Homework 1 – solution

1. Either company needs to adjust its premium so that it can make

payoffs for up to N ships without losing money, where N is the smallest
number such that P (X > N5 ) < 0.05 (where X ∼ Bin(n, 0.015) is the
number of lost ships). Using excel, it’s easy to find that, for the smaller
company (n = 1000), N = 22, and for the larger company (n = 2000),
N = 39. So the minimum premium that allows to satisfy the requirement of
risk being no more than 0.05 is: 22·100000
1000
= 2200, for the smaller company;
39·100000
and 2000 = 1950, for the larger company.

2. Let X be the (random) volume to be put in a vial. We know that

X ∼ N (µ, σ),

with σ = 0.1 and µ unknown (to be determined).

The requirement that the fraction of under-filled vials be 0.01 is expressed
as
P (X < 2.5) = 0.01.
Standardizing, we obtain
µ ¶
2.5 − µ
P Z< = 0.01,
σ
from which it follows that
2.5 − µ
= −z0.01 = −2.33.
σ
Solving for µ we obtain

µ = 2.5 + 2.33σ = 2.73.

3. a) No – it takes negative values.

R∞
b) This can be a pdf – everywhere nonzero and −∞ f (x) dx = 1.
c) This one is fine – for the same reasons as b)
R∞
d) No since −∞ f (x) dx = 1.1 6= 1.

1
 e) This one is fine.
f) No – it can take negative values (for large x).
R∞
g) No since f (x) dx = √1 6= 1.
−∞ 2

R∞
4. We need to choose C such that −∞ f (x) dx = 1.
a) Z ∞ Z ∞
1
f (x) dx = C exp(−λx) dx = C .
−∞ 0 λ
So we have C λ1 = 1, and, therefore, C = λ.
b) Because of symmetry of the function we can write
Z ∞ Z ∞
1
f (x) dx = 2C exp(−λx) dx = 2C .
−∞ 0 λ
So C = λ/2.
c) Z ∞ Z 3
9
f (x) dx = C x dx = C .
−∞ 0 2
2
So C = 9
.