QT Study Pack 2006 Wip

ii
Acknowledgement
Acknowledgement
STRATHMORE UNIVERSITY STUDY PACK
iii
Acknowledgement
Instructions for Students
Instructions for Students

iv
Contents
Acknowledgement............................................................................ii
Instructions for Students................................................................iii
Contents...........................................................................................iv
Course Description...........................................................................v
Index................................................................................................vi
LESSON ONE....................................................................................1
1. Linear Algebra and Matrices.....................................................................................1
LESSON TWO..................................................................................45
2. Sets Theory and Calculus........................................................................................45
LESSON THREE..............................................................................80
3. Descriptive Statistics and Index Numbers..............................................................80
LESSON FOUR..............................................................................116
4. Measures of Relationships and Forecasting..........................................................116
LESSON FIVE................................................................................157
5. Probability.............................................................................................................157
LESSON SIX..................................................................................186
6. Sampling and Estimation......................................................................................186
LESSON SEVEN............................................................................229
7. Decision Theory....................................................................................................229
LESSON EIGHT.............................................................................250
8. Operation Research...............................................................................................250
LESSON NINE...............................................................................294
9. Revision Aid..........................................................................................................294
QUANTITATIVE TECHNIQUES
v
Contents
Course Description
Course Description
vi
Index
Lesson One
1
LESSON ONE
1. Linear Algebra and Matrices
Contents
- Functions and graphs
- Linear equations, higher order equations, inequalities and
simultaneous equations
- Matrix algebra
- Application of matrix algebra output analysis and elementary
Markovian.
- Input output analysis.
- Markovian Process.
2
Algebra and Matrices
Linear
1.1
Functions and graphs
A function is a mathematical relationship in which the value of a single
dependent variable are determined from the values of one or more
independent variables. The following is an example of a function in which
y is said to be a function of x.
y = a + bx
In the example, both x and y are variables this is because they may
assume different values throughout the analysis of the function. On the
other hand, a and b are referred to as constants because they assume
fixed values.
The variable y is a dependant variable in the sense that its values are
generated from an independent variable x.
The collection of all the values of the independent variable for which the
function is defined is referred to as the domain of the function
corresponding to this we have the range of the function, which is the
collection of all the values of the dependent variable defined by the
function
The fact that it is a function of x can also be denoted by the following
general form
y = f(x)
Functions of a single independent variable may either be linear or non
linear.
Linear functions can be represented by:
y = a + bx
Whereas non linear functions can be represented by functions such as:
i.
ii.
iii.
iv.
v.
vi.
y = o + 13 x + 2x3
y2 = 3x + 18
y = 2x2 + 5x + 7
where , a, b, c, d, k =
ax2 + bx + cy + d = 0constants
xy = k
y = ax
Graph of a function
A graph is a visual method of illustrating the behaviour of a particular
function. It is easy to see from a graph how as x changes, the value of the
f(x) is changing.
The graph is thus much easier to understand and interpret than a table
of values. For example by looking at a graph we can tell whether f(x) is
increasing or decreasing as x increases or decreases.
We can also tell whether the rate of change is slow or fast. Maximum and
minimum values of the function can be seen at a glance. For particular
values of x, it is easy to read the values of f(x) and vice versa i.e. graphs
can be used for estimation purposes
Different functions create different shaped graphs and it is useful
knowing the shapes of some of the most commonly encountered
functions. Various types of equations such as linear, quadratic,
Lesson One
3
trigonometric, exponential equations can be solved using graphical
methods.
Equations
An equation is an expression with an equal sign (=)
Equations are classified into two main groups linear equations and non
linear equations. Examples of linear equations are
x + 13 = 15
7x + 6 = 0
Non linear equations in the variable x are equations in which x appears
in the second or higher degrees. They include quadratic and cubic
equations amongst others. For example
5x2 + 3x + 7 = 0 (quadratic equation)
2x3 + 4x2 + 3x + 8 = 0 (cubic equation)
The solution of equations or the values of the variables for which the
equations hold is called the roots of the equation or the solution set.
Solution of Linear Equation
Supposing M, N, and P are expressions that may or may not involve
variables, then the following constitute some rules which will be useful in
the solution of linear equations
Rule 1: Additional rule
If M = N then M + P = N + P
Rule 2: Subtraction rule
If M = M, Then M P = N P
Rule 3: multiplication rule
If M = N and P O then M x P = N x P
Rule 4: Division rule
If P x M = N and P O
And N/P = Q
Q being a raterial number then
M = N/P
Example
i.
Solve 3x + 4 = - 8
ii.
Solve
y
=-4
3
Solutions
i.
3x + 4 = 8
3x + 4 4 = 8 4
3x = 12
(by subtraction rule)

(simplifying)
4
Linear
3x
12
3
3
(by division rule)
x=4
ii.
y
3
(simplifying)
4 3
y = 12
(simplifying)
Solution of quadratic equations

