x4 15000 x4 15000 = 0.8 x4 = 16600 U4 = 0.

= 0.7881 = 2000 2000 Because of the deductible amount 10000 the insurers simulated claim costs for the four months are 5200, 2600, 0, 6600 respectively. Hence the total claim costs are 14400. The correct choice is b. 1.8 EXERCISES: 1. Using the Rejection Method generate a random sample from f (x) = 2x, 0 < x < 1. Y are ou given U1 = 1/3 and U2 = 1/4 as random numbers from U(0, 1). a)1/3 b)1/4 c)1/5 d)1/6 e)1/2

2. Y are given: ou ( 1/6 + x/12 for 2x<6 f (x) = 4/3 x/6 for 6x8 0 otherwise Y are also given U1 = 1/3 and U2 = 1/4 as random numbers from U(0, 1). Generate a random ou sample from f (x) using the Rejection Method. a)3 b)4 c)2 d)5 e)7 x 10 , 10 < x < 20. 50 Y are given the following random numbers from U(0, 1) : U1 = 0.096, U2 = 0.966, U3 = ou 0.648, U4 = 0.492. 3. Using the Rejection Method generate a random sample from: f (x) = a)12.48 b)14.48 c)16.48 d)18.48 e)19.48 4. Y are to generate a random sample from: f (x) = Cx2 , 1 < x < 5, using the Rejection ou Method. Y are given U1 = 0.156, U2 = 0.1 as random numbers from U(0, 1). ou a)2.5 b)4.624 c)3.624 d)1.624 e)2.624

5. Y are to generate a random observation from P (2) using the Composition Method. Use the ou following sequence of random numbers from U(0, 1) : 0.64, 0.50, 0.25, 0.75, 0.50, 0.67, 0.05, 0.15. What is your random observation? a)6 b)5 c)4 d)3 e)2 6. Y are to draw a random sample from B(8, 0.5) where you are given the following 8 independent ou observations from U (0, 1) : 0.64, 0.50, 0.25, 0.75, 0.50, 0.67, 0.05, 0.15. a)1 b)2 c)3 d)4 e)5 7. Using the Inverse Transform Method, generate random samples from B(4, 0.5) where you are given the following random numbers from U (0, 1) : U1 = 0.965, U2 = 0.539, U3 = 0.303, U4 = 0.731, U5 = 0.662. 8. Using the Inverse Transform Method, generate random samples from P (3) where you are given the following random numbers from U (0, 1) : U1 = 0.64, U2 = 0.25. x2 9. Using the Inverse Transform Method, you are to generate 3 observations from f (x) = , 0 < 9 x < 3. Y may use the following random numbers from U(0, 1) : U1 = 0.008, U2 = 0.729, U3 = ou 0.125. II - 17

10. Examination grades are distributed according to the following probability density function: x/25 for 0 < x < 5 f (x) = . A grade of 6 or above is a passing grade. Y are to use ou (10 x)/25 for 5 < x < 10 the following 5 random numbers from U(0, 1) to simulate 5 examination grades: 0.02, 0.92, 0.66, 0.49, 0.77. Using the 5 simulated examination grades estimate the percentage of passing grades. a)20% b)25% c)30% d)35% e)40% 11. Four machines are in a shop. The number needing repair in each week has a Binomial distribution with p = 0.5. For each machine, the repair time, in hours, is U (0, 10). Y are to esou timate X, the total repair time (in hours) for a three weeks period, using the simulation. Use the following numbers from U(0, 1) to simulate the number of machines needing repair during each of the three weeks : 0.3, 0.6, 0.7. Use the following numbers from U(0, 1) to simulate repair times:0.3, 0.1, 0.7, 0.6, 0.5, 0.8, 0.1, 0.3. Determine X. e)10 12. Y are given the following probability function: f (x) = 1 |x| 1 x 1 . Y are ou ou 0 otherwise to simulate 2 observations from f (x) using the Inverse Transform Method and the following two random numbers from U(0, 1): 0.02 and 0.68. Using the two simulated observations estimate the mean of the distribution. b) 0.3 c)0 d)0.1 e)0.3 a) 0.1 13. A random number U from U (0, 1) is used to generate a random observation, x, from a B(n, p). The following table gives the correspondence between the values of U and values of x: Values of U Values of x 0 U < 0.027 0 0.027 U < k 1 . . . . . . 0.657 U < 1 n Determine k. a)0.030 b)0.036 c)0.116 d)0.216 e)0.256 14. Y are given the following distribution function F (x) = x2 , 0 x 1. The Inverse Transou form Method was applied to three random numbers from U(0, 1). It generated the following observations from F (x) : 0.09, 0.64, 0.49. Determine the mean of the uniform random numbers used. n a)0.16 b)0.19 c)0.22 d)0.26 e)0.31 15. Y are to use simulation to analyze the medical claims, yi , i = 1, 2, 3, . . . , 9 of each person ou in a group of nine. Insurance coverage pays for the excess, if any, of each claim over 10000. The distribution of yi is given by: y: 0 100 50000 100000 P (Y = y) : 0.10 0.80 0.09 0.01 Y are to simulate the yi , i = 1, 2, 3, . . . , 9 for the group using the following random numbers ou from U(0, 1) : 0.250, 0.002, 0.910, 0.640, 0.995, 0.890, 0.780, 0.300, 0.350. Determine the average amount per person paid by the insurance company. a)14444 b)1444 c)144444 d)10000 e)70000 16. Customers arrive at a store according to the Poisson Process at a mean rate of = ln2. Y ou II - 18 a)30 b)25 c)20 d)15

