1.

The following grouped frequency distribution gives the pay ranges for
all middle management personnel in a company. Find the mean pay?
Class Boundaries Frequency
2 ! " ! # $
# ! " ! $ 2%
$ ! " ! & 2'
& ! " ! ( 2&
( ! " ! % 1%
SOLUTION
Call ) * the pay for middle management personnel in that company. ) is
discrete variable.
+e replace the class boundaries of ) by the class average as the following
table ,
Class boundaries
"
i
Class average
"
i
Frequency
n
i
-robability
-
i
.-/"
i
0.n
i
1n
2 * # 2& $ $112
# * $ #& 2% 2%112
$ * & $& 2' 2'112
& * ( && 2& 2&112
( * % (& 1% 1%112
2n.12 2p.1
The mean pay is the mean of variable ) . 3/)04 according to the formula of
3/)04 we have
3/)0 .

i
i i
x p .
.
102
4
.2& 5
102
27
.#& 5
102
29
.$& 5
102
25
.&& 5
102
17
.(& . $%.#&
So, conclude that the mean pay is 47.35
3nd of 6olution of 3"ercise 1.
2. For a population of 7rms4 there is a prior probability p . .1 that a
given 7rm is defaulting4 and q . 1-p . .' that it is non8defaulting.
9oreover4 using 7nancial analysis and 7nancial ratios4 7rms are
classi7ed into three credit groups, high4 medium and low. The table
below gives the conditional probabilities for a 7rm to belong to a credit
group given it is defaulting or not.
Credit group :igh 9edium ;ow
<on8defaulting .%& .2 .&
=efaulting .$ .1& .>1
Compute the posterior probability that a 7rm defaults given that it?s
credit is high /resp. medium4 low0. @t is possible to conclude that
7nancial analysis is eAcient in detecting 7rm?s default for the given
population?
SOLUTION
+e have prior probabilities,
-/=.defaulting0 . p . .1B -/<=.non8defaulting0 . q . 1 * p . .'B
The posterior proaility that a !rm de"aults #i$en that it%s
credit is hi#h& is '()*+,
Cccording to the BCD36? theorem E formula4 we have,
-/=F:0 .
) (
) ( ). | (
H P
D P D H P
.
) ( ). | ( ) ( ). | (
) ( ). | (
ND P ND H P D P D H P
D P D H P
+
.
9 . 0 75 . 0 1 . 0 04 . 0
1 . 0 04 . 0
+

..&>'B
6imilarly4 we have,
The posterior proaility that a !rm de"aults #i$en that it%s
credit is medium& is '()*-,
Cccording to the BCD36? theorem E formula4 we have,
-/=F90 .
) (
) ( ). | (
M P
D P D M P
.
) ( ). | ( ) ( ). | (
) ( ). | (
ND P ND M P D P D M P
D P D M P
+
.
9 . 0 2 . 0 1 . 0 15 . 0
1 . 0 15 . 0
+

..%('B
The posterior proaility that a !rm de"aults #i$en that it%s
credit is lo.& is '()*L,
Cccording to the BCD36? theorem E formula4 we have,
-/=F;0 .
) (
) ( ). | (
L P
D P D L P
.
) ( ). | ( ) ( ). | (
) ( ). | (
ND P ND L P D P D L P
D P D L P
+
.
9 . 0 05 . 0 1 . 0 81 . 0
1 . 0 81 . 0
+

..($2>B
6o4 conclusion, -/=F:0.&.>'GB -/=F90.%.('GB -/=F;0.($.2>GB
H<ote, basically4 -/=.:0.-/:.=0.-/=F:0.-/:0.-/:F=0.-/=0B and similarly
with -/=.904 -/=.;0B
Cnd -/90.-/9.=05-/9.<=0.-/9F=0.-/=05-/9F<=0.-/<=0B similarly with
-/:04 -/;0.
@llustration, -/=0.-/:.=05-/9.=05-/;.=0.-/:F=0.-/=05-/9F=0.-/=0
5-/;F=0.-/=0.

