OPMT 1130 Myra Andrews

Business Statistics Winter 2023

Lecture 11 Extra Questions

1. A cell phone manufacturer offers a 9-month warranty with a free replacement if the device
was defective. The manufacturer estimates that the cell phones have an average life of 24
months and that they follow an exponential distribution.
(a) What percentage of cell phones will need to be replaced because they became defective
while still under warranty?
(b) If the cell phone has already lasted 12 months, how much longer do you expect it to last?

2. On Sundays, the 104 bus that leaves from the 22nd St Station to Queensborough Landing runs
only once per hour. After getting off the SkyTrain you wait at the bus stop for the 104 bus.
You do not know when the last 104 bus came by. The arrival time of the next 104 bus
follows a uniform distribution between zero and one hour.
(a) On average, how long will you wait before the next 104 bus arrives?
(b) What is the probability you will wait at least 15 minutes for the next 104 bus?
(c) 10% of the time you will wait longer than how many minutes for the next 104 bus?

3. Old Faithful, a geyser located in Yellowstone National Park, erupts every 91 minutes. If you
show up at random, the time you will have to wait to see it erupt is uniformly distributed.
(a) You arrive at random and wait 20 minutes. Find the probability you will see it erupt.
(b) How long would you have to wait so there is a 90% chance you will see it erupt?
(c) On average, how long would you have to wait before it erupts?

4. You are interested in purchasing a commercial property located in Burnaby. You know that
one other person has already made an offer on the property. The seller announced that the
highest offer above $5,000,000 will be accepted. Assume that the competitor’s offer is a
random variable that is uniformly distributed between $5,000,000 and $6,000,000.
(a) Suppose you offer $5,400,000. What is the probability that your offer will be accepted?
(b) Suppose you offer $5,800,000. What is the probability that your offer will be accepted?
(c) What amount should you offer to maximize the probability that you will get the property?
You know someone who is willing to pay you $6,200,000 for the property. Calculate your
expected profit if you make an offer of: (d) $5,400,000 (e) $5,800,000 (f) $5,600,000
(g) Would it make sense to offer less than $6,000,000? Why or why not?

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OPMT 1130 Myra Andrews
Business Statistics Winter 2023

Solutions
1. (a) 31.27% (b) another 24 months
2. (a) 30 minutes or 0.5 hours (b) 0.7500 (c) 54 minutes
3. (a) 20/91 = 0.2198 (b) 81.9 minutes (c) 45.5 minutes

4. (a) 0.40 (b) 0.80 (c) Bid $6,000,000 which gives a 100% chance you will get the property
(d) If you offer $5,400,000 there is a 40% chance your offer will be accepted (60% chance it
will not). If you get the property you will earn a profit of $800,000 from reselling it.
The expected profit with an offer of $5,400,000 is 800,000 × 0.40 + 0 × 0.60 = $320,000
(e) The expected profit with an offer of $5,800,000 is 400,000 × 0.80 + 0 × 0.20 = $320,000
(f) The expected profit with an offer of $5,600,000 is 600,000 × 0.60 + 0 × 0.40 = $360,000
(g) By offering $6,000,000 you will for sure get the property and make a $200,000 profit.
By offering only $5,600,000 (which is less than $6,000,000) you will maximize your
expected profit. So it makes sense to offer less than $6,000,000.

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