Midterm1 Spring2023 Answerkeys

Economics 1620
Spring 2023
Midterm 1
NAME: ________________________________________________
Instructions: You have 80 minutes for this exam. You can use a calculator but no cell
phones.
In the multiple choice section, please write your final answer in the space provided.
In the short answers section, all work must be shown. Partial credit will be provided for work
that is clearly documented.
Please use four decimal points in all work, including intermediate work and your final
answer.
A formula sheet and cumulative normal distribution table are provided at the end of this
document.
Total points Possible points

Multiple choice 50
10 at 5 pts each
Short answer problem 1
Part a) 4
Part b) 4
Part c) 4
Part a) 4
Part b) 4
Part c) 4
Part a) 4
Part b) 4
Part c) 4
Part d) 4
Total score 90
Part I: Multiple Choice
WRITE YOUR ANSWER IN THE SPACE PROVIDED
ANSWER:_____1) A donut shop serves both students and non-students. In addition, some
of their customers come before noon and some come in the afternoon. Overall, 20 percent
of customers are students. Overall, 60 percent of customers come before noon. Among
students, 75 percent come before noon. What percent of customers come in the afternoon?
A) 40 percent
B) 50 percent
C) 60 percent
D) 70 percent
students, 75 percent come before noon. What percent of customers are either students or
come before noon?
A) 60 percent
B) 65 percent
C) 75 percent
D) 80 percent
students, 75 percent come before noon. Among those who come before noon, what percent
are students?
A) 20 percent
B) 25 percent
C) 60 percent
D) 75 percent
ANSWER:_____4) The probability of cancer in the population is 2 percent. A person with

cancer has an 80 percent probability of testing positive. A person without cancer has a 10
percent probability of testing positive. A woman tests positive. What is her probability
having cancer?
A) 1.6 percent
B) 2 percent
C) 14 percent
D) 86 percent
ANSWER:_____5) Your firm has revenues, which equal $80 on average and have a
standard deviation of $5. Your costs average $75 and have a standard deviation of $6.
Revenues and costs follow a joint normal distribution with correlation of 0.5. What is the
probability that your profits (i.e., revenue minus cost) are positive?
A) 9 percent
B) 18 percent
C) 82 percent
D) 91 percent
ANSWER:_____6) A basketball player makes 60 percent of her free throws. In a game last
week, she took seven free throws. Assume that these are independent events. Define Y as
the number of free throws she successfully made. What is the standard deviation of Y?
A) 1.30 percent
B) 1.68 percent
C) 2.05 percent
D) 4.20 percent
ANSWER:_____7) During a typical year (365 days), it rains with 20 percent probability on
each day. Assume that whether or not it rains is independent across days. Define Y as the
number of days that it rains in a given year. What is the probability that it rains 80 days or
less? [Hint: use the normal approximation]
A) 17.88 percent
B) 45.22 percent
C) 54.78 percent
D) 82.12 percent
ANSWER:_____8) Let the random variable Z follow a uniform distribution on [1,5] (i.e.,
a=1 and b=5). Find the value k, such that Pr(Z > k) = 0.25.
A) 1.25
B) 2
C) 3.75
D) 4
ANSWER:_____9) Suppose that a stock return is normally distributed, with a mean return
of 0.1 and a standard deviation of 0.1. What is the probability that the stock return exceeds
0.2?
A) 15.87 percent
B) 46.02 percent
C) 53.98 percent
D) 84.13 percent
ANSWER:_____10) The correlation between X and Y equals 0.3. The variance of X equals
4 and the variance of Y equals 25. What is the covariance between X and Y?
A) 1.73
B) 3
C) 5.48
D) 30
Short answer 1: Farmers tend to make a profit in 85 percent of all rainy seasons but only
make a profit in 20 percent of all dry seasons. 60 percent of seasons are rainy.
a) What is the probability that a season is both dry and one in which farmers make a profit?
FINAL ANSWER__________________________________________________
b) Suppose that farmers make a profit in a given season. Given this, what is the probability
that the weather was dry?
FINAL ANSWER__________________________________________________
c) Suppose that farmers don’t make a profit in a given season. Given this, what is the
probability that the weather was dry?
FINAL ANSWER__________________________________________________
Short answer 2: The retailer Nike typically releases their earnings reports on a quarterly
basis. Investors often respond to the release of this information, relative to expectations.
Consider the following set of outcomes. For example, there is a 25 percent chance that the
earnings report exceeds expectations and the price of the Nike stock increases.
Nike stock decreases No change in Nike Nike stock increases

stock
Earnings exceeds 0.1 0.15 0.25
expectations
Earnings does not 0.25 0.15 0.1
exceed expectations
a) What is probability that Nike stock increases?
FINAL ANSWER__________________________________________________
b) What is the probability that the Nike stock decreases or that earnings do not exceed
expectations?
FINAL ANSWER__________________________________________________
c) Given that the stock increased, what is the probability that earnings did not exceed
expectations?
FINAL ANSWER__________________________________________________
Short answer 3: You own 1 share of stock A stock and 2 shares of stock B. The price of
stock A (one year from now) follows a normal distribution with a mean of $200 and a
standard deviation of $20. Likewise, the price of stock B (one year from now) follows a
normal distribution with a mean of $100 and a standard deviation of $10. The covariance
between the two prices is -100.
a) What is the probability that the price of stock A is greater than $220 one year from now?
FINAL ANSWER__________________________________________________
b) What is the expected value of your portfolio one year from now?
FINAL ANSWER__________________________________________________
c) What is correlation between the two prices?
FINAL ANSWER__________________________________________________
d) What is the standard deviation of your portfolio value one year from now?
FINAL ANSWER__________________________________________________

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Economics 1620

Total points Possible points

WRITE YOUR ANSWER IN THE SPACE PROVIDED

ANSWER:_____4) The probability of cancer in the population is 2 percent. A person with

Nike stock decreases No change in Nike Nike stock increases

a) What is probability that Nike stock increases?

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