are to simulate one observation of Y , the time until the next arrival, using the Inverse Transform Method, and U, an observation from U (0, 1). Determine the simulated value of Y corresponding to U = 0.5. a)e1/2 b) ln 2 c)1 d)e1/2 e)2 17. Let Ui , i = 1, 2, 3, . . . , n be random variables from U(0, 1). Define Xi = ln Ui , Yi = P ln(1 Ui ) for i = 1, 2, 3, . . . , n, and Z = n Xi . Which of the following is true? i=1 I. The numbers x1 , x2 , . . . , xn and y1, y2 , . . . , yn are random numbers from the same exponential distribution II. The average of the numbers xi , i = 1, 2, 3, . . . , n is equal to the average of the numbers yi , i = 1, 2, 3, . . . , n. III. Z is a random number from Gamma distribution. a)I only b)II only c)III only d)I and III e)II and III 18. Y are devising a procedure for generating a random value, s, from B(3, 0.3). Which of the ou following are valid procedures? I. Generate the random values U1 , U2 , U3 from U(0, 1). For each Ui set si = 1 if Ui 0.3, otherwise P set si = 0. Set s = 3 si . i=1 II. Generate one random value, U, from U (0, 1). Set s = 0, if U < 0.343; s = 1, if 0.343 U < 0.784; s = 2 if 0.784 U < 0.973; s = 3, if 0.973 U. III. Generate one random value, U, from U(0, 1). Set s = 3, if U < 0.027; s = 2, if 0.027 U < 0.216; s = 1, if 0.216 U < 0.657; s = 0, if 0.657 U. b)II only c)III only d)I, II, III e)None of the above a)I only 19. Let S represent the number of heads in 3 tosses of a fair coin. Let U1 , U2 , U3 , . . . , represent independent observations from U (0, 1). Which of the following represent valid procedures for simulating an observation on S. 1/2 I. Let Yk be a function of Uk , where for all k, Yk = 1 if Uk 1/2 . Set S = Y1 + Y2 + Y3 . 0 if Uk > II. Determine S as follows: S = 0, if 0 U1 < 1/8; S = 1 if 1/8 U1 < 4/8; S = 2 if 4/8 U1 < 7/8; S = 3 if 7/8 U1 1. III. Let Z be the number of Ui s less than or equal to 1/2 among {U1 , U2 , U3 , U4 , U5 , U6 }. Then set S = 0, if Z = 0 or 1; S = 1 if Z = 2; S = 2, if Z = 3 or 4; S = 3, if Z = 5 or 6. a)I only b)II only c)III only d)I, II, III e)None of the above. 20. Which of the following methods are valid for the purpose of simulating observations, xi , of a random variable X that is uniformly distributed on the set {1, 2, 3, . . . , 8}. I. Generate a random number Ui from U (0, 1). Set xi = I, where I is an integer satisfying: I/8 Ui < (I + 1)/8. II. Generate random values Ui from U(0, 1). Set xi = 1 + INT [8Ui ]. III. Generate xi from the Mixed Congruential generator xn+1 = 5xn + 7 modulo 8, with x0 = 4. a)I only b)II only c)III only d)I, II, III e)None of the above. erify that now the cycle length is 21. Repeat Example 1.2-1 with a = 3, c = 2, x0 = 3, m = 17. V II - 19

16. ou 22. Y are given P (X = j) = (0.4)(0.6)j1 , j = 1, 2, 3, . . . , Y are also given U1 = 0.124 and ou U2 = 0.876 from U(0, 1). What are the corresponding random numbers from the given probability function? 23. The number of flies in a cup of soup has a Poisson distribution with mean of 2.5. Y are to ou simulate Z, the number of flies in 2 cups of soup. Y are given the following uniform numbers ou in (0, 1). First Cup: U = 0.80, Second Cup: U = 0.40. Use e2.5 = 0.082 to determine Z. x<0 0 x/8 0x<2 24. The random variable X has distribution function given by: F (x) = (x + 1)/4 2 x < 3 . 1 3x Y are given U1 = 3/4, U2 = 1/2, U3 = 1/4, U4 = 7/8. Using the Inverse Transform Method ou obtain the corresponding random values of X and calculate X. a)19/64 b)1 c)2 d)17/8 e)3 25. A random variable X has distribution function F (x) with (i) F (x) = 0 for, x < 0, (ii) F (0) = 0 0 1/2, (iii) F (x) = x, for 0 < x < 1 where F (x) is the derivative of F (x). Three samples X1 , X2 , X3 are simulated from the distribution of X by using the Inverse Transform Method to three observations from U(0, 1). The observations are: 0.25, 0.625 and 0.52. Determine the sample mean. a)0.23 b)0.29 c)0.35 d)0.41 e)0.47 26. Y are given the following multiplicative congruential generator: x0 = 1, xn+1 = 7xn modulo ou 13, n = 0, 1, 2, 3, . . . , Which of the following are true? I.- The maximum possible cycle length is 12. II.- The above generator is faster than a linear congruential generator with nonzero increment using the same modulus, multiplier and starting value. III.- x4 = 9. a)I, II only b)I, III only c)II, III only d)I, II, III e)None of the above 27. Of a group of 3 independent lives with medical expense insurance, the number with medical expense during a year is distributed according to a B(3, 0.9). The amount X, of medical expenses for any person, once expenses occur, has the following distribution. x 100 10000 P (x = x) 0.9 0.1 Each year, the insurance company pays the total medical expenses for the group in excess of 5000. Use the U(0, 1) random numbers 0.01, and 0.20, in the order given, to generate the number of claims for each of two years. Use the following U(0, 1) random numbers, in the order given, to generate the amount of each claim: 0.80, 0.95, 0.70, 0.96, 0.54, 0.01. Calculate the total amount that the insurance company pays for the two years. c)5100 d)5200 e)10200 a)0 b)5000 28. Y are given a probability distribution with the following probability function:The Inverse ou Transform II - 20 a)2 b)3 c)4 d)5 e)6