Suppose that we have an equation given as follows
ax2 + bx + c = 0
Where a, b and c are constants, and a 0. such an equation is referred to
as the general quadratic equation in x. if b = 0, then we have
ax2 + c = 0
Which is a pure quadratic equation
There are 3 general methods for solving quadratic equations; solution by
factorization, solution by completing the square and solution by the
quadratic formula.
Solution by Factorization
The following are the general steps commonly used in solving quadratic
equations by factorization
(i) Set the given quadratic equation to zero
(ii) Transform it into the product if two linear factors
(iii)
Set each of the two linear factors equal to
zero
(iv)
Find the roots of the resulting two linear
equations
Example
Solve the following equation by factorization
i.
6x2 = 18x
ii.
15x2 + 16x = 15
Solutions
i.
6x2 = 18x
6x2 18x = 0....................................(step 1)
6x(x 3) = 0.....................................(step 2)
6x = 0...............................................(step 3)
and x 3 = 0
Lesson One
5
x = 0 or x = 3 ...............................(by step 4)
15x2 + 16x = 15
ii.
15x2 + 16x 15 = 0.......................... (step 1)
(5x 3) (3x +5) = 0..........................(step 2)
5x 3) = 0} Step 3
3x + 5 = 0}
x=-5
or + 3 ...........................(step 4)
Solution by Completing the Square

The process of completing the square involves the construction of a
perfect square from the members of the equation which contains the
variable of the equation.
Consider the equation 9x2 bx = 0
The method of completing the square will involve the following steps
i.
Make the coefficient of x2 unity
ii.
Add the square of the coefficient of x to both sided of the
equal sign. The

left hand side is now a perfect square
iii.
Factorize the perfect square on the left hand side.
iv.
Find the square root of both sides
v.
Solve for x
Example
Solve by completing the square.
i.
3x2 = 9x
ii.
2x2 + 3x + 1 = 0
Solutions
i.
3x2 = 9x or
(3x2 - 9x = 0)
x2 - 3x = 0.............................................. (Step 1)
2
3
3
x 2 3 x
2
2 ..........................(Step 2)
6
Linear
3
9
x
2
4 ............................................(Step 3)
x 3
9
4 ............................................(Step 4)
3 3
2 2
33 3 3
or
2
2 2
(= 3 or 0)
2x2 + 3x + 1 = 0
ii.
x2 +
X2
or
(2x2 + 3x = -1)
3x
1
= - ..... (Step 1)
2
2
3x 3

2 4
1 (Step 2)
2
3x
1
.. (Step 3)
x+ =
4
16
3
1
x+ =
4
16
3
1
x= =
4
4
3
1
3
1
+ or
4
4
4
4
1
or 1 =
2
Solution by Quadratic Formula

Consider the general quadratic equation
ax 2 + bx + c = 0 where a 0
The roots of the equation are obtained by the following formula:
x
b b 2 4ac
2a
Example
Lesson One
7
Solve for x by formula
5x2 + 2x 3 = 0
Solution
a = 5, b = 2, c = - 3
x
b b 2 4ac
2a
2 2 4(5)(3)
2(5)
3
or 1
5
Inequalities
An inequality or inequation is an expression involving an inequality sign
(i.e. >, <, , , i.e. greater than, less than, less or equal to, greater or
equal to) The following are some examples of inequations in variable x.
3x + 3 > 5
x2 2x 12 < 0
The first is an example of linear equation and the second is an example of
a quadratic in equation.
Solutions of inequations
The solutions sets of inequations frequently contain many elements. In a
number of cases they contain infinite elements.
Example
Solve and graph the following inequation
x 2 > 2 ; x c w (where x is a subset of w)
Solution
x 2 > 2 so x 2 + 2 > 2 + 2
Thus, x>4
The solution set is infinite, being all the elements in w greater than 4
0
Example
Solve and graph
3x 7 < - 13;
10
11
8
Linear
Solution
3x - 7 < -13
3x - 7 + 7 < -13 + 7
3x < -6
3x
-6
<
3
3
x < -2
.. R Line
-4
-3
-2
-1
Rules for solving linear inequations

Suppose M, M1, N, N1 and P are expressions that may or may not involve
variables, then the corresponding rules for solving in equations will be:
Rule 1: Addition rule
If M > N and M1> N1
Then M + P > N + P and
M1 + P >N1+ P
Rule 2: Subtraction Rule
If M < N and M1 N1
Then M P < N P and
M1 P N1 P
Rule 3: Multiplication rule
If M N and M1 > N1 and P 0
Then MP NP; M1P > N1P
M(-P) N(-P) and M1(-P) < N1(-P)
Rule 4: Division
If M > N and M1< N1 and P 0
Then M/P > N/P: M1/P < N1/P
M/(-P) < N/(-P) : and M1/(-P) > N1/(-P)
Rule 5: Inversion Rule
Lesson One
9
If M/P N/Q where P, Q 0
M1/P > N1/Q
Then P/M Q/N and P/M1 < Q/N1
Note: The rules for solving equations are the same as those for solving
equations with one exception; when both sides of an equation is
multiplied or divided by a negative number, the inequality symbol must
be reversed (see rule 3 & Rule 4 above).
Example
Solve and graph the following:
i.
7 2x > - 11 ;
ii.
5x + 4 2x 10 ;
iii.
3 2x + 1 < 7 ;
Solutions
i.
7 - 2x > -11
-2x > -11 (subtraction rule)
-2x 18
<
(bydivision rule)
-2
-2
x<9
line
-3 -2 -1 0
ii.
-5x + 4x 2x - 10
-7x + 4 10
-7x -14
x2
(by division rule)
10
11
10
Linear
....Q
line
-4
-3
-2
-1
-3 2x + 1 < 7
iii.
-4 2x < 6
(by substraction rule)
-2 x < 3
( by division rule)
Q
line
-4
-3
-2
-1
Linear inequation in two variables: relations

