unreliable when compared with products from
the other countries. How would you explain this situation?

Ans:
This is an example of a lurking variable. Lurking variable (confounding factor); a
concealed variable that affects the apparent relationship between two other
variables.
For this problem, one explanation would be that Japan produces a lot of high-tech
products, which tend to cost more to purchase, and to cost much more to repair
should they fail (in which case an extended warranty would protect the buyer
against a substantial repair cost).

18. Analyzing the scatterplot

Describe the following scatterplots between X and Y in term of sign
(positive/negative) and how is the association.

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Ans:
It is negative; Strong
We can describe the association by following 4 steps:
Direction: The direction is trending down.
Curvature: The pattern is almost linear.
Variation: The points tightly cluster around the trend.
Outliers: We don’t see any unexpected point outside the line.
From the graph we can observe that the correlation coefficient is very close to r= -1,
i.e., perfect negative correlation. See Lecture 1c (Slide 14) for a similar pattern and
discussions.
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