Method was used to generate a random observation x1 = 5.5 from this distribution by using U, a uniform random number between 0 and 1. Determine the value of U. a)1/6 b)1/3 c)3/5 d)5/12 e)5/6 29. Y are given a random variable X with the following probability density function: ou n 2 f (x) = 24x 0 x 1/2 . Let U be a uniform random number between 0 and 1. Use the 0 otherwise Inverse Transform Method to determine a random observation from the distribution of X, given U = 0.125. a)0.003 b)0.072 c)0.250 d)0.325 e)0.375 30. Y are given the following Multiplicative Congruential random number generator: xn+1 = ou 17xn (modulo 1001) with x0 = 30. Use this generator to obtain x1 , x2 , x3 , and then divide by 1000 to obtain three uniform random numbers over [0, 1]. Then apply the Central Limit Theorem to use these uniform random numbers to obtain one observation from an approximately normal distribution with mean 10 and standard deviation 5. a)9.150 b)9.620 c)9.915 d)10.7 e)10.858 31. Y are given the following mixed congruential random number generator: x0 = 2 (seed), ou xn+1 = 6xn + 7 modulo 8, n = 0, 1, 2, . . . . Determine the number of unique random numbers (excluding the seed) that can be generated. a)1 b)3 c)5 d)7 e)8 32. A company is insured against liability suits. The number of suits for a given year is distributed as follows: # of suits: 0 1 2 3 Probability: 0.5 0.2 0.2 0.1 For each of these three years, you simulate the number of suits per year by generating one uniform random number from the interval (0, 1] and the applying the Inverse Transform Method. Y three our random numbers are 0.83, 0.59, 0.19. The liability loss from an individual suit is a random variable with the following cumulative distribution function ( 0 x<0 1 x=0 F (x) = 2 1 x + 1 0 < x 10. 20 2 Y generate uniform random numbers from the interval [0, 1] and apply the Inverse Transform ou method to simulate the amounts of the individual losses. The first nine uniform random numbers, in order, are: 0.51, 0.01, 0.78, 0.74, 0.03, 0.69, 0.17, 0.86, 0.82. Use, in order, as many of these uniform random numbers as needed to simulate the companys total loss due to liability suits over the three year period. a)0.0 b)0.2 c)5.6 d)5.8 e)14.4 33. Y are given the following five uniform random numbers over the interval [0, 1]: 0.3, 0.8, 0.1, 0.4, 0.7. ou Using these numbers, the Inverse Transform Method, and the method of complementary random numbers, generate as many random observations as possible from the uniform distribution over the II - 21

interval [2, 8]. Determine the sample average of these random observations. a)2.3 b)2.7 c)4.8 d)5.0 e)5.2 34. Repeat Example 1.6-7 with T = 2 and = 1. Y may use U1 = 0.2, U2 = 0.15, U3 = 0.5, ou U4 = 0.12, U5 = 0.3. 35. Repeat Example 1.6-8 with T = 2 and = 1. Use U = 0.29 to simulate the value of N(T ). Use U1 = 0.1, U2 = 0.3, U3 = 0.8, U4 = 0.5, U5 = 0.2, U6 = 0.75 to generate the times of occurrence of the Poisson events. 36. Let the random variable Y have distribution function, F (y), which is expressed as a weighted sum of distribution functions G(y) and H(y) of two other random variables Y1 and Y2 , respectively, i.e., F (y) = G(y) + (1 )H(y) where 0 < < 1. Thus Y has the probability density function of Y1 with probability and that of Y2 with probability 1 , where is known as the Mixing Parameter and Y is known as the Mixture Random Variable. The Composition Method for simulating a random sample from the distribution of Y can be carried out as follows: STEP 1: Generate U1 from U(0, 1). STEP 2: Generate U2 from U(0, 1). STEP 3: If U1 < , then generate a random sample from Y1 using U2 , otherwise generate a random sample from Y2 . Let G(y) be the distribution function of B(5, 0.5) and H(y) that of P (2). Let = 0.3, U1 = 0.15, U2 = 0.62. Generate a random sample from F (y). a)1 b)2 c)3 d)4 e)5 37. Do Exercise 36 where G(y) is the distribution function of Exp(2), H(y) that of P (3), = 0.10, U1 = 0.15, U2 = 0.62. a)1 b)3 c)5 d)7 ( e)9 0 f or y < 3 (y + 3)/6 f or 3 y < 3 , = 1 f or 3 y e)0.58

38. Do Exercise 36 where G(y) = 1 e2y , H(y) = 0.3, U1 = 0.15, U2 = 0.62. a)0.24 ANSWERS: 1)a 2)b 12)b 13)d 20)b 23)e 30)a 31)b 3)c 14)c 24)d 32)d 4)d 15)a 25)a 33)d b)0.30 5)e 16)c 26)d 36)c c)0.34 6)e 17)d 27)c 37)b

