Exam Solution for ”Uncertainty, Data and Judgment”

INSEAD MBA Programme 2014, Period 1

Professor Anil Gaba

Q1 (a) Z1 = X1 + Y
µ( Z1 ) = µX1 + µY = 7 + 11 = 18
σZ2 1 = σX
2
+ σY2 = 22 + 32 = 13
√1
σZ1 = 13 = 3.61
(b) Z2 = X2 + Y
µ( Z2 ) = µX2 + µY = 5 + 11 = 16
σZ2 2 = σX
2
+ σY2 = 12 + 32 = 10
√2
σZ2 = 10 = 3.16
(c) Let W = Z1 + Z2 = X1 + X2 + 2Y
µW = µZ1 + µZ2 = 18 + 16 = 34
2 2 2
σW = σX + σX + 4σY2 = 22 + 12 + 4(32 ) = 41
√1 2

σZ2 = 41 = 6.4
(d) Assuming that X1 , X2 and Y are jointly normal,
2 2
W vN (µW , σW ) where µW = 34 and σW = 41
P (W > 40) = P (Z > 40−34
6.4
) = P (Z > 0.94) = 0.1736
(e) Let W = Z1 + Z2
µ( Z1 ) = 18, σZ2 1 = 13, µ( Z2 ) = 16, σZ2 2 = 10
2
From part(c), σW = σZ2 1 + σZ2 2 + 2Cov(Z1 , Z2 ) = 41
If Z1 and Z2 were independent, Cov(Z1 , Z2 ) = 0.
2
Then σW = σZ2 1 + σZ2 2 = 13 + 10 = 23 6= 41
Hence, 41 = 23 + 2Cov(Z1 , Z2 ) ⇔ Cov(Z1 , Z2 ) = 41−23 2
=9
Cov(Z1 ,Z2 ) 9
Corr(Z1 , Z2 ) = σZ σZ = (3.61)(3.16) = 0.79
1 2
Q2 (a) Let n = total number of interruptions, i.e., n = 10
X = number of interruptions in the night shift
p = prob(interruption happens in the night shift) = 0.5
X∼Bin(n = 10, p = 0.5)
P (X≥9) = P (X = 9) + P (X = 10) = 0.0098 + 0.0010 = 0.0108
(b) Using the notation in part(a)
P(9 or more interruptions happen in the same shift, day or night)
= P (X≥9) + P (X≤1)
= 0.0108 + P (X = 1) + P (X = 0)
= 0.0108 + 0.0098 + 0.0010
= 0.0216
(c) 52(0.0216) = 1.12, about 1 week out of 52 weeks
(d) Let n = total number of interruptions logged, i.e., n = 537
x = observed number of interruptions in the night shift, i.e., x = 291
p = proportion of interruptions in the night shift
Estimated fraction of interruptions = nx = 291
537
= 0.54
A 95% CI for p is
r
x
x n
(1 − nx )
±1.96 = 0.54±0.042, i.e., 0.498≤p≤0.582
n n

(e) Let λ = average number of interruptions in one week = 537

103
= 5.2
Y = number of interruptions in one week
Assume Y ∼P oisson(λ = 5.2). From the table,
P (Y ≥10) = 0.022 + 0.0104 + 0.0045 + 0.0018 + 0.0007 + 0.0002 + ... = 0.04
(f) Let λ = average number of interruptions in the night shift per week
= 209
103
= 2.8
Y = number of interruptions in the night shift per week
Assume Y ∼P oisson(λ = 2.8). From the table,
P (Y ≥9) = 0.0018 + 0.0005 + 0.0001 + ... = 0.0024
Q3 (a) Let n = total number of people surveyed, i.e., n = 50
x = number of people with expresso machine, i.e., x = 15
p = proportion of people with expresso machine
A 90% CI for p is
r
x
x n
(1 − nx )
±1.96 = 0.3±0.109, i.e, 0.191≤p≤0.409
n n

(b) Let n = sample size required

E = margin of error, i.e., E=0.04

2
zα/2 1.962
n= = ≈ 600
4E 2 4(0.04)2
(c) The sample size required is

2
zα/2 σ (1.96)3 2
n=( )2 = [ ] ≈ 864
E 0.2

One would choose 864 to satisfy both part (b) and (c)
Q4 (a) Stores is not ”significant”, p-value is 0.7394.
(b) Should use 3 and not 4 dummy variables for seasons.
(c) Regression coefficients show the impact of Winter and Summer on Sales,
controlling for stores. In the correlation, this is not the case.
(d) S&P: 21298 ± 1.96(11776)
CPI: −264300 ± 1.96(131098)
Impacts of advertising: 0.1478 + 0.1196 = 0.2676
Every $ spent on advertising leads to 0.2676 thousands of $ in sales. Units
are different!
(e) Model 4 is ”good” with all coefficients being significant.
ˆ = 3966 + 6003(0) + 0.1109(628) + 103(53) ≈ 9495
sales
A 95% approximate PI is

9495 ± 1.96se = 9495 ± 1.96(4531) = 9495 ± 8881

Q5 (a) 2
(b) 4
(c) 2