Problem 1: A Customer Has Approached A Bank For A Loan. Without Further Information

Problem 1: A customer has approached a bank for a loan.
Without further information,

the bank believes there is a 4% chance that the customer will default on the loan. The
bank can run a credit check on the customer. The check will yield either a favorable or an
unfavorable report. From past experience, the bank believes that P(favorable report being
received | customer will default) = 0.03 and P(favorable report being received | customer
will not default) = 0.99.
a) What is the probability that a favorable report will be received?
b) If a favorable report is received, what is the probability that the customer will default
on the loan?
Solution:
Let D be the event that the customer defaults on the loan; ND is the event that the
customer doesnt default. Let F be the event that the credit check yields a favorable
report; UF is the event that it doesnt. We are given the following probabilities: P(D)=.04,
P(ND)=.96, P(F | D) = 0.03, P(F | ND) = 0.99.
a) We want to know P(F). Basedonthetotalprobabilityrule:
P(F)=P(D)P(F|D)+P(ND)P(F|ND)=(.04.03)+(.96.99)=.95
b)WewanttocomputeP(D|F).BasedontheBayesrule:
P(D | F) = P(F | D)P(D)/P(F)=0.030.04/0.95=0.001
Problem 2: ExactlytwocabcompaniesoperateinBelleville.TheBlueCompanyhas
bluecabs,andtheGreenCompanyhasGreenCabs.Exactly85%ofthecabsareblueand
theother15%aregreen.Acabwasinvolvedinahitandrunaccidentatnight.A
witness,Wilbur,identifiedthecabasaGreencab.Carefultestsweredonetoascertain
peoplesabilitytodistinguishbetweenblueandgreencabsatnight.Thetestsshowed
thatpeoplewereabletoidentifythecolorcorrectly80%ofthetime,buttheywerewrong
20%ofthetime.Whatistheprobabilitythatthecabinvolvedintheaccidentwasindeed
agreencab,asWilbursays?
Solution:
P(G)=.15Thisisthebaserateofgreencabsinthecity.Itgivesthepriorprobability
thatthecabintheaccidentisgreen.Similarly,P(B)=.85.
P(SG|G)=.80.Thisistheprobabilitythewitnesswillbecorrectinsayinggreenwhenthe
cabinfactisgreen,i.e.,giventhatthecabreallywasgreen.Similarly,P(SB|B)=.80.
Thesearetheprobabilitiesthatwitnessesarecorrect,sobythecomplementrule,the
probabilitiesofmisidentificationsare:P(SG|B)=.2andP(SB|G)=.2.
Whatwewanttoknowistheprobabilitythatthecabreallywasgreen,giventhatWilbur
saiditwasgreen,i.e.,wewanttoknowP(G|SG).
AccordingtoBayesrule,thisprobabilityisgivenby:
P(G|SG)=P(G)Pr(SG|G)/Pr(SG).
Wehavethevaluesforthetwoexpressionsinthenumerator:P(G)=.15andP(SG|G)=.
8,butwehavetodoalittleworktodeterminethevaluefortheexpressionP(SG)inthe
denominator.Accordingtothetotalprobabilityrule:
P(SG)=P(G)P(SG|G)+P(B)P(SG|B)=(.15.80)+(.85.20)=.12+.17=.29
Finally,wesubstitutethisnumber,.29,intothedenominatorofBayesRule:
P(G|SG)=P(G)P(SG|G)/P(SG)=15.80/.29=.414
Sotheprobabilitythatthewitnesswascorrectinsayingthecabwasgreenisjustabit
above.4definitelylessthanfifty/fiftyand(bythecomplementrule)theprobability
thatheiswrongisnearly.6.Thisissoeventhoughwitnessesareprettyreliable.How
canthisbe?Theansweristhatthehighbaserateofbluecabsandthelowbaserateof
greencabsmakeitsomewhatlikelythatthewitnesswaswronginthiscase.
Problem 3: Officialsatthesuicidepreventioncenterknowthat2%ofallpeoplewho
phonetheirhotlineactuallyattemptsuicide.Apsychologisthasdevisedaquickand
simpleverbaltesttohelpidentifythosecallerswhowillactuallyattemptsuicide.She
foundthat
1. 80%ofthepeoplewhowillattemptsuicidehaveapositivescoreonthis
test;
2. butonly5%ofthosewhowillnotattemptsuicidehaveapositivescoreon
thistest.
Ifyougetapositiveidentificationfromacalleronthistest,whatistheprobabilitythathe
wouldactuallyattemptsuicide?
Solution:
Let S be the event that the caller will attempt suicide; NS that he will not. Let P be the
event that the caller has a positive score on the test; NP is the event that the score is not
positive. We are given the following probabilities: P(S)=.02, P(NS)=.98, P(P | S) = 0.8,
P(P | NS) = 0.05.
We want to know P(S | P). First compute the probability that a caller will have a positive
score on the test, P(P). Basedonthetotalprobabilityrule:
P(P)=P(S)P(P|S)+P(NS)P(P|NS)=(.02.8)+(.98.05)=.065
ThenbasedontheBayesrule:
P(S | P) = P(P | S)P(S)/P(P)=0.80.02/0.065=0.246
Problem 4: Threemanufacturingplants,sayA,BandC,produce20,30and50percent
ofacompanysoutputrespectively.ThemanagerofplantCisveryqualityconsciousand
only1%oftheitemsfromthatplantaredefective.PlantsAandBhavedefectiveratesof
3%and5%respectively.
a)Whatistheprobabilitythatarandomlychosenitemfromthecompanyswarehouseis
defective?
b)Anitemisselectedatrandomfromthecompanyswarehouseandfoundtobe
defective.CalculatetheprobabilityitwasmanufacturedinplantC.
Solution:
LetA,BandCbetheeventsthatarandomlychosenitemisfromplantsA,BandC
respectively.LetDbetheeventthatarandomlychosenitemisdefective.Wearegiven
thefollowingprobabilities:P(A)=.2,P(B)=.3,P(C)=.5,P(D|A)=.03,P(D|B)=
0.05,P(D|C)=0.01.
a)WewanttocomputeP(D).Basedonthetotalprobabilityrule:
P(D)=P(A)P(D|A)+P(B)P(D|B)+P(C)P(D|C)=(.2.03)+(.3.05)+(.5.01)=
.026
b)WewanttocomputeP(C|D).BasedontheBayesrule:
P(C | D) = P(D | C)P(C)/P(D)=0.010.5/0.026=0.19

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