An expression of the form
y 2x 1
is technically called a relation. It corresponds to a function, but different
from it in that, corresponding to each value of the independent variable
x, there is more than one value of the dependent variable y
Relations can be successfully presented graphically and are of major
importance in linear programming.
1.2
Linear simultaneous equations:
Two or more equations will form a system of linear simultaneous
equations if such equations be linear in the same two or more variables.
For instance, the following systems of the two equations is simultaneous
in the two variables x and y.
2x + 6y = 23
4x + 7y = 10
The solution of a system of linear simultaneous equations is a set of
values of the variables which simultaneously satisfy all the equations of
the system.
Solution techniques
a) The graphical technique
The graphical technique of solving a system of linear equations consists
of drawing the graphs of the equations of the system on the same
rectangular coordinate system. The coordinates of the point of
intersection of the equations of the system would then be the solution.
Lesson One
11
Example
y
10
8
6
(2,
4)
2x + y = 8
4
2
-4
-2
x + 2y = 10
2
10
12
-2
-4
The above figure illustrates:
Solution by graphical method of two equations
2x + y = 8
x + 2y = 10
The system has a unique solution (2, 4) represented by the point of
intersection of the two equations.
b) The elimination technique
This method requires that each variable be eliminated in turn by making
the absolute value of its coefficients equal in the equations of the system
and then adding or subtracting the equations. Making the absolute
values of the coefficients equal necessitates the multiplication of each
equation by an appropriate numerical factor.
Consider the system of two equations i and ii below
2x 3y = 8 .. ..................................i.
3x + 4y = -5 ...................................ii.
Step 1
Multiply (i) by 3
6x 9y = 24 .............................................iii.
Multiply (ii) By 2
6x + 8y = - 10 ..........................................iv.
Subtract iii from iv.
12
Linear
17y = -34 ..................................................v.
y = -2
Step 2
Multiply (i) by 4
8x 12y = 32 . ..........................................vi
Multiply (ii) by 3
9x + 12y = -15 .. ..........................................vii
Add vi to vii
17x = 17 ...................................................viii
x=1
c) The substitution technique
To illustrate this technique, consider the system of two equations i. and ii

reproduced below
.....2x 3y = 8 ..
i.
.....3x = 4y = -5
ii.
The solution of this system can be obtained by

a) Solving one of the equations for one variable in terms of the other
variable;
b) Substituting this value into the other equation(s) thereby obtaining
an equation with one unknown only
c) Solving this equation for its single variable finally
d) Substituting this value into any one of the two original equations
so as to obtain the value of the second variable
Step 1
Solve equation (i) for variable x in terms of y
2x 3y = 8
x= 4 + 3/2 y
(iii)
Step 2
Substitute this value of x into equation (ii). And obtain an equation in y
only
3x + 4y = -5
3 (4 + 3/2 y) + 4y = -5
8 y = - 17 .
(iv)
Lesson One
13
Step 3
Solve the equation (iv). For y
8 = -17
y = -2
Step 4
Substitute this value of y into equation (i) or (iii) and obtain the value of x
2x 3y = 8
2x 3(-2) = 8
x=1
Example
Solve the following by substitution method
2x + y = 8
3x 2y = -2
Solution
Solve the first equation for y
y = 8 2x
Substitute this value of y into the second equation and solve for x
3x 2y = -2
3x 2 (8-2x) = -2
x=2
Substitute this value of x into either the first or the second original
equation and solve for y
2x + y = 8
(2) (2) + y = 8
y=4
1.3
MATRICES
A matrix is a rectangular array of items or numbers. These items or
numbers are arranged in rows and columns to represent some
information.
The position of an element in one matrix is very important as well be
seen later; therefore an element is located by the number of the row and
column which is occupies.
The size of a matrix is defined by the number of its rows (m) and column
(n).
14
Linear
a b
For example =
and B =
c d
a b c
d e f
g h i
are (2 x 2) and (3 x 3) matrices since A has 2 rows and 2 columns and B

has 3 rows and 3 columns.
A matrix A with three rows and four columns is given by one of:
a11 a12
A= a 21 a 22
a
31 a 32
a13
a 23
a 33
a14
a 24
a 34
or
A = a ij i = 1, 2, 3
j = 1, 2, 3, 4
Properties of matrices
Equal Matrices
Two matrices A and B are said to be equal, that is
A=B
or
a = b
ij
ij
If and only if they are identical if they both have the same number of
rows and columns and the elements in the corresponding locations in the
two matrices should be the same, that is, a ij = bij for all i. And j.
Example
The following matrices are equal
3 4 0 3 4

2 2 3 = 2 2
5 1 1 5 1
Column Matrix or column vector

A column matrix, also referred to as column vector is a matrix consisting
of a single column.
Lesson One
15
For example x =
x1

x 2
.

