Problem Set: Random Variables

PROBLEM SET: RANDOM VARIABLES
SOLUTIONS
PROBLEM R.1
Solution:
a)!
x
3
6
9
Sum
P(x)
0.25
0.50
0.25
1.00
x
3
6
9
Sum
x-E[X]
-3
0
3
x*P(x)
0.75
3.00
2.25
6.00
Thus, E[X] = 6.
b)!
(x-E[X])2
9
0
9
Thus, VAR[X] = 4.5.

c)! Standard deviation of X is the square root of VAR[X], which is 2.12.
P(x)
0.25
0.50
0.25
1.00
(x-E[X])2*P(x)
2.25
0
2.25
4.5
PROBLEM R.2
Solution: Let X denote the companys monthly demand.
a)! E[X] = 300(0.20) + 400(0.30) + 500(0.35) + 600(0.15) = 445.
b)! Cost: 445 @ $50 = $22250.
Revenue: 300 @ $70 = 21000.
Difference: Net loss of $1250.
c)!
x
300
400
500
600
Sum
x-E[X]
-145
-45
55
155
(x-E[X])2
21025
2025
3025
24025
P(x)
0.20
0.30
0.35
0.15
1.00
(x-E[X])2*P(x)
4205
607.5
1058.75
3603.75
9475
Thus, VAR[X] = 9475.

Taking the square root, the standard deviation of X is 97.3396.
d)! Let Z denote the total revenue.
Then, Z = 70*X.
E[Z] = E[70*X] = 70*E[X] = 70*445 = 31150.
VAR[Z] = VAR[70*X] = 702*VAR[X] = 4900*9475= 46427500.
STD[Z] = sqrt(VAR[Z]) = sqrt(46427500) = 6813.7728.
Recall: If alaph is a constant and Y is a random variable, then VAR(alpha*Y) is alpha squared times
VAR(Y).
PROBLEM R.3
Solution:
a)! Note P(X=2) = P(Y=2) = 1/2 = 4/8. Thus,
X
Y
0
1
2
0
1
2
0
1
2
T
0
1
2
1
2
3
2
3
4
Probability
(1/8)(1/8) = 1/64
(1/8)(3/8) = 3/64
(1/8)(4/8) = 4/64
(3/8)(1/8) = 3/64
(3/8)(3/8) = 9/64
(3/8)(4/8) = 12/64
(4/8)(1/8) = 4/64
(4/8)(3/8) = 12/64
(4/8)(4/8) = 16/64
Therefore, the distribution of T is given by:

T
0
1
2
3
4
Probability
1/64
3/64 + 3/64 = 6/64 = 3/32
4/64 + 9/64+ 4/64 = 17/64
12/64 + 12/64 = 24/64 = 3/8
16/64 = 1/4
b)! E[X] = E[Y] = (1/8)*0 + (3/8)*1 + (1/2)*2 = 11/8 = 1.375

E[T] = E[X] + E[Y] = 2* (11/8) = 22/8 = 11/4 = 2.75
c)! VAR[X] = VAR[Y] = (1/8)*(0-11/8)2 + (3/8)*(1-11/8)2 + (1/2)*(2-11/8)2 = 31/64 = 0.4844
VAR[T] = VAR[X] + VAR[Y] = 2*(31/64) = 62/64 = 31/32 = 0.9688
PROBLEM R.4
Solution: To determine the independence of X and Y, compute the marginal probabilities P(x) and P(y). Each is
given by P(0) = 1/2 and P(1) = 1/2.
Entering this in the joint probability table we have:
Y
X
0
1
P(y)
0
0.25
0.25
0.50
1
0.25
0.25
0.50
P(x)
0.50
0.50
1.00
Hence, for all cells in the joint probability distribution, each joint probability is equal to the product of the
corresponding marginal probabilities. This means that X and Y are independent as expected.
What does independence tell us? Essentially, that knowledge of the value of one random variable tells us nothing
about the value of the second random variable, or that the two variables vary separately.
PROBLEM R.5
Solution:
a)! The marginal distribution of X and the marginal distribution of Y are given by:
x
p(x)
0.5
0.5
p(y)
0.5
0.3
0.2
b)! E(X) = .5(1) + .5(2) = 1.5

