Econ 141 Problem Set 1

Sahil Chinoy

September 15, 2016

q
Zi2 , where each Zi is an independent standard normal random variable. So W is
P
1. (a) True. W =
i=0
the sum of q independent random variables each with mean 1 and variance 2, which means we can
apply the central limit theorem to show that as q , W/q approaches
p q a normal distribution
with mean 1 and variance 2q . Thus, the standardized version of W , 2 (W 1), approaches a
standard normal distribution as q .
(b) False. The law of large numbers states that as the number of samples from a population with
an arbitrary distribution approaches infinity, the sample mean converges in probability to the
population mean.
(c) False. Take U to be a standard normal variable. Then E[Y 3 ] = (Y )3 +3(Y )2 E[U ]+3Y E[U 2 ]+
3E[U 3 ]. But E[U 2 ] 6= 0, so E[Y 3 ] 6= (Y )3 for nonzero Y .
1
(d) 10 of the workers are high-skilled. Take Hi to be the wage of a random high-skilled worker,
h to be the number of high-skilled workers, Li to be the wage of a random low-skilled worker,
and l to be the number of low-skilled workers. We know E(Hi ) = 20 and E(Li ) = 10. Then
E( hHh+l
i +lLi
) = hE(Hih+l
)+lE(Li )
= 20h+10l
h+l
h
= 11, which implies h+l 1
= 10 .
(e) The investor should always prefer Plan I. E(2X + 2Y ) = E(3X + Y ) = 4, so the plans do
not differ in expected return. However, V ar(2X + 2Y ) = 4V ar(X) + 4V ar(Y ) + 8Cov(X, Y ) =
2 (8+8), while V ar(3X +Y ) = 9V ar(X)+V ar(Y )+6Cov(X, Y ) = 2 (10+6). For 1 < 1,
8 + 8 < 10 + 6, so the investor should prefer Plan I (technically, for = 1, the investor should
be indifferent).
(f) Cov(X, Y) 5. V ar(X) = E(X 2 ) [E(X)]2 = 16, and V ar(Y ) = E(Y 2 ) [E(Y )]2 = 4,
so V ar(X, Y ) 10. Also, V ar(X + Y ) = V ar(X) + V ar(Y ) + 2Cov(X, Y ), so Cov(X, Y ) =
1 1
2 (V ar(X + Y ) V ar(X) V ar(Y )). So Cov(X, Y ) 2 (10 16 4) = 5.

(g) We cannot reject the null hypothesis at the 5% level. Y = 0.17 + 0.1X = 0.47, SE(Y ) =
0.1 SE(X) = 0.2, so t = 0.470.25
0.2 = 1.1. Since the population is normal, we can take c = 1.96 for
the 5% significance level. Thus, since |t| < c, we cannot reject the null hypothesis at the 5% level.
2. By linearity of expectation, E(U ) = E(Y ) E(X) = y (y x ) x = 0.
Y 2
Cov(U, X) = Cov(Y, X)Cov(X, )Cov(X, X) = Cov(Y, X)V ar(X) = X,Y X Y X,Y X X =
0.
Variable Mean () Variance ( 2 )
3. u 6.295 2.352
p/p 4.448 8.956
Correlation = 0.124
q
= X
Y
= 0.124 8.956
2.352 = 0.242

= Y X = 4.448 (0.242)(6.295) = 2.925