.
.

x n
Row matrix or row vector

It is a matrix with a single row
For example y = y = y1 , y 2 , y3 .........y n
Transpose Matrix
The transpose of an mxn matrix A is the nxm matrix A T obtained by
interchanging the rows and columns of A.
A
=
aij
mxn
mxn
The transpose of A i.e. AT is given by

AT =
aij
aji
mxn
nxm
Example
Find the transposes of the following matrices
1 5 7
A= 2 1 4
0 9 3
B= b1 , b 2 , b3 , b 4
x1
C= x 2
x
3
Solution
16
i. A
1 5 7
= 2 1 4
0 9 3
Linear
1 2 0
= 5 1 9
7 4 3
ii. BT = b1 , b 2 , b3 , b 4
b1

b
= 2
b3

b 4
x1

T
iii. C = x 2
x
3
x1 x 2 x 3
Square Matrix
A matrix A is said to be square when it has the same number of rows as
columns
Lesson One
17
e.g.
A=
2 5
is a square matrix of order 2
3 7
B = n n is a square matrix of the order n
Diagonal matrices
It is a square matrix with zeros everywhere in the matrix except on the
principal diagonal
e.g.
3 0 0
A = 0 1 0
0 0 7
9 0 0
, B = 0 0 0
0 0 0
An identity of unity matrix

It is a diagonal matrix in which each of the diagonal elements is a
positive one (1)
e.g.
1 0
I2
0 1
1 0 0
andI3 0 1 0
0 0 1
2 2 unitmatrix
0 1
3 3unitmatrix
2 x 2 unit matrix
0 0 1
3x3 unit matrix
A null or zero matrix

A null or zero matrix is a matrix whose elements are all equal to zero.
Sub matrix
The sub matrix of the matrix A is another matrix obtained from A by
deleting selected row(s) and/or column(s) of the matrix A.
7 9 8
e.g, if A = 2 3 6
1 5 0
2 3 6
7 9
and A 2 =
1 5 0
1 5
then A1 =
are both sub matrices of A
18
Linear
OPERATION ON MATRICES
Matrix addition and subtraction
We can add any number of matrices (or subtract one matrix from
another) if they have the same sizes. Addition is carried out by adding
together corresponding elements in the matrices. Similarly subtraction is
carried out by subtracting the corresponding elements of two matrices as
shown in the following example
Example: Given A and B, calculate A + B and A B
A=
6 1 10 5
4
2 5
3
9 13 6 0
12 4 7 3
B = 0 4 10 4
7 3 7 9
1 10 5 12 4 7 3
18 3 3 8
6
A+B= 3
4
2 5 + 0 4 10 4 = 3 0 12 9
9 13 6 0 7 3 7 9 2 10 1 9
1 10 5 12 4 7 3
6 5 17 2
6
A-B= 3
4
2 5 - 0 4 10
4 = 3
8 8 1
9 13 6 0 7 3 7 9 16 16 13 9
If it is assumed that A, B, C are of the same order, the following

properties are fulfilled:
a) Commutative law:
A+B=B+A
b) Associative law: (A + B) + C = A + (B + C)
=A+B+C
Multiplying a matrix by a number

In this case each element of the matrix is multiplied by that number
Example
Lesson One
19
If A =
6 1 10 5
3 4 2 5
9 13 6 0
60 10 100 50
then (10)A = 30 40 20 50
90 130 60 0
Matrix Multiplication
a) Multiplication of two vectors
Let row vector A represent the selling price in shillings of one unit of
commodity P, Q, R respectively and let column vector B represent the
number of units of commodities P, Q, R sold respectively. Then the vector
product A B will be equal to the total sales value
i. e. A B =
Total sales value
100
Let A = 4 5 6 and B = 200

300
100
then 4 5 6 200
= 400 + 1,000 + 1,800 = Shs 3,200
300
Rules of multiplication
i.
ii.
iii.
The row vector must have the same number of elements as the
column vector
The first vector is a row vector and the second is a column
vector
The corresponding elements in each vector are multiplied
together and the results obtained are added. This addition is
always a single number
Going back to the example given before
100
A B = 4 5 6 200 = 4 100 + 5 200 + 6 300=Shs3,200 a

300
single number
b) Multiplication of two matrices
20
Linear
Rules
i.
Multiplication is only possible if the first matrix has the same

number of columns as the second matrix has rows. That is if A
is the order ab, then B has to be of the order bc. If the AB
= D, then D must be of the order ac.
ii.
The general method of multiplication is that the elements in
row m of the first matrix are multiplied by the corresponding
elements in columns n of the second matrix and the products
obtained are then added giving a single number.
We can express this rule as follows
b11
b 21
a11 a12
a 21 a 22
and b =
Let A =
d11 d12
d 21 d 22
Then A B = D =
A = 2 x 2 matrix
b12
b 22
b13
b 23
d13
d 23
B = 2 x 3 matrix
D = 2 x 3 matrix
Where
d11 = a11 b11 + a12 b21
d12 = a11 b12 + a12 b22
Lesson One
21
Example I
6 3 1 5 6 0 1 5 6 2 1 8
6 1
3 0 2
2 3 3 4 2 0 3 5 2 2 3 8
2 3
4 5 8
22 5 20
=
18 15 28
Example II
Matrix X gives the details of component parts used in the make up of two
products P1 and P2 matrix Y gives details of products made on each day of
the week as follows:
Matrix
Y
Products
Matrix
X
P1
Parts
A
P1 3 4
Products
P2 2 5
Mon
Tues
Wed
Thur
Fri
C
2
P2
1 2
2 3
3 2
2 2
1 1
Use matrix multiplication to find the number of component parts used on

