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1-23-09

# 1-23-09 - Economic Statistics Class Notes Numerical Example...

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Economic Statistics – Class Notes – 1/23/09 Numerical Example: The Importance of the Variance – Suppose you have two job offers: o Company A – Average starting salary is \$35,000 o Company B – Average starting salary is \$40,000

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Company B – has a larger variance: P(salary < \$35,000) = 0.286 or 28.6% Riskier than company A because of the wider variance Company A – has a smaller variance: P(salary < \$35,000) = 0.05 or 5.0% For those who are risk averse , COMPANY A is a safer choice because the probability of getting a salary that is less than \$35,000 is 5% IDEA : Do NOT just look at the average, always look at the VARIANCE too! C. Random Variables and Probability Distributions 1. Probability – A number between 0 and 1 that indicates how likely an event will occur 2. Random Variable – A well defined rule for assigning a numerical value to the outcome of an experiment. a.
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1-23-09 - Economic Statistics Class Notes Numerical Example...

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