Javed Iqbal So far, we learnt to use normal table to find probabilities on standard normal distribution RV i.e., Z
Working with normally distributed random variables X (real life random variable with any value of mean and standard deviation).
In all such questions first define the random variable involved, state its distribution specify its mean and standard deviation and write the required probability statement. Note that all the X variables problems are transformed to P(𝑍 ≤ 𝑧) using the transformation given as follows (rounded z to only 2 decimal places).
𝑋−𝜇 𝑍= 𝜎
Weiss p-303 Example 6.11, Example 6.13, Exercise p-309. Ex: 6.90, 6.87, 6.93, 6.94, and 6.99
We do not consider section 6.4 and onwards topics from this chapter.
Practice questions from other books/resources:
Q1: The marks of students in a course are normally distributed with mean 68 and standard deviation 10. A student scores 98. a) Find the first and 3rd quartile of marks and IQR. b) By doing relevant calculations show whether the student’s score is an outlier? [Ans: a) Q1 = 61.25, Q3 = 74.75, IQR = 13.5, b) [Q1−1.5 IQR, Q3 +1.5 IQR] = [ 41.0, 95.0], yes it is an outlier.
Q2: In an article about the cost of health care, Money magazine reported that a visit to a hospital emergency room for something as simple as a sore throat has a mean cost of $328 (Money, January 2009). Assume that the cost for this type of hospital emergency room visit is normally distributed with a standard deviation of $92. Answer the following questions about the cost of a hospital emergency room visit for this medical service. a. What is the probability that the cost will be more than $500? b. What is the probability that the cost will be less than $250? c. What is the probability that the cost will be between $300 and $400? d. If the cost to a patient is in the lower 8% of charges for this medical service, what was the cost of this patient’s emergency room visit? [Ans: a) 0.0307 b) 0.1977 c) 0.4002 d) $198.74]
Q3: For borrowers with good credit scores, the mean debt for revolving and installment accounts is $15,015 (BusinessWeek, March 20, 2006). Assume the standard deviation is $3540 and that debt amounts are normally distributed. a. What is the probability that the debt for a borrower with good credit is more than $18,000? b. What is the probability that the debt for a borrower with good credit is less than $10,000? c. What is the probability that the debt for a borrower with good credit is between $12,000 and $18,000? d. What is the probability that the debt for a borrower with good credit is no more than $14,000? [Ans: a) 0.2005 b) 0.0778 c) 0.6018 d) 0.3859]
Q4: A client has an investment portfolio whose mean value is equal to $1,000,000 with a standard deviation of $30,000. He has asked you to determine the probability that the value of his portfolio is between $970,000 and $1,060,000, find it. [Ans: 0.8185. Assume that value of portfolio is normally distributed]
Q5: A contractor has concluded from his experience that the cost of building a luxury home is a normally distributed random variable with a mean of $500,000 and a standard deviation of $50,000. a. What is the probability that the cost of building a home will be between $460,000 and $540,000? b. The probability is 0.2 that the cost of building will be less than what amount? c. Find the shortest range such that the probability is 0.95 that the cost of a luxury home will fall in this range. [Ans: a) 0.5762 b) $458000 c) $500,000 ± 98000 i.e. (402000; 598000)]
Q6: I am considering two alternative investments. In both cases I am unsure about
the percentage return but believe that my uncertainty can be represented by normal distributions with the means and standard deviations shown in the accompanying table. I want to make the investment that is more likely to produce a return of at least 10%. Which investment should I choose? [Ans: For ‘Investment A’, Prob of return exceeding 10% is 0.6293, for B it is 0.5987 so A selected]
Q7: Tata Motors, Ltd., purchases computer process chips from two suppliers, and the company is concerned about the percentage of defective chips. A review of the records for each supplier indicates that the percentage defectives in consignments of chips follow normal distributions with the means and standard deviations given in the following table. The company is particularly anxious that the percentage of defectives in a consignment not exceed 5% and wants to purchase from the supplier that’s more likely to meet that specification. Which supplier should be chosen?
[Ans: For A Prob of defective not exceeding 5% is 0.9332, for B it is 0.9082 so A
should be selected]
Q8: Suppose the annual employer 401(k) cost per participant is normally distributed with a standard deviation of $625, but the mean is unknown. If 73.89% of such costs are greater than $1,700, what is the mean annual employer 401(k) cost per participant? [Ans: $2100]
Q9: Trading volume on the New York Stock Exchange is heaviest during the first half hour (early morning) and last half hour (late afternoon) of the trading day. The early morning trading volumes (millions of shares) for 13 days in January and February are shown here (Barron’s, January 23, 2006; February 13, 2006; and February 27, 2006). 214 163 265 194 180 202 198 212 201 174 171 211 211 The probability distribution of trading volume is approximately normal. a. Compute the mean and standard deviation to use as estimates of the population mean and standard deviation. b. What is the probability that, on a randomly selected day, the early morning trading volume will be less than 180 million shares? c. What is the probability that, on a randomly selected day, the early morning trading volume will exceed 230 million shares? d. How many shares would have to be traded for the early morning trading volume on a particular day to be among the busiest 5% of days? [Ans: a) 199.69, 26.0396 b) 0.2236 c) 0.123 d) 242.525 million shares]