each day of the week.
Solution:
After careful consideration, it will be easy to decide that the correct
order of multiplication is YXX (Note the order of multiplication). This
multiplication is compatible and also it gives the desired answer.
2
YX= 3
2
1
3
2
2
1
5 x 2 matrix
3 4 2
2 5 3
2 x 3 matrix =
13+22
23+32
33+22
23+22
13+12
14+25
24+35
34+25
24+25
14+15
5 x 3 matrix
12+25
22+33
32+23
22+23
12+13
22
A B
Mon
Tues
Wed
Thur
Fri
12
13
10
5
Linear
14 8
23 13
22 12
18 10
9 5
Interpretation
On Monday, number of component parts A used is 7, B is 14 and C is 8. in
the same way, the number of component parts used for other days can be
interpreted.
The determinant of a square matrix
The determinant of a square matrix det (A) or A is a number associated
to that matrix. If the determinant of a matrix is equal to zero, the matrix
is called singular matrix otherwise it is called non-singular matrix. The
determinant of a non square matrix is not defined.
Determination of a 2 x 2 matrix
a b
c d
= ad - cb
ii. Determinant of a 3 x 3 matrix
a b c
A d e f
g h i
e f
h i
= a
d f
b
g i
+c
d e
g h
a ei - fh - b di - gf +c dh - eg
simplify
iii.
Determinant of a 4 x 4 matrix
Lesson One
23
A=
a b c d
e f g h
i j k l
m n o p
f g h
A = a j k l
n o p
e g h
b i k
l
n o p
e f h
e f g
+c i j l
d i j
k
m o p
m n o
Simplify 3 x 3 determinants as in ii and then evaluate the 4 x 4

determinants.
Inverse of a matrix
If for an n n square matrix A, there is another n n square matrix B
such that there product is the identity of the order n X n, I n, that is A X B
= B X A = I, then B is said to be inverse of A. Inverse if generally written
as A-1
Hence AA-1 = I
Note: Only non singular matrices have an inverse and therefore the
inverse of a singular matrix is non defined.
General method for finding inverse of a matrix
In order to introduce the rule to calculate the determinant as well as the
inverse of a matrix, we should introduce the concept of minor and
cofactor.
The minor of an element
Given a matrix A = (aij), the minor of an element aij in row i and column j
(call it mij), is the value of the determinant formed by deleting row i and
column j in matrix A.
Example
4 2 3
Let A = 5 6 1
2 3 0
The minors are,
24
Linear
m11 =
6 1
= 60 31 = 3
3 0
m12 =
5 1
= 50 12 = 2
2 0
Similarly
m13 =
5 6
2 3
m 21 =
=15 12=3
2 3
3 0
m 22 =
=0 9= 9
=0 6= 6
m 32 4 3
m31 = 2 3
6 1
= 2 -18 = -16
4 3
2 0
m 23 =
4 2
2 3
=12 4 = 8
m 33 4 2
5 1
= 4 - 15 = -11
5 6
= 24 -10 = 14
The cofactor of an element

The cofactor of any element aij (known as cij) is the signed minor
associated with that element.
The sign is not changed if (i+j) is even and it is changed if (i+j)is odd.
Thus the sign alternated whether vertically of horizontally, beginning
with a plus in the upper left hand corner.
i.e. 3 x 3 signed matrix will have signs

Hence the cofactor of element a 11 is m11 = -3, cofactor of a 12 is m12 = +2

the cofactor of element a13 is +m13 = 3 and so on.
Matrix of cofactors of A
in general for a matrix M
3 2 3
9 6 8
16 11 14
a b c
=
d e f
g h i
Cofactor of a is written as A, cofactor of b is written as B and so on.

Hence matrix of cofactors of M is written as
Lesson One
25
A B C
= D E F
G H I
The determinant of a nn matrix

The determinant of a nn matrix can be calculated by adding the
products of the element in any row (or column) multiplied by their
cofactors. If we use the symbol for determinant.
Then
= aA + bB + cC
or
= dD + eE + fF e.t.c
Note: Usually for calculation purposes we take = aA + bB + cC
Hence in the example under discussion
= (4 3) + (2 2) + (3 3) = 1
The ad joint of a matrix
A B C
The ad joint of matrix D E F is written as

G H I
A D G
B E H i.e. change rows into columns and columns into rows

C F I
(transpose)
The inverse of the matrix
is written as
i.e. A -1
a b c
d e f
g h i
1
(ad joint of the matrix of cofactors)
determinant
A D G
1
=
B E H

C F I
26
Linear
Where = aA + bB + cC
4 2 3
Hence inverse of 5 6 1
2 3 0
is found as follows
= (4 3) + (2 2) + (3 3) = 1
A = -3
B=2
C=3
D=9
E = -6
F = -8
G = -16
H = 11
A D G
B E H
C F I
-1
I = 14
-3 9 -16
2 -6 11
3 -8 14
-3 9 -16
1
2 -6 11
3 -8 14
-3 9 -16
2 -6 11
3 -8 14
(note: Check if A A-1 = A-1 A = 1)