E(X2) = .5(1)2 + .5(2)2 = 2.5
VAR(X) = E(X2) - E(X)2 = 2.5 1.52 = 0.25
E(Y) = .5(1) + .3(2) + .2(3)= 1.7
E(Y2) = .5(1)2 + .3(2)2 + .2(3)2 = 3.5
VAR(Y) = E(Y2) - E(Y)2 = 3.5 1.72 = 0.61
c)! P(X=1 and Y=2) = 0.1
d)! P(X=2 and Y2) = P(X=2 and Y=1) + P(X=2 and Y=2) = 0.3 + 0.2 = 0.5
e)! E(X+Y) = E(X) + E(Y) = 1.5 + 1.7 = 3.2
Below is the probability distribution of X+Y.
P[X+Y=2] = P[X=1 and Y=1] = 0.2
P[X+Y=3] = P[X=2 and Y=1] + P[X=1 and Y=2] = 0.3 + 0.1 = 0.4
P[X+Y=4] = P[X=3 and Y=1] + P[X=2 and Y=2] = 0.2 + 0.2 = 0.4
P[X+Y=5] = P[X=2 and Y=4] = 0
z=x+y
p(z)
VAR(X+Y)
2
0.2
3
0.4
4
0.4
5
0.0
= 0.2(2-3.2)2 + 0.4(3-3.2)2 + 0.4(4-3.2)2

= 0.2(1.44) + 0.4(0.04) + 0.4(0.64)
= 0.56
f)! E(10X+5Y) = 10*E(X) + 5*E(Y) = 10*(1.5) + 5*(1.7) = 15 + 8.5 = 23.5

P[10X+5Y=15] = P[X=1 and Y=1] = 0.2
P[10X+5Y=20] = P[X=1 and Y=2] = 0.1
P[10X+5Y=25] = P[X=1 and Y=3] + P[X=2 and Y=1] = 0.2 + 0.3 = 0.5
P[10X+5Y=30] = P[X=2 and Y=2] = 0.2
P[10X+5Y=35] = P[X=2 and Y=3] = 0
z=10x+5y
p(z)
15
0.2
20
0.1
25
0.5
30
0.2
35
0.0
VAR(10X+5Y) = 0.2(15-23.5)2 + 0.1(20-23.5)2 + 0.5(25-23.5)2 + 0.2(30-23.5)2

= 0.2(72.25) + 0.1(12.25) + 0.5(2.25) + 0.2(42.25)
= 25.25
40
0.0
PROBLEM R.6
Solution:
a)!
X
(Tractors
Day 1)
0
0.1
0.1
0
0.2
0
1
2
TOTAL
Y (Tractors Day 2)
1
0.1
0.2
0.2
0.5
2
0
0.2
0.1
0.3
TOTAL
0.2
0.5
0.3
1.0
Thus, the marginal distributions of X and Y are given by:

x
p(x)
0.2
0.5
0.3
p(y)
0.2
0.5
0.3
b)! No, because P(X and Y) P(X) * P(Y) for all X and Y.
For example, P(X=0 and Y=0) = 0.1, and this is not equal to P(X=0)*P(Y=0) = 0.2*0.2= 0.04.
c)! E(X) = 0.2(0) + 0.5(1) + 0.3(2) = 1.1
VAR(X) = 0.2(0-1.1)2 + 0.5(1-1.1) 2 + 0.3(2-1.1) 2
= 0.2(1.21) + 0.5(.01) + 0.3(.81)
= 0.242 + 0.005 + 0.243
= 0.49
d)! Let T = X+Y.
P[T=0] = P[X=0 and Y=0] = 0.1
P[T=1] = P[X=0 and Y=1] + P[X=1 and Y=0] = 0.1 + 0.1 = 0.2
P[T=2] = P[X=0 and Y=2] + P[X=1 and Y=1] + P[X=2 and Y=0] = 0 + 0.2 + 0 = 0.2
P[T=3] = P[X=1 and Y=2] + P[X=2 and Y=1] = 0.2 + 0.2 = 0.4
P[T=4] = P[X=2 and Y=2] = 0.1
t
p(t)
0
0.1
1
0.2
2
0.2
3
0.4
4
0.1
E(T)
= 0.1(0) + 0.2(1) + 0.2(2) + 0.4(3) + 0.4(4)

= 2.2
VAR(T) = 0.1(0-2.2)2 + 0.2(1-2.2) 2 + 0.2(2-2.2) 2 + 0.4(3-2.2) 2 + 0.4(4-2.2) 2
= 1.36
e)! Note that the overhead cost must be paid regardless of the number of tractors sold.
(2 day profit) = (35000-20000) * T (2000+4000).
E(2 day profit)
= E[(35000-20000) * T (2000+4000) ]
= E[(35000-20000) * T] E[2000+4000]
= (35000-20000) * E(T) (2000+4000)
= 15000*(2.2) (6000) = 27000
Note that (2000+4000)=6000 is a constant, which has no variability. Thus, VAR(6000) = 0.