d)0.48 10)e 18)d 28)d 38)d

11)a 19)e 29)c

II - 22

SOLUTIONS TO EXERCISES: 1. Here f (x) = 2x, 0 < x < 1. Let g(x) = 1, 0 < x < 1, so that f (x)/g(x) = 2x 2, for all f (y) where y is a x (0, 1). Hence c = 2. Now, according to the Rejection Method, if U cg(y) random sample from g(x) and U is a random number from U (0, 1), then it follows that X = y is a random sample from f (x). We are given U1 = 1/3 is from g(x) and hence y = 1/3. We are also f (y) 2y 1 = = y = . Since U = 1/4 1/3, it follows given that U = U2 = 1/4. Observe that cg(y) 2(1) 3 that X = y = 1/3 is a random sample from f (x). The correct choice is a. 1 1 = , 2 < x < 8, 82 6 which is a uniform random variable defined over the same interval as f (x). Thus f (x)/g(x) = 1 + x/2 for 2 x 6 , which has its maximum value of 2 for all x [2, 8]. It follows 8x for 6 x 8 that c = 2. Now U1 = 1/3, it follows that y = 2 + (8 2)U1 = 4 is a random sample from g(x). If (1/6 + y/12) f (y) = = 1/2, then it will follow that X = y = 4 is a random sample from U cg(y) 2(1/6) f (x). We are given that U = U2 = 1/4 which is < 1/2, hence we have X = 4 is indeed a random sample from f (x). The correct choice is b. 2. Since here f (x) is defined over the interval [2, 8], we select g(x) = 1 1 = , 10 < x < 20. 3. Since f (x) is defined over the interval (10, 20), we select g(x) = 20 10 10 x 10 Consequently, f (x)/g(x) = 2 for all x (10, 20) so that c = 2. Now U1 = 0.096 so 5 f (y) y 10 that y = 10 + (20 10)U1 = 10.96. Also U = U2 = 0.966, and since U = = cg(y) 10 0.096, we proceed further and generate another random number from U(0, 1). Now U3 = 0.648 is the next uniform random number that is given. Hence y = 10 + (20 10)U3 = 16.48. Since y 10 f (y) = = 0.648, we conclude that X = y = 16.48 is a random U = U4 = 0.492 cg(y) 10 sample from f (x). The correct choice is c. 4. We are given that f (x) = Cx2 , 1 < x < 5, it follows that C = 3/124. Taking g(x) = 1/4, 3 2 x 75/31 for all x (1, 5). Hence c = 75/31 and for 1 < x < 5, we have f (x)/g(x) = 31 y2 f (y) U1 = 0.156, we have y = 1 + (5 1)U1 = 1.624. Now U = U2 = 0.1 < = = cg(y) 25 (1.624)2 = 0.105, it follows that X = y = 1.624 is a random sample from f (x). The correct 25 choice is d. 5. Following Example 1.6-5, e2 = 0.135. (i) U1 = 0.64 > e2 = 0.135; (ii) U1 U2 = 0.32 > 0.135; (iii) U1 U2 U3 = 0.08 < 0.135. It follows that n = 3 and X = n 1 = 2 is a random observation from P (2). The correct choice is e. II - 23

6. Since you are drawing only one random number from B(8, 0.5) and we are given 8 uniform random numbers, we observe that of the 8 uniform random numbers given only 5 of them are p = 0.5. Hence X = 5 is a random sample from B(8, 0.5). The correct choice is e. 7. We have pj = P (X = j) = 4! nj p (0.5)4 , j = 0, 1, 2, 3, 4, where pj+1 = pj = j!(4 j)! j+11p

4j pj , j = 1, 2, 3, 4 and p0 = (1 p)4 = (1/2)4 = 0.0625. j+1 j 0 1 2 3 4 pj 0.0625 0.25 0.375 0.25 0.0625 F (j) 0.0625 0.3125 0.6875 0.9375 1.00 V erify that U1 = 0.965 X1 = 4; U2 = 0.539 X2 = 2; U3 = 0.303 X3 = 1; U4 = 0.731 X4 = 3; U5 = 0.662 X5 = 2. 8. pj = P (X = j) = e3 3i , j = 0, 1, 2, 3, ...., p0 = e3 = 0.0497 j! F (j) j pj 0 0.0497 0.0497 1 3p0 = 0.1493612 0.199 2 3 p1 = 0.2240418 0.423 2 3 3 p2 = 0.2240418 0.647 3 4 3 p3 = 0.1680314 0.815 4

V erify that U1 = 0.64 X1 = 3; U2 = 0.25 X2 = 2. x3 x3 9. Since F (x) = P (X x) = 0 (x /9)dx = . Hence U1 = 0.008 0.008 = 1 x1 = 27 27 x3 x3 2 3 0.6; U2 = 0.729 0.729 = x2 = 2.7; U3 = 0.125 0.125 = x3 = 1.5. 27 27 ( 2 x /50 0<x5 16 34 (10 6)2 10. F (x) = 1 (10 x)2 /50 5 x < 10 . Now F (6) = 1 = 1 = = 50 50 50 1 10 x 17 = 0.68. Thus values of uniform random numbers which are at least 0.68 will give a pass grade 25 of 6 or better. Only 2 out of 5 values satisfy that condition hence the percentage of passing grades 2 is , i. e., 40%. The correct choice is e. 5
2