Solution of simultaneous equations
In order to determine the solutions of simultaneous equations, we may
use either of the following 2 methods
i.
The cofactor method
ii.
Cramers rule
The cofactor method
This method requires that we obtain
a) The minors and cofactors
b) The ad joint of the matrix
c) The inverse of the matrix
d) Multiply the original by the inverse on both of the matrix
equation
Lesson One
27
Example
Solve the following
a) 4x1 + x2 5x3 = 8
-2x1 + 3x2 + x3 = 12
3x1 x2 + 4x 3 = 5
b) 4x1 + 3x3 + 5x3 = 27
x1 + 6x2 + 2x3 = 19
3x1 + x2 + 3x3 = 15
c) 4x1 + 2x2 + 6x3 = 28
3x1 + x2 + 2x3 = 20
10x1 + 5x2 + 15x3 = 70
d) 2x1 + 4x2 3x3 = 12
3x1 5x2 + 2x3 = 13
-x1 + 3x2 + 2x3 = 17
Solution
a) From a, we have
4 1 -5 x1

-2 3 1 x2
3 -1 4 x
3
A
= 12
We need to determine the minors and the cofactors for the above
matrix
Definition
A minor is a determinant of a sub matrix obtained when other elements
are detected as shown below.
A cofactor is the product of (-1) i + j and a minor where
i = Ith row i = 1, 2, 3 .
j = Jth row j = 1, 2, 3 .
28
Cofactor of 4 (a11) = (-1)
Linear
1+1
Cofactor of -2 (a21) = (-1)
2+1
3+1
1+2
2+2
2+3
1+3
Cofactor of +1 (a23) = (-1)
2+3
3+3
3 1
= 13
1 4
1
1
1
3
2
3
5
= 1
4
5
= 16
1
1
= 11
4
4 5
= 31
3 4
4 5
= 6
2 1
2 3
= 7
3 1
4 1
= 7
3 1
4 1
= 14
2 3
The matrix of C of cofactors is
13 11 7
1 31 7
16 6 14
13 1 16
CT = 11 31 6 = Ad joint of the original matrix of coefficients

7 7 14
The original matrix of coefficients
4 1 5
1
= 2 3
3 1 4
Therefore
Lesson One
29
4 1 5
2 3 1
3 1 4
4 1 5 4 1
2 3 1 2 3
3 1 4 3 1
(48 + 3 10) (-45 4 8)
41 + 57
98
The inverse of the matrix of coefficients, see (*) will be
13 1 16
1
=
11 31 6
98
-1 7 14
by multiplying the inverse on both sides of * we have,
4 1 5
13 1 16
1
11 31 6 2 3 1
98
3 1 4
-1 7 14
x1
x
2
x
3
13 1 16 8
1

11 31 6 12
98
5
-1
7
14

98 0 0 x1
1
x
0 98 0
2
98

0 0 98 x 3
1 0 0 x1

= 0 1 0 x 2
0 0 1 x
3
x1
x 2
x
3
196
1
=
490
98
98
2

= 5

1
5
1
X1 = 2, X2 = 5, X3 = 1
c) 4x1 + 2x2 + 6x3 = 28
30
Linear
3x1 + x2 + 2x3 = 20
10x1 + 5x2 + 15x3 = 70
4 2 6 x1

3 1 2 x2
10 5 15 x
3
4 2 6
3 1 2
10 5 15
28
= 20

70
4 2 6 4 2
3 1 2 3 1
10 5 15 10 5
= (60 + 40 + 90) (60 + 40 + 90)

=0
Hence the solutions of x1, x2, and x3 do no exist. The equations are
independent
Now work out part (b) on your own.
Cramers Rule in Solving Simultaneous Equations
Consider the following system of two linear simultaneous equations in
two variables.
a11 x1 + a12 x2 = b1 (i)
a21 x1 + a22 x2 = b2 (ii)
after solving the equations you obtain
x1 =
b1a 22 b 2a12
a11a 22 a12a 21
b1 a12
b 2 a 22
a11 a12
a 21 a 22
and
x2 =
a11b 2 - a 21b1
a11a 22 - a12 a 21
a11 b1
a 21 b 2
a11 a12
a21 a22
Lesson One
31
Solutions of x1 and x2 obtained this way are said to have been derived
using Cramers rule, practice this method over and over to internalize it.
Its advisable for exam situation since its shorter.
Example
Solve the following systems of linear simultaneous equations by Cramers
rule:
i)
2x1 5x2 = 7
x1 + 6x2 = 9
ii)
x1 + 2x2 + 4x3 = 4
2x1 + x3 = 3
3x2 + x3 = 2
Solutions
i.
2x1 5x2 = 7
x1 + 6x2 = 9
can be expressed in matrix form as
2 5
1 6
x1
7
=
9
x 2
and applying cramers rule
x1 =
7 -5
9 6
=
2 -5
1 6
x2 =
2
1
2
1
7
9
=
-5
6
87
2
= 5
17
17
11
17
can be expressed in matrix form as
1 2 4 x1

