Dam Height, First Annual Probability of Flood if Height = Damages if Flooding Occurs $800,000 500,000 300,000 200,000 H (ft) Cost SO 0.25 20 700,000 0.05 800,000 0.01 900,000 0.002 30 40
Continuous Probability Distributions
Probability distributions are of two types, which are continuous probability distributions and discrete probability distributions. A continuous probability distribution contains an infinite number of values. For example, if time is infinite: you could count from 0 to a trillion seconds, billion seconds, so on indefinitely. A discrete probability distribution consists of only a countable set of possible values.
Normal Distribution
Suppose we had to design a bathroom weighing scale, how would we decide what should be the range of the weighing machine? Would we take the highest recorded human weight in history and use that as the upper limit for our weighing scale? This may not be a great idea as the sensitivity of the scale would get reduced if the range is too large. At the same time, if we keep the upper limit too low, it may not be usable for a large percentage of the population!
A new product’s chief uncertainty is its annual net revenue. Money has been spent, but an additional $30,000 is required to license a patent. The firm’s interest rate is 10%. What is the expected PW and standard deviation for deciding whether to proceed?
Step by step
Solved in 2 steps with 3 images