..$".15.1&".15.>&".1..1 as givenI
There are si#ni!cant de/erences y comparison the computed
posterior proaility .ith the conditional proaility #i$en in
the tale (y 0inancial 1nalysis,2
34p. '()*+,55.678 9: '(+*),548; '()*
-,57.<789:'(-*),5=58; '()*L,5<4.>689:'(L*
),56=8.
?onclusion2 it is impossile to conclude that !nancial analysis
is e@cient in detectin# !rm%s de"ault "or the #i$en population.
3nd of 6olution of 3"ercise 2.
#. C study shows that the distribution of annual earnings of all marJeting
assistant professors in the Knited 6tates with 7ve years of e"perience
has a mean of L&4 and a standard deviation of L>4. 6ay we
draw a random sample of & assistant professors of marJeting. +hat is
the probability that their annual earnings will average more than
L&(4&?
SOLUTION
Call ) /L0 * the annual earnings of all marJeting assistant professors in
K6 with &years of e"perience. ) is random variable that follows the
<ormal =istribution,
)M</NB

2
0 with E(X) = = 50,000; and SD(X) =

= 8,000 or Var(X)
=

= 8,000

;
<ow4 draw a random sample of & /n.&0 assistant professors of
marJeting4
and call X /L0 8 the average of their annual earnings4 so X is also a
random variable and X also follows the <ormal =istribution,
X M</NB

2
1n0 with E( X ) = E(X) = 50,000 and Var( X ) = Var(X)!n =

!n = 8,000

!50;
To compute the probability of X O&(4&4 we use P8statistics with,
P .
n
X

4 so P is also a random variable and P follows </B10.
Cccording to the Central ;imit Theorem4 we have,
-/ X O&(&0 . -/
50
8000
50000 X
O
50
8000
50000 56500
0 . -/PO&.%$0 . .& * -/P.&.%$0 .
.& * .& . .
*Note: with every Z 3.9, P(Z) = 0.5;
?onclusion2 proaility that the annual earnin#s a$era#e more
than 5<,5AAB is A.
3nd of 6olution of 3"ercise #.
$. Cn economist wants to estimate the average amount in checJing
accounts at banJs in a given region. C random sample of 1 accounts
gives N.L$&%.( and s.L1$.. =etermine at '&G con7dence
interval for 4 the average amount in any checJing account at a banJ in
the given region.
SOLUTION
Call ) /L0 * the average amount in any checJing accounts at a banJ in
a given region. ) is random variable and follows the <ormal
=istribution </NBQ
2
0.
From a random sample of 1 accounts4 we have,
n . 1B
x . L$&%.(B
s.L1$.B
with con7dence interval /c.i0 for N is /18R0 . '&G .O R . &G . .&B
@n this case4 Q is unJnown E n.1O#4 so the N of ) with c.i /18R0 .
'&G is /two8side c.i0,
x 8S
R12
.
n
s
! N ! x 5S
R12
.
n
s
with R . .& .O S
R12
. 1.'(
$&%.( * 1.'(
100
140
! N ! $&%.( 5 1.'(
100
140
$#.1( ! N ! $>&.$B
?onclusion2 .ith 758 c.i "or C, the a$era#e amount in any
checDin# accounts at a anD in a #i$en re#ion is2
43A.=< : C : 465.A4
3nd of 6olution of 3"ercise $.
&. C marJeting 7rm discovers that %&G of the # customers who
participated in a blind taste test prefer brand C to brand B. Tive a '&G
c.i. for the number of people who prefer brand C?
SOLUTION
Call p /population proportion0 * the proportion of people who prefer
band C.
+ith %&G of # customers who participated in a blind taste test prefer
band C to brand B .O n . #B pU . %&G . .%&B
+ith '&G c.i /.O R . .&0 for p4 the population proportion p is,
pU 8 B ! p ! pU 5 B where B . S
R12
n
p p ) ^ 1 ( ^
B
-U 8 S
R12
n
p p ) ^ 1 ( ^
! p ! pU 5 S
R12
n
p p ) ^ 1 ( ^
B with S
R12
. 1.'(
.%& * 1.'(
30
) 75 . 0 1 ( 75 . 0
! p ! .%& 5 1.'(
30
) 75 . 0 1 ( 75 . 0
.&'& ! p ! .'&B
?onclusion2 .ith 758 c.i "or p, the numer o" people .ho
pre"er and 1 is "rom
57.58 to 7A.58
3nd of 6olution of 3"ercise &.