Question

A woman in a highland village in the Andes knits sweaters and sells them for export. She also takes care of her family and helps farm the family land; therefore, the amount of time she can devote to knitting is random. The probability distribution of the number of sweaters she can produce per month is as follows:
a. What is the expected number of sweaters per month she manufactures?

b. What is the variance of the number of sweaters per month she manufactures?

c. The exporter pays $12 for each sweater. The woman pays $2 per sweater for yarn. She also pays $3 per month to send the sweaters to the exporter (this is the shipping cost regardless of the number of sweaters shipped). Give profit from knitting sweaters as a function of the number of sweaters knitted.

d. What are expected profits and the variance of profits?

Answer 1

Answer:

Expected number of sweaters per month can be given as follows:

E(X) = Σ x P(X = x)

Now,

E(X) = [2 * 0.1 + 3* 0.1+ 4* 0.2 + 5* 0.3 + 6* 0.2 + 7 * 0.1]

E(X) = 4.7.

Var(X) = E(X^2) – [E(X)]^2

     We have E(X) = 4.7. Thus, [E(X)]2= 4.7*4.7 = 22.09.

Now E(X^2) = [2*2 * 0.1 + 3*3* 0.1+ 4*4* 0.2 + 5*5* 0.3 + 6*6* 0.2 + 7*7*0.1]

    E(X^2) = 24.1

Thus by formula, Var(X) = E(X2) – [E(X)]2

Var(X) = 24.1-22.09

Var(X) = 2.01

Given that exporter pays the $12 for each sweater. The woman pays $2 per sweater. The cost of shipment is $3 irrespective of the number of sweaters. Now, let m is the number of sweaters she made. Thus, the total cost she would have to pay would be

Total cost by woman = 2m+3

The total cost paid by the exporter would be = 12m.

Now the profit of woman would be given by,

                  = The total cost exporter pay – cost paid by the woman

                 = 12m – (2m +3)

                 = 12m – 2m -3

                 = 10m – 3.

Now expected profit made by the woman is given in the following table below:

E(Profit) = Σ profit* P(X = x)

In a similar way, as we have done in part (a).

E(Profit) = [17 * 0.1 + 27* 0.1+ 37* 0.2 + 47* 0.3 + 57* 0.2 + 67 * 0.1]

E(Profit) = 44.

Now, we calculate the variance:

Var(profit) = E(profit^2) – [E(profit)]^2

Var(profit) =

E(profit^2) = [17*17 * 0.1 + 27*27* 0.1+ 37*37* 0.2 + 47*47* 0.3 + 57*57* 0.2 + 67*67*0.1]

    E(profit^2) = 2137.

[E(profit)]^2 = 44*44 = 1936.

Thus, the variance can be given as =

Var(profit)= 2137 – 1936

Var(profit) = 201.