3. A person can’t decide whether to buy a house now or wait ayear, in which case

Question

3. A person can’t decide whether to buy a house now or wait ayear, in which case a price

increase may put a house beyond his reach. His best guess is that,if he waits a year,

the price increase will be approximately normal, with a mean of 8%and, re?ecting

the uncertainty of the market, a standard deviation of10%.

(a) If the price increase exceeds 25%, he feels he will be unableto a?ord a house.

What is the chance of this?

(b) On the other hand, if the price drops, he will save some money.What is the

chance of this?

Explanation / Answer

mean, = 8 standard deviation, = 10 a) P(X>25) P(Z>(X-)/)=P(Z>(25-8)/10 )=P(Z>1.7) = 1-0.9554= 0.0446 hence chance that the price increase exceeds 25% is 0.0446 b) P(X

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