Rx

11. As in Exercise 7 we have j 0 1 2 3 4 pj 0.0625 0.25 0.375 0.25 0.0625 F (j) 0.0625 0.3125 0.6875 0.9375 1.000 V erify that U1 = 0.3 y1 = 1; U2 = 0.6 y2 = 2 and U3 = 0.7 y3 = 3. Thus the total number of machines for the 3-week period is y1 + y2 + y3 = 1 + 2 + 3 = 6 machines. The repair times for the 6 machines are obtained as follows: If Ui U(0, 1) then 10Ui U(0, 10). Hence the repair times are U1 = 0.3 x1 = 10(0.3) = 3; U2 = 0.1 x2 = 1; U3 = 0.7 x3 = 7; U4 = 0.6 x4 = 6; U5 = 0.5 x5 = 5; U6 = 0.8 x6 = 8. Hence X = 3 + 1 + 7 + 6 + 5 + 8 = 30 hours in all. The correct choice is a. II - 24

 for 1 x < 0 (1 + x)2 /2 1 + x for 1 x < 0 2 . 12. Observe that f (x) = , and F (x) = 1 (1 x) /2 for 0 x < 1 1 x for 0 x 1 1 for 1 x Also note that F (0) = 1/2. Hence for U1 = 0.02, set 0.02 = (1 + x1 )2 /2 x1 = 0.8 or 1.2 x1 = 0.8. For U2 = 0.68, set 0.68 = 1 (1 x2 )2 /2 x2 = 0.2 or 1.8 0.2. It 0.8 + 0.2 x1 + x2 follows x= = = 0.3. The correct choice is b. 2 2 n! pj (1 p)nj so that P (X = j!(n j)! P (X = 0) = 0) = (1 p)n = 0.027 and P (X = n) = 1 0.657 = 0.343 = pn . Thus P (X = n) (1 p)n 0.027 (0.3)3 = n = 3, p = 0.7. Hence P (X = 0) + P (X = 1) = k k = = pn 0.343 (0.7)3 (0.3)3 + 3(0.3)2 (0.7) = 0.216. The correct choice is d. 13. Following Example 1.3-1, we note that P (X = j) = 14. Since F (x) = x2 , set U1 = F (x1 ) = x2 = (0.09)2 = 0.0081, U2 = F (x2 ) = x2 = (0.64)2 = 1 2 1 0.6578 2 2 = 0.2192667 ' 0.4096, U3 = F (x3 ) = x3 = (0.49) = 0.2401. Hence (U1 +U2 +U3 ) = 3 3 0.22 is mean of the uniform random numbers. The correct choice is c. 15. j pj Claim amount F (j) Amount paid 0 0.1 0 0.1 0 1 0.8 100 0.9 0 2 0.09 50000 0.99 40000 3 0.01 100000 1.00 90000 U 0.250 0.002 0.910 0.640 0.995 0.890 0.780 0.300 0.350 Claim amount 100 0 50000 100 100000 100 100 100 100 Amount paid 0 0 40000 0 90000 0 0 0 0 40000 + 90000 130000 Hence the average amount paid = = ' 14444. The correct choice is a. 9 9 16. The inter arrival time is Exp() if the customers are arriving according to a Poisson Process with rate . Then Y Exp() where = ln 2. Since F (y) = P (Y y) = 1 ey , it follows, 1 1 for U = 0.5, we have 0.5 = 1 ey or 0.5 = ey y = ln(0.5) = ln 2 = 1. The correct choice is c. 17. I.- True, (See Example 1.6-1). III.- True: Since the sum of n independent and identically distributed exponential random variables is indeed a Gamma random variable. (See Example 1.6-2). II.- False: Two random samples of size n do not, in general, yield the same sample mean. The correct choice is d. 18. I.- True: This procedure amounts to setting s = number of Ui p = 0.3 as the random sample from B(3, 0.3). II - 25

II.- True: Observe that if P (X = j) = pj =

3! (0.3)j (0.7)3j , j = 0, 1, 2, 3, then j!(3 j)! j 0 1 2 3 pj 0.343 0.441 0.189 0.027 F (j) 0.343 0.784 0.973 1.000 An application of the Inverse Transform method immediately shows the statement given is true. III.- True: If X B(n, p) then Y = nX B(n, 1p), (See Result 1.4-1). Here n = 3, p = 0.3 3! (0.7)j (0.3)3j , j = 0, 1, 2, 3. Thus we have and pj = P (Y = j) = j!(3 j)! j 0 1 2 3 pj 0.027 0.189 0.441 0.343 F (j) 0.027 0.216 0.657 1.000 Hence set Y = 0 if 0 U < 0.027 3 X = 0 X = 3 Y = 1 if 0.027 U < 0.216 3 X = 1 X = 2 Y = 2 if 0.216 U < 0.657 3 X = 2 X = 1 Y = 3 if 0.657 U < 1.000 3 X = 3 X = 0 The correct choice is d.

19. Following the solution for Exercise 18, it is clear that I and II are true. Recall that if Z = number of Ui 1/2 then Z B(6, 1/2). Now S B(3, 1/2). Let us examine if P (S = 0) = P (Z = 0 or 1). Since P (S = 0) = (1/2)3 = 1/8, on the other hand P (Z = 0 or 1) = P (Z = 0) + P (Z = 1 6 7 1) = (1/2)6 + 6(1/2)6 = + = . Clearly P (S = 0) 6= P (Z = 0 or 1). Hence III is false. 64 64 64 The correct choice is e. 20. I - False: Recall Note-2 of Section 1.3 where the procedure for obtaining a random number from a discrete uniform distribution requires setting X = j if and only if j 1 nU < j X = I INT [nU] + 1. Here n = 8 and therefore X = I + 1 if and only if I 8U < I + 1 U < 8 I +1 . 8 II - True III - False: V erify that x1 = 3, x2 = 6, x3 = 5, x4 = 0, x5 = 7, x6 = 2, x7 = 1, x8 = 4, x9 = 3. Note that the value 8 will never be obtained by this procedure despite P (X = 8) = 1/8. On the other hand P (X = 0) = 0 but will be obtained as a random sample. The correct choice is b. 21. V erify that x1 = 11, x2 = 1, x3 = 5, x4 = 0, x5 = 2, x6 = 8, x7 = 9, x8 = 12, x9 = 4, x10 = 14, x11 = 10, x12 = 15, x13 = 13, x14 = 7, x15 = 6, x16 = 3. ln(1 U ) ln(0.876) 22. V erify that for U1 = 0.124, N = INT = INT = INT [0.259] = ln(1 p) ln(0.6) ln(0.124) = INT [4.08] = 4 X = N +1 = 5. 0 X = N +1 = 1; U2 = 0.876, N = INT ln(0.6) 23. Let Xi be the random variable representing the number of flies in the ith cup of soup, i = 1, 2.

