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Successive weekly sales, in units of 1,000, have a bivariate normal distribution with common mean 40, common standard deviation 6, and correlation .6.

(a) Find the probability that the total of the next 2 weeks’ sales exceeds 90.

(b) If the correlation were .2rather than .6, do you think that this would increase or decrease the answer to (a)? Explain your reasoning.

(c) Repeat (a) when the correlation is 2.

Short Answer

Expert verified

a). The probability that the total of the next 2weeks’ sales exceeds 90is 0.1757.

b). The probability decreases.

c). The correlation is0.141.

Step by step solution

01

Given Information (Part a)

Random variables Xand Ythat marks the sales in two successive weeks.

E(X+Y)=E(X)+E(Y)=80.
02

Explanation (Part a)

E(X+Y)=E(X)+E(Y)=80

and Var(X+Y)=Var(X)+Var(Y)+2Cov(X,Y)

=115.2

Cov(X,Y)=Var(X)Var(Y)ÒÏ(X,Y)

=36*06

=21.6

So X+Y is Normally distributed random variable with parameters

X+Y~N(80,115.2)
03

Explanation (part a)

We are required to find:

P(X+Y>90)=PX+Y-80115.2>90-80115.2

=1-PX+Y-80115.2≤90-80115.2

=1-Φ(0.931675)

=0.1757

04

Final Answer (Part a)

The probability that the total of the next 2weeks’ sales exceeds 90is0.1757.

05

Given Information (Part b)

Random variables Xand Ythat marks the sales in two successive weeks.

E(X+Y)=E(X)+E(Y)=80.

06

Explanation (Part b)

The probability would decrease and the reason is following. Observe that E(X+Y)=80<90s these variables have to be greater than their mean if they want to achieve 90 or more. If the correlation is lower, the rising of X would not imply so big rising of Y as it would be with greater correlation: Therefore, it's much harder to obtain 90 or more with lower correlation than with bigger correlation, so the probability must decrease.

07

Final Answer (Part b) 

The probability must be decreasing.

08

Given Information (Part c)

Random variablesXandYthat marks the sales in two successive weeksE(X+Y)=80.

09

Explanation (Part c)

Recalculate the variance,

Var(X+Y)=Var(X)+Var(Y)+2Cov(X,Y)

=86.4

Cov(X,Y)=Var(X)Var(Y)ÒÏ(X,Y)

=7.2

So, X+Yis Normally distributed random variable with parameters,

X+Y~N(80,86.4).

10

Explanation (Part c)

P(X+Y>90)=PX+Y-8086.4>90-8086.4

=1-PX+Y-8086.4≤90-8086.4

=1-Φ(1.0758287)

=0.141

11

Final Answer (Part c)

The correlation is0.141.

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