VAR(2 day profit)
= VAR [(35000-20000) * T + (-(2000+4000)) ]

= VAR [(35000-20000) * T] + VAR[(-1)*(6000)]
= (35000-20000)2 VAR(T) + (-1)2 VAR(6000)
= 150002 * 1.36 + 0
= 150002 * 1.36
= 306,000,000
StDev(2 day profit)
= sqrt(150002 *1.36)
= 15000*sqrt(1.36)
= 17492.856.
PROBLEM R.7
Solution:
a)! Let T be the total project completion time.
The project is completed when all four jobs are completed.
Since B and C cannot start until A is completed and D cannot start until B is completed, the project is
completed when both Jobs B and D are completed, i.e., the projected is completed when B or D are
completed, whichever is later.
Let A, B, C and D denote the duration time of Jobs A, B, C and D, respectively, in weeks.
Thus, T = max{A+B, A+C+D}
We have:
P(A=1) = 0.4
P(A=2) = 0.6
P(B=3) = 0.5
P(B=4) = 0.5
P(C=1 D=2) = 0.2

P(C=1 D=3) = 0
P(C=2 D=2) = 0.4
P(C=2 D=3) = 0.4
Based on this, we could draw a probability tree (which is omitted here). We obtain the following
probabilities for each outcome.
A=1
A=1
A=1
A=1
A=1
A=1
A=1
A=1
A=2
A=2
A=2
A=2
A=2
A=2
A=2
A=2
(A, B, C, D) Outcome
B=3 C=1 D=2
B=3 C=1 D=3
B=3 C=2 D=2
B=3 C=2 D=3
B=4 C=1 D=2
B=4 C=1 D=3
B=4 C=2 D=2
B=4 C=2 D=3
B=3 C=1 D=2
B=3 C=1 D=3
B=3 C=2 D=2
B=3 C=2 D=3
B=4 C=1 D=2
B=4 C=1 D=3
B=4 C=2 D=2
B=4 C=2 D=3
A+B
4
4
4
4
5
5
5
5
5
5
5
5
6
6
6
6
A+C+D
4
5
5
6
4
5
5
6
5
6
6
7
5
6
6
7
T
4
5
5
6
5
5
5
6
5
6
6
7
6
6
6
7
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
Probability
0.5 * 0.2
0.5 *
0
0.5 * 0.4
0.5 * 0.4
0.5 * 0.2
0.5 *
0
0.5 * 0.4
0.5 * 0.4
0.5 * 0.2
0.5 *
0
0.5 * 0.4
0.5 * 0.4
0.5 * 0.2
0.5 *
0
0.5 * 0.4
0.5 * 0.4
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
=
0.04
0
0.08
0.08
0.04
0
0.08
0.08
0.06
0
0.12
0.12
0.06
0
0.12
0.12
The probability distribution for T is given below:

t
p(t)
4
0.04
5
0.26
6
0.46
7
0.24
b)! Let R be the firms net contribution for this project. Note that R depends on T (completion time) and C
(duration of Job C). The joint probability table for T and C can be computed:
AND
C=1
C=2
Total
T=4
0.04
0
0.04
T=5
0.10
0.16
0.26
T=6
0.06
0.40
0.46
T=7
0
0.24
0.24
Total
0.20
0.80
1.0
Recall that the firm receives $10,000 for completing the job if T <= 5, and $9,500 if T>5. The cost will be
$4000 in addition to $500*T (labor cost) and $500*C (machinery rental). The following shows the value
of R as a function of T and C:
R
C=1
C=2
T=4
10000
- 4000 - 4*500
- 1*500
=3500
10000
- 4000 - 4*500
- 2*500
= 3000
T=5
10000
- 4000 - 5*500
- 1*500
=3000
10000
- 4000 - 5*500
- 2*500
= 2500
T=6
9500
- 4000 - 6*500
- 1*500
= 2000
9500
- 4000 - 6*500
- 2*500
= 1500
T=7
9500
- 4000 - 7*500
- 1*500
= 1500
9500
- 4000 - 7*500
- 2*500
= 1000
The probability distribution for R is given as follows:

r
p(r)
1000
0.24
1500
0.40
2000
0.06
2500
0.16
3000
0.10
3500
0.04

Problem Set: Random Variables

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PROBLEM SET: RANDOM VARIABLES

Thus, VAR[X] = 4.5.

Thus, VAR[X] = 9475.

Therefore, the distribution of T is given by:

b)! E[X] = E[Y] = (1/8)0 + (3/8)1 + (1/2)*2 = 11/8 = 1.375

b)! E(X) = .5(1) + .5(2) = 1.5

= 0.2(2-3.2)2 + 0.4(3-3.2)2 + 0.4(4-3.2)2

f)! E(10X+5Y) = 10E(X) + 5E(Y) = 10(1.5) + 5(1.7) = 15 + 8.5 = 23.5

VAR(10X+5Y) = 0.2(15-23.5)2 + 0.1(20-23.5)2 + 0.5(25-23.5)2 + 0.2(30-23.5)2

Thus, the marginal distributions of X and Y are given by:

= 0.1(0) + 0.2(1) + 0.2(2) + 0.4(3) + 0.4(4)

Note that (2000+4000)=6000 is a constant, which has no variability. Thus, VAR(6000) = 0.

= VAR [(35000-20000) * T + (-(2000+4000)) ]

P(C=1 D=2) = 0.2

The probability distribution for T is given below:

The probability distribution for R is given as follows:

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