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j 0 1 2 3 4 . . .

pj = 0.082 e 2.5p0 = 0.205 2.5 p = 0.25625 2 1 2.5 p = 0.2135417 3 2 2.5 p = 0.1334636 4 3 . . .

2.5

F (j) 0.082 0.287 0.543 0.757 0.890 . . .

For U = 0.80, X1 = 4 and for U = 0.40, X2 = 2. Thus Z = X1 + X2 = 6. The correct choice is e. 24. Observe that P (X = 2) = F (2) F (2 ) = (2 + 1)/4 2/8 = 3/4 1/4 = 1/2. The graph of F (x) is given here. For U1 = 3/4, Solve for x, 3/4 = (x + 1)/4. Hence x1 = 2 is the simulated value of X. For U2 = 1/2, we observe that 1/4 = F (2 ) U2 = 1/2 < F (2) = 3/4. Hence x2 = 2 is the simulated value of X. For U3 = 1/4, we observe that 1/4 = F (2 ) U3 = 1/4 < F (2) = 3/4. Hence x3 = 2 is the simulated value of X. x4 + 1 7 For U4 = 7/8, we solve = x4 = 5/2. 4 8 x1 + x2 + x3 + x4 2 + 2 + 2 + 5/2 Hence x = = = 17/8. The correct choice is d. 4 4 NOTE: This is an example of a random variable which has a pdf which is discontinuous at X = 2 but continuous for all other values. for x < 0 0 1/2 for x = 0 Rx . 25. F (x) = 2 0 tdt + 1/2 = x /2 + 1/2 for 0 x < 1 1 for 1 x Its graph is given here For U1 = 0.25, we have 0 = F (0 ) 0.25 < F (0) = 1/2 x1 = 0. For U2 = 0.625, we solve for x2 where x2 /2 + 1/2 = 0.625 x2 = 2(0.125) = 0.25 x2 = 0.5 2 2 For U3 = 0.52, we solve for x3 where x2 /2 + 1/2 = 0.52 x2 = 2(0.02) = 0.04 x3 = 0.2. 3 3 x1 + x2 + x3 0 + 0.5 + 0.2 7 = = = 0.2333 ' 0.23. The correct choice is a. Hence x = 3 3 30 26. I - True: V erify that x1 = 7, x2 = 10, x3 = 5, x4 = 9, x5 = 11, x6 = 12, x7 = 6, x8 = 3, x9 = 8, x10 = 4, x11 = 2, x12 = 1 = x0 . Clearly the cycle length is 12. II - True: Since we need to carry out one extra addition operation to calculate each xi . III - True: In I, we obtained x4 = 9. The correct choice is d. II - 27

27. Let N be the number of medical claims where P (N = j) = 0, 1, 2, 3.

3! (0.9)j (0.1)3j , j = j!(3 j)!

j 0 1 2 3 0.001 0.027 0.243 0.729 pj F (j) 0.001 0.028 0.271 1.000 For U1 = 0.01, we conclude N1 = 1 is the number of claims in year one For U2 = 0.20, we conclude N2 = 2 is the number of claims in year two. Similarly the amount, X, of medical expenses for any person has the following distribution: X=x 100 10000 P (X = x) 0.9 0.1 P (X x) = F (x) 0.9 1.0 Thus for U1 = 0.8, x1 = 100 is the first year expense, U2 = 0.95, x2 = 10000 is the first, second year expense, U3 = 0.70, x3 = 100 is the second, second year expense. First year expenses amount is 100 and the payment amount is 0. Second year expenses amount is 10000 + 100 = 10100 and the payment amount will be 5100. Thus for the two years, the company pays 5100. The correct choice is c. 28. Being a probability density function the area under the curve must equal 1. Area under the curve equals the areas of the two triangular regions A and C plus the area of the rectangle B. Thus 1 = (area A) + (area B) + (area C) = 1 (2)h + 4h + 1 (2)h = h + 4h + h = 6h = h = 1/6 2 2 Note that the pdf of X is non-zero only for 2 x 10. For 2 x < 4, the pdf is given by the equation of the line through (2, 0) and (4, 1/6), i.e., f (x) = (x 2)/12. For 4 x < 8, the pdf is given by the equation of the line through (4, 1/6) and (8, 1/6), i.e., f (x) = 1/6. For 8 x < 10, the pdf is given by the equation of the line through (8, 1/6) and (10, 0), i.e., f (x) = (10 x)/12. Thus x<2 0 (x 2)/12 2x<4 1/6 4x<8 f (x) = (10 x)/12 8 x 10 0 10 < x Since f (x) is continuous for all x, we have x<2 0 (x 2)2 /24 2x<4 F (x) = (x 3)/6 4x<8 [24 (x 10)2 ]/24 8 x 10 1 10 < x 5 Now U = F (5.5) = (5.5 3)/6 = . The correct choice is d. 12 (NOTE: The above procedure was followed to illustrate the process in general. For the given problem we have P (2 < X 5.5) = P (2 < X 4) + P (4 < X 5.5) = Area A + Area II - 28

