ECON 83a

Summer 2023 Problem Set 2

Handwritten submissions are acceptable but they need to be contained in a single
doc, docx, or pdf file. Remember: your homework must be legible and must show
all of your work. TA is permitted to give partial or zero credit otherwise. R
section in this problem set is not required (bonus instead).

1. The Car Repair Ratings website provides consumer reviews and ratings for
garages in the United States and Canada. The time customers wait for service
to be completed is one of the categories rated. The following table provides a
summary of the wait-time ratings ( 1 = Slow/Delays; 10 = Quick/On Time) for
40 randomly selected garages located in the province of Ontario, Canada (Car
Repair Ratings website, November 14, 2012).

Wait-Time Rating Number of Garages

1 6
2 2
3 3
4 2
5 5
6 2
7 4
8 5
9 5
10 6

a. Develop a probability distribution for x = wait-time rating.

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Summer 2023 Problem Set 2
b. Any garage that receives a wait-time rating of at least 9 is considered to
provide outstanding service. If a consumer randomly selects one of the 40
garages for their next car service, what is the probability the garage selected
will provide outstanding wait-time service?

c. What is the expected value and variance for x

d. Suppose that 7 of the 40 garages reviewed were new car dealerships. Of

the 7 new car dealerships, two were rated as providing outstanding wait-
time service. Compare the likelihood of a new car dealership achieving an
outstanding wait time service rating as compared to other types of service
providers.

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Summer 2023 Problem Set 2
2. The Knowles / Armitage (KA) group at Merrill Lynch advises clients on how to
create a diversified investment portfolio. One of the investment alternatives they
make available to clients is the All World Fund composed of global stocks with
good dividend yields. One of their clients is interested in a portfolio consisting
of investments in the All World Fund and a treasury bond fund. The expected
percent return of an investment in the All World Fund is 7.80% with a standard
deviation of 18.90%. The expected percent return of an investment in a treasury
bond fund is 5.50% and the standard deviation is 4.60%. The covariance of an
investment in the All World Fund with an investment in a treasury bond fund is
-12.4.

a. Which of the funds would be considered the more risky? Why?

b. If KA recommends that the client invest 75% in the All World Fund and
25% in the treasury bond fund, what is the expected percent return and
standard deviation for such a portfolio? What would be the expected return
and standard deviation, in dollars, for a client investing $10, 000 in such a
portfolio?

c. If KA recommends that the client invest 25% in the All World Fund and
75% in the treasury bond fund, what is the expected percent return and
standard deviation for such a portfolio? What would be the expected return
and standard deviation, in dollars, for a client investing $10, 000 in such a
portfolio?

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Summer 2023 Problem Set 2
d. Which of the portfolios in parts (b) and (c) would you recommend for an ag-
gressive investor? Which would you recommend for a conservative investor?
Why?

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Summer 2023 Problem Set 2
3. Many companies use a quality control technique called acceptance sampling to
monitor incoming shipments of parts, raw materials, and so on. In the electronics
industry, component parts are commonly shipped from suppliers in large lots.
Inspection of a sample of n components can be viewed as the n trials of a binomial
experiment. The outcome for each component tested (trial) will be that the
component is classified as good or defective. Reynolds Electronics accepts a lot
from a particular supplier if the defective components in the lot do not exceed
1%. Suppose a random sample of five items from a recent shipment is tested.

a. Assume that 1% of the shipment is defective. Compute the probability that

no items in the sample are defective.

b. Assume that 1% of the shipment is defective. Compute the probability that

exactly one item in the sample is defective.

c. What is the probability of observing one or more defective items in the

sample if 1% of the shipment is defective?

d. Would you feel comfortable accepting the shipment if one item was found
to be defective? Why or why not?

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Summer 2023 Problem Set 2
4. The length of time patients must wait to see a doctor in a local clinic is
uniformly distributed between 15 minutes and 2.5 hours.

a. What is the probability of a patient waiting exactly 50 minutes?

b. What is the probability that a patient would have to wait between 45 min-
utes and 2 hours?

c. Compute the probability that a patient would have to wait over 2 hours.

d. Determine the expected waiting time and its standard deviation.

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Summer 2023 Problem Set 2
5. “DRUGS R US” is a large manufacturer of various kinds of liquid vitamins.
The quality control department has noted that the bottles of vitamins marked
6 ounces vary in content with a standard deviation of 0.3 ounces. Assume the
contents of the bottles are normally distributed.

a. What percentage of all bottles produced contains more than 6.51 ounces of
vitamins?

b. What percentage of all bottles produced contains less than 5.415 ounces?

c. What percentage of bottles produced contains between 5.46 to 6.495 ounces?

d. Ninety-five percent of the bottles will contain at least how many ounces?

e. What percentage of the bottles contains between 6.3 and 6.6 ounces?

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Summer 2023 Problem Set 2
6. (Bonus R practice) Use some codes we learn in class and generate a sample of
30 from an N (10, 2) distribution and a sample of 1 from an N (30, 2) distribution.
Combine these together to make a single sample of 31.

a. A boxplot is a standardized way of displaying the distribution of data based

on a five-number summary, including minimum, first quartile (Q1), median,
third quartile (Q3), and maximum. Produce a boxplot of these data using
boxplot().

b. What do you notice about this plot?

c. Based on the boxplot, what characteristic do you think would be appropriate

to measure the location and spread of the distribution? Explain why.