2 0 1 x2
0 3 1 x
4

= 3

2
and by cramers rule
32
Linear
4
3
2
x1 =
1
2
0
2
0
3
2
0
3
4
1
1
4
1
1
22
17
1
2
0
x2
1
2
0
4
3
2
2
0
3
4
1
1
4
1
1
9
17
1
2
0
x3
1
2
0
2
0
3
2
0
3
4
3
2
4
1
1
7
17
Solving simultaneous Equations using matrix algebra

i.
Solve the equations

2x + 3y = 13
3x + 2y = 12
in matrix format these equations can be written as
2 3 x 13
=
3 2 y 12
pre multiply both sides by the inverse of the matrix
2 3
= 5
3 2
and inverse of the matrix is
Lesson One
33
1

5
2 3
3 2
2
5
=
3
3
5
2

5
Pre multiplication by inverse gives
3
5
2

5
2
5
Therefore x = 2
ii.
2
5
=
3
2 3
3 2
3
5 13 2
=
2 12 3
y=3
Solve the equations

4x + 2y + 3z = 4
5x + 6y + 1z = 2
2x + 3y = -1
Solution:
Writing these equations in matrix format, we get
BX =
A
4 2 3
5 6 1
2 3 0
x
y

z
4
2

-1
Pre-multiply both sides by the inverse
the inverse of A as found before is A-1
3 9 16 4 3

2 6 11 5 6
3 8 14 2 3
hence x = 22
2 x

1 y
0 z
y = -15
3 9 16
= 2 6 11
3 8 14
3 9 16
2 6 11
2 =
-1
3 8 14
22
-15
-18
z = -18
(Note: under examination conditions it may be advisable to check the

solution by substituting the value of x, y, z into any of the three original
equations)
1.4
MARKONIKOV CHAIN
Probability Transition Matrices (Brand switching)
34
Linear
These are matrices in which the individual elements are in the form of
probabilities.
The probabilities represent the probability of one even following another
event i.e. the probability of transition from one event to the next
The probabilities of the various changes applied to the initial state by
matrix multiplication, give a forecast of the succeeding state.
Normally a transition matrix is defined with its columns adding upto one
and state vectors as column vectors.
In this case the succeeding sated is found by pre-multiplying the
transition matrix by the proceeding state (column) vector
If the transition matrices are given with their rows adding up to one,
then the succeeding state is found by post multiplying the transition
matrix by the preceding state (row) vector.
Example 1
The probability transition matrix of the switching probabilities, consider
that two brands G and X share the market in the ratio of 60% to 40%
respectively of customers. If in every week 70% of Gs customers retain
the brand but 30% switch to product x where as 80% of Xs customers
retain brand but 20% percent switch to brand G. Analyse the exchange in
share market per week.
G
X
G 0.7
0.2
State the system next week
X 0.3
0.8
Column vector for initial market share
G 60
X 40
0.7 0.2 60 50
=
0.3 0.8 40 50
Share next week

Share week after
0.7 0.2 50 45
=
0.3 0.8 50 55
and so on
This process can continue till equilibrium is reached.
Let the market share be
0.7 0.2 G G
=
0.3 0.8 X X
Lesson One
35
0.7G + 0.2 X = G
0.2X = 0.3G
i.e.
G
X
or
or
0.3G + 0.8X = X
0.3X = 0.2X
0.3
3
=
0.2
2
Hence Gs share is 60% and Xs share is 40%

Example 2
A marketing division toothpaste manufacturing company has worked out
the following transition probability matrices concerning the behaviors of
customers before and after an advertising campaign.
Transition probability matrix
(before advertising campaign)

TO
Our Brand
FROM
(State I)
Our brand (State I)
0.8
Another Brand (sate II)
0.4
Transition probability matrix
(After advertisement)
Another Brand
(Sate II)
0.2
0.6
TO
Our Brand
(State I)
0.9
0.5
FROM
Our brand (State I)
Another Brand (sate II)
Another Brand
(Sate II)
0.1
0.5
If the advertising campaign costs Shs 20,000 per year, would it be

worthwhile for the company to undertake the campaign?
You may suppose there are 60,000 buyers of toothpaste in the market
and for each customer average annual profit of the company is Shs 2.50
Solution
Let P1 be the fraction share of our brand and P 2 be the fraction share of
another brand
0.8P1 0.4 P2
Before Advertising
P1
0.8 0.2
P1
0.4 0.6
P2
P2
0.2 P1 0.6 P2 P1
0.4 P2 0.2 P1 and 0.6 P2 0.8 P1

Thus:
P2
36
P1 2 3 and P2
Linear
0.9 P1 0.5P2
After Advertising
P1
0.1P1 0.5 P2 P1
0.5 P2 0.1P1 and 0.5 P2 0.9 P1
0.9 0.1
P1
0.5 0.5
P2
Thus:
P2
P1 5 6 and P2
If there are 60,000 buyers

Before Advertising
P1 2 3
After Advertising
P1 5 6
this implies that,

2
60, 000 40, 000 customers
will
buy our brand
contribution 40, 000 2.5
= Sh.100,000
this implies that,