of a rectangle with base 1.5 and height 1/6 = (1/2)(2)(1/6) + (1.5)(1/6) = 5/12. In fact the expression for F (x) could also be obtained using the areas of the associated regions.) 29. Since F (x) = P (X x) = 8x3 , 0 x 1/2, we have 0.125 = 8x3 x3 = 0.015625 x = 0.250. The correct choice is c. 30. Recall that for U U(0, 1), E(U) = 1/2 and V (U) = 1/12. Since x1 = 510, x2 = 662 and x3 = 243, the uniform random numbers are U1 = 0.510, U2 = 0.662, U3 = 0.243. Let Y = U1 + U2 + U3 . Then E(Y ) = 3(1/2) = 3/2 and V (Y ) = 3(1/12) = 1/4 and using the Y 3/2 ' N(0, 1) Y ' N(3/2, 1/4). If W N(10, 52 ) Central Limit Theorem we have p 1/4 W 10 N(0, 1). It follows, U1 + U2 + U3 = 1.415 is a random sample from N(3/2, 1/4). then 5 1.415 3/2 W 10 p = Hence W = 9.15 is a random sample from N(10, 25). The correct 5 1/4 choice is a. 31. Since x1 = 3, x2 = 1, x3 = 5, x4 = 5 we conclude that the number of unique random numbers (excluding the seed) is just three and they are 3, 1, and 5. The correct choice is b. 32. The cumulative distribution function G(j) for the number of suits for the given year is given by: j: 0 1 2 3 pj : 0.5 0.2 0.2 0.1 G(j) 0.5 0.7 0.9 1.0 V erify that the Inverse Transform method yields the following: For U1 = 0.83 x1 = 2 suits in the first year, For U2 = 0.59 x2 = 1 suits in the second year, For U3 = 0.19 x3 = 0, suits in the third year. Thus we have, 3 suits in all for the three-year period. Now the cumulative distribution function for the liability loss, Y, is given by y<0 0 1/2 y=0 F (y) = 1/2 + y/20 0 < y 10 V erify the following: U1 = 0.51 1/2 + y1 /20 = 0.51 y1 = 0.2; U2 = 0.01 y2 = 0; U3 = 0.78 1/2 + y3 /20 = 0.78 y3 = 5.6. Thus the total loss for the three year period is y1 + y2 + y3 = 0.2 + 0 + 5.6 = 5.8. The correct choice is d. 33. Recall if U U(0, 1) so is 1 U (called complementary random number, Note 3 of Section 1.2). If X U(0, 1) then Y = a + (b a)X U(a, b) (Note 4 of Section 1.2). Here a = 2 and b = 8. Thus we have II - 29

U: 0.3 0.8 0.1 1U : 0.7 0.2 0.9 Y = 2 + 6U : 3.8 6.8 2.6 Y = 2 + 6(1 U) : 6.2 3.2 7.4 The sample average of the 10 values of Y obtained is 1 (3.8 + 6.8 + 2.6 + 4.4 + 6.2 + 6.2 + 3.2 + 7.4 + 5.6 + 3.8) = 10 The correct choice is d.

0.4 0.6 4.4 5.6

50 10

0.7 0.3 6.2 3.8

= 5.

34. Here T = 2, = 1. The values of the uniform random numbers are U1 = 0.2, U2 = 0.15, U3 = 0.5, U4 = 0.12, U5 = 0.3. Following Example 1.6-7 we have: Step-1: t = 0, I = 0 Step-2: U1 = 0.2 Step-3: t = t (1/) ln U1 = 0 ln 0.2 = 1.609. Since t = 1.609 < 2 = T, we do not stop and go to the next step. Step-4: I = 1, S1 = 1.609. Thus the time at which the first Poisson event occurs is S1 = 1.609. We proceed to generate the time of occurrence of the second Poisson event. Step-2: U2 = 0.15. Step-3: t = t (1/) ln U2 = 1.609 ln 0.15 = 3.506. Since t = 3.506 > 2 = T, we stop. Thus only one Poisson event happens during the time interval (0, 2) and its time of occurrence is S1 = 1.609. The second Poisson event does not occur in the interval (1.609, 2]. 35. Since T = 2, N(T ) P (2) = P (2). For U1 = 0.29, we verify that N(2) = 2( since pj = e2 2j /j!, for j = 0, 1, 2, 3, . . . ; so that p0 = e2 = 0.1353352, p1 = 2e2 = 0.2706706...). Hence U1 = 0.1, U2 = 0.3 U(1) = 0.1, U(2) = 0.3 and S1 = T U(1) = 0.2, S2 = T U(2) = 0.6. 36. Since U1 = 0.15 < 0.3 = , we conclude that Y is a random sample from B(5, 0.5). From Example 1.4-3 it follows that U2 = 0.62 yields Y = 3 as a random sample from F (y). The correct choice is c. 37. Here U1 = 0.15 > 0.10 = , we conclude that Y is a random sample from P (3). From Example 1.3-3 it follows that for U2 = 0.62, Y = 3 is the required random sample from F (y). The correct choice is b. 38. Since U1 = 0.15 < 0.3 = , we generate a random sample from G(y), i.e., Exp(2). Hence the random sample is Y = (1/) ln(1 U2 ) = (1/2) ln(0.38) = 0.483792 0.48. The correct choice is d.

