Business Math : Probability, Binomial Distributions, Decision-Making, Payoff Tables and Risk Management

1. Super Cola sales break down as 80% regular soda and 20% diet soda. While 60% of the regular soda is purchased by men, only 30% of the diet soda is purchased by men. If a woman purchases Super Cola, what is the probability that it is a diet soda?

2. A process follows the binomial distribution with n = 8 and p = .3. Find
a. P(x = 3)
b. P(x > 6)
c. P(x  2)

3. Scores on an endurance test for cardiac patients are normally distributed with mean = 182 and standard deviation = 24.
a. What is the probability a patient will score above 190?
b. What percentage of patients score below 170?
c. What score does a patient at the 75th percentile receive?

4. A calculus instructor uses computer aided instruction and allows students to take the midterm exam as many times as needed until a passing grade is obtained. Following is a record of the number of students in a class of 20 who took the test each number of times.

Students Number of tests

10 1
7 2
2 3
1 4

a. use the relative frequency approach to construct a probability distribution
b. show that it satisfies the required condition for being a probability distribution.
c. Find the expected value of the number of tests taken.

5. (40 points)

Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these two decisions is:

s1 s2 s3
New Restaurant -$80K $20K $160K
Expand -$40K $20K $100K

Paul has calculated the indifference probability for the lottery having a payoff of $160K with probability p and -$80K with probability (1-p) as follows:

Amount Indifference Probability (p)
-$40K .4
$20K .7
$100K .9

a. Is Paul a risk avoider, a risk taker, or risk neutral? EXPLAIN.

b. Suppose Paul has defined the utility of -$80K to be 0 and the utility of $160K to be 80. What would be the utility values for -$40K, $20K, and $100K based on the indifference probabilities?

c. Suppose P(s1) = .4, P(s2) = .3, and P(s3) = .3. Which decision should Paul make using the expected utility approach?

d. Compare the result in part c with the decision using the expected value approach.

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