Christel Precious A.

Eboa
1/26/16

BST 111 BFD

7:30 - 9:00AM TTH

CASE PROBLEM 1
The 2002 New York City Housing and Vacancy Survey showed a total of 59,324 rent-controlled
housing units and 236,263 rent-stabilized units built in 1947 or later. For these rental units, the
probability distributions for the number of persons living in the unit are given:
Number of persons
1
2
3
4
5
6

Rent-Controlled
0.61
0.27
0.07
0.04
0.01
0.00

Rent-Stabilized
0.41
0.30
0.14
0.11
0.03
0.01

1) What is the expected value of the number of persons living in each type of unit?
2) What is the variance of the number of persons living in each type of unit?
3) Make some comparisons between the number of persons living in rent-controlled units and the
number of persons living in rent-stabilized units.
Let X be Rent-Controlled
X
1
2
3
4
5
6

P(X)
X*P(X)
0.61
0.61
0.27
0.54
0.07
0.21
0.04
0.16
0.01
0.05
0.00
0
Total:
1.57
Expected Value = 1.57

(X - E[X]) ((X - E[X)^2)*P(X)

-0.57
0.198189
0.43
0.049923
1.43
0.143143
2.43
0.236196
3.43
0.117649
4.43
0
0.7451
Variance = 0.7451

Let Y be Rent-Stabilized
Y
1
2
3
4
5
6

P(Y)
Y*P(Y)
0.41
0.41
0.30
0.6
0.14
0.42
0.11
0.44
0.03
0.15
0.01
0.06
Total:
2.08
Expected Value = 2.08

(Y - E[Y])
-1.08
-0.08
0.92
1.92
2.92
3.92

((Y - E[Y)^2)*P(Y)
0.478224
0.00192
0.118496
0.405504
0.255792
0.153664
1.4136
Variance = 1.4136

The number of persons living in rent-controlled units and the number of persons living in
rent-stabilized units has a ratio of 1-to-3.98 or 4 respectively.
CASE PROBLEM 2

The demand for a product of Carolina Industries varies greatly from month to month. The
probability distribution in the following table, based on the past two years of data, shows the
companies monthly demand.
1) If the company bases monthly orders on the expected value of the monthly demand, what
should Carolinas monthly order quantity be for this product?
2) Assume that each unit demanded generates $70 in revenue and that each unit ordered costs
50. How much will the company gain or lose in a month if it places an order based on your
answer to part (a) and the actual demand for the item is 300 units?
Unit Demand
300
400
500
600

Probabilit
y
0.20
0.30
0.35
0.15
Total:

For Expected Value

60
120
175
90
445

Expected @
445
Price

70.00

Cost

$
50.00
Gain or
(Loss):

$
31,150.00
$
22,250.00
$
8,900.00

Actual @ 300
$

21,000.00

15,000.00

6,000.00

CASE PROBLEM 3
The Vi-An Computer Company is considering a plant expansion to enable the company to begin
production of a new computer product. The companys president must determine whether to
make the expansion a medium- or large-scale project. Demand for the new product is uncertain,
which for planning purposes may be low, moderate or high demand. The probability estimates
for demand are 0.20, 0.50, and 0.30 respectively. Let x and y be the annual profit in dollars, the
firms planners developed the following profit forecasts for the medium- and large-scale
expansion projects:
Demand
Low
Moderate
High

Medium-Scale Expansion
Profit
$50,000
$150,000
$200,000

Large-Scale Expansion
Profit
0
$100,000
$300,000

Probability
0.20
0.50
0.30

1) Compute the expected value for the profit associated with the two expansion alternatives.
Which decision is preferred for the objective of maximizing the expected profit?

2) Compute the variance for the profit associated with the two expansion alternatives. Which
decision is preferred for the objective of minimizing the risk or uncertainty?
3) Compute the expected value of the sum of two random variables.
4) Compute the variance of the sum of two random variables.
5) Compute the standard deviation of the sum of two random variables.
X

P(X)

50,000

150,000

200,000

X*P(X)
(X - E[X])
$
$
0.20
10,000
(95,000)
$
$
0.50
75,000
5,000
$
$
0.30
60,000
55,000
$
Total:
145,000
Expected Value = 145,000
2,725,000,000
P(Y)

100,000

300,000

0.20

Y*P(Y)
$

(Y - E[Y])
$
(140,000)
$
(40,000)
$
160,000

$
50,000
$
0.30
90,000
$
Total:
140,000
Expected Value = 140,000
12,400,000,000
0.50

((X - E[X)^2)*P(X)
$

1,805,000,000

12,500,000

907,500,000

2,725,000,000
Variance =

((Y - E[Y)^2)*P(Y)
$

3,920,000,000

800,000,000

7,680,000,000

$ 12,400,000,000
Variance =

Based on the computed expected value decision X is preferred for the objective of
maximizing the expected profit. While, decision X is preferred for the objective of minimizing the
risk or uncertainty based on the computed variance.
E(X + Y) = 145,000 + 140,000 = $ 285,000
(X - E[X])
$
(95,000)
$
5,000
$
55,000

(Y - E[Y])
$ (140,000)
$ (40,000)
$ 160,000

P(xy)
0.20
0.50
0.30
Covariance:

$
$
$
$

Product
2,660,000,000
(100,000,000)
2,640,000,000
5,200,000,000

Var(X + Y) = 2,725,000,000 + 12,400,000,000 + 2(5,200,000,000) = $ 25,525,000,000

Standard Deviation = sqrt(25,525,000,000) = 159,765.4531