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Problems from sample tests issued by the Society of Actuaries. 1. #14/May2000 The Rejection Method is used to generate a random Variable with pdf f (x) using the pdf of g(x) and constant c as the basis, where f (x) = 12(x 2x2 + x3 ), 0 < x < 1,and g(x) = 1, 0 < x < 1. The constant c has been chosen so as to minimize n, The expected number of iterations needed to generate a random variable from f (x). Calculate n. a) 1.52 b) 1.78 c) 1.86 d) 2.05 2.11 Solution f (x) = 12(x 2x2 + x3 ) is to be minimized over 0 < x < 1. This is done by setting the first g(x) derivative of the ratio equal to 0. i.e.. 12(1 4x + 3x2 = 0 = x = 1 and 1/3. It is clear that f (1) f (1/3) 1 = 0 and c = = 12 1 2( 1 ) + 27 = 16 ' 1.78. The correct choice is b. 3 4 9 g(1) g(1/3) 2. #32/May 2000 Insurance for a citys snow removal costs covers 4 winter months. There is deductible of 10000 per month. The insurer assumes that the citys monthly costs are independent and normally distributed with mean 15000 and standard deviation 2000. To simulate 4 months claim costs, the insurer uses the Inverse Transform method where small random numbers correspond to low costs. The four random numbers from U(0, 1) are 0.5389, 0.1151, 0.0013, 0.7881. Calculate the insurers simulated claim costs. a) 13400 b) 14400 c) 17800 d) 20000 e) 26600 Solution Since X = Claim cost is distributed N(15000, 20002 ) we have X15000 N(0, 1). Hence using 2000 the Inverse Transform method x1 15000 U1 = 0.5398 = = x1 = 15000 + 0.1(2000) = 15200 2000 x2 15000 = x2 = 15000 1.2(2000) = 12600 U1 = 0.1151 = 2000 x3 15000 = x3 = 15000 3(2000) = 9000 U2 = 0.0013 = 2000 x4 15000 = x4 = 15000 + 0.8(2000) = 16600 U4 = 0.7881 = 2000 Because of the deductible amount 10000 the insurers simulated claim costs for the four months are 5200, 2600, 0, 6600 respectively. Hence the total claim costs are 14400. The correct choice is b. CHAPTER 3 3. #43/November 2000 Lucky Tom finds coins on his 60 minute walk to work at a Poisson rate of 2 per minute. 60% of the coins are 1 each; 20% are worth 5 each; 20% are worth 10 each. The denominations of the coins found are independent. Two actuaries are simulated Toms 60 minute walk to work. (i) The first actuary begins by simulating the number of coins found, using the procedure of repeatedly simulating the time until the next coin is found, until the length of the walk is exceeded. For each coin found, he simulates its denomination, using the Inverse Transform algorithm. The expected number of random number he needs for one simulation of the is F. II - 31

(ii) The second actuary uses the same algorithm for simulating the times between events. However, she first simulates finding coins worth 1, then simulates finding coins worth 5, then simulates finding coins worth 10, in each case simulating until the 60 minutes are exceeded. The expected number of random numbers she needs for one complete simulation of Toms walk is G. Which of the following statements is true? a) Neither is a valid method for simulating the process b) The first actuarys method is valid; the second actuarys is not c) The second actuarys method is valid; the first actuarys is not d) Both methods are valid, but they may produce different results from the same sequence of random numbers e) Both methods are valid and they produce identical results from the same sequence of random numbers Solution (i) Here T = 60 minutes and = 2 per minute, N(T ) P (T ) = P (120). First actuary is following Example 1.6-7. Thus we will need on the average T + 1 random numbers to generate times of the coins found. i.e.. 121 random numbers. After a coin is found we need to obtain its denomination (1, 5, or 10) and that requires one random number to ascertain that. Thus we need 120 more random numbers. here F = 121 + 120 = 241. (ii) Here N(T ) = N1 (T ) + N5 (T ) + N10 (T ) where N1 (T ) P (0.60T ) = P (72), N5 (T ) P (0.20T ) = P (24), N10 (T ) P (0.20T ) = P (24) are the mutually independent Poisson process corresponding to coins of denominations 1, 5, and 10 respectively. Accordingly for N1 (T ) we will require 72 + 1 = 73 uniform random numbers. Similarly for N5 (T ) and N10 (T ) we will require 2(24 + 1) = 50 random numbers.. Thus G = 73 + 50 = 123. In Chapter 3, we have shown that both the procedures are valid but will not yield the same results. The correct choice is d. 4. Same as #3 Determine which of the following ranges contain the rate F/G. a) 0 < F/G 0.4 b) 0.4 < F/G 0.8 c) 0.8 < F/G 1.2 1.6 < F/G

d) 1.2 < F/G 1.6

e)

Solution F 241 = = 1.96. Thus the correct choice is e. G 123 5. #37/November 2000 (Modified to conform to the current syllabus) Arrival times of a Poisson process are simulated from Exp(5). The random numbers from U (0, 1) are 0.10, 0.50, 0.24, 0.01. How many Poisson events happen in the interval (0, 2).? a) 1 b) 2 c) 3 d) 4 e) 5 Solution Here T = 2, = 5. Following Example 1.6-7, we have STEP-1: t = 0, I = 0 STEP-2: U1 = 0.10 1 1 STEP-3: t = t lnU1 = 0 ln(0.10) = 0.46 < 2 = T 5 STEP-4: I = 1, SI = 0.46 We go to step 2: U2 = 0.05 II - 32

1 1 STEP-3: t = t lnU2 = 0.46 ln(0.05) = 0.46 + 0.60 = 1.06 < 2 = T 5 STEP-4: I2 = 2, S2 = 1.06 We go to step 2 1 1 STEP-3: t = t lnU3 = 1.06 ln(0.24) = 1.35 < 2 = T 5 STEP-4: I = 3, S3 = 1.35 We go to step 2. i.e.. U4 = 0.01 1 1 STEP-3: t = t1 lnU4 = 1.35 ln(0.01) = 2.27 > 2 = T 5 So we stop. Thus 3 Poisson events happen during (0, 2). The correct choice is c.

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