5
60, 000 50, 000 customers

will
buy
our brand
contribution (50, 000 2.5) 20, 000

= Sh.105,000
the difference between adverting and not advertising is

105,000 100,000 = Sh.5,000 in favour of advertising,
Thus the advertising campaign is worthwhile.
INPUT OUTPUT ANALYSIS
The input output analysis is a topic which requires application of
matrices
The technique analyses the flow of inputs from one sector of the economy
to the other sectors thus the technique is quite useful in studying the
interdependence of sectors within a single economy.
The input output analysis was first developed by Prof Leontief hence
the Leontief matrix has been developed. See the following example
Example (B)
INPUT OUTPUT TABLE
FROM
Agric
Industry
Service
TO
Agric
Final
Total
Industr Servic Deman Demand
y
e
d
(output)
300
360
320
1080
2060
450
470
410
800
2130
610
500
520
270
1900
P2
Lesson One
37
Primary inputs
Total inputs
700
2060
800
2130
650
1900
NB: In the above table, one should be able to interpret the table e.g. of
the total demand of 2060 metric tones, 300 is produced from the
agricultural sector, 360 from industrial sector and 320 from the service
sector. 1080 metric tones makes up the final demand.
The final demand is the additional demand besides the sectoral demand
which is normally made by other users e.g. government, foreign
countries, other manufacturers not included in the other sectors.
For production if items besides the inputs from other sectors namely
labour capital e.t.c
Technical coefficients : (to sectors)
300
Agriculture 300 =
2060
450
450 =
2060
610
610 =
Industry
2060
0.22
0.30
2130
470
470 =
2130
500
500 =
Service
360
360 =
2130
0.7
0.22
0.23
320
320 =
1900
410
410 =
1900
520
520 =
1900
0.14
0.22
0.27
0.17
The matrix of technical coefficients is:

FROM
TO
Agric
Agric
Industry
Service
Primary
Service
0.14
Industr
y
0.7
0.22
0.30
x
0.22
0.23
x
0.22
0.27
x
0.17
Final
Deman
d
1080
(y1)
800 (y2)
270(y3)
-
Total
Demand
(output)
2060
2130
1900
-
38
Linear
inputs
2060(x1
)
2130(x2
)
1900(x3
)
From the above table, we may develop the following equations

0.14x1 + 0.7x2 + 0.17x3 + y1 = x1
0.22x1 + 0.22x2 + 0.22x3 + y2 = x2
0.30x1 + 0.23x2 + 0.27x3 + y3 = x3
0.14 0.17 0.17 x1

0.22 0.22 0.22 x2
0.30 0.23 0.27 x
3
A
y1
+ y2

y3
x1
x2 ...................(*)
x3
X
Let the coefficient matrix be represented by
a11 a12
a 21 a 22
a
31 a 32
a13
a 23
a 33
y1
and y = y2

y3
x1

and x = x2

x3
Equation (*) may be written as

AX + Y = X
Y = X AX
Y = X (I-A)
(I A)1 Y = X
The matrix I A is known as Leontief Matrix

Technical Coefficients
These show the units required from each sector to make up one complete
product in a given sector e.g. in the above matrix of coefficients it may
be said that one complete product from the agricultural sector requires
0.14 units from the agricultural sector itself, 0.22 from the industrial
sector and 0.30 from the service sector
NB: The primary inputs are sometimes known as value added
Example 1
Determine the total demand (x) for the industrial 1, 2, 3 given the matrix
of technical coefficients (A), Capital and the final demand vector B.
1
A = 2
3
0.3 0.4 0.1
0.5 0.2 0.6

0.1 0.3 0.1
20

B = 10

30
Lesson One
39
From the input output analysis
X = (I A) B , Where X =
X1

X 2 X1
x
3
is the demand vector
1 0 0
0.3 0.4 0.1
I - A = 0 1 0 - 0.5 0.2 0.6

0 0 1
0.1 0.3 0.1
0.7 -0.4 -0.1
-0.5 0.8 -0.6

-0.1 -0.3 0.9
(I - A)
-1
0.7 -0.4 -0.1
= -0.5 0.8 -0.6

-0.1 -0.3 0.9
The matrix of cofactors is

=
0.54 0.51 0.23
0.39 0.62 0.25

0.32 0.47 0.36
The transpose (ad joint) of the above matrix is
0.54 0.39 0.32
0.51 0.62 0.25

0.32 0.47 0.36
(I - A)
= 0.495 (0.008 + 0.126 + 0.18

= 0.809
0.54 0.39 0.32

1
(I - A) =
0.51 0.62 0.47
0.809
0.23 0.25 0.36

-1
0.66 0.48 0.40
= 0.63 0.77 0.58
0.23 0.31 0.44
40
Linear
0.66 0.48 0.40 20 X1

0.63 0.77 0.58 10 = X2
0.23 0.31 0.44 30

X3
Therefore X =
30
X = 37.7
21.9
The total demand from the three industries 1, 2 and 3 is 30 from 1, 37.7
from 2 and 21.9 from 3.
Example 2
Three clients of Disrup, Ltd P, Q and Rare direct competitors in the retail
business. In the first week of the year P had 300 customers Q had 250
customers and R had 200 customers. During the second week, 60 of the
original customers of P transferred to Q and 30 of the original customers
of P transferred to R. similarly in the second week 50 of the original
customers of Q transferred to P with no transfers to R and 20 of the
original customers of R transferred to P with no transfers to Q.
Required
a) Display in a matrix the pattern of retention and transfers of customers
from the first to the second week
(4 marks)
b) Re-expres the matrix that you have obtained in part (a) showing the
elements as decimal fractions of the original numbers of customers of
P, Q and R (2 marks) Refer to this re expressed matrix as B
c) Multiply matrix B by itself to determine the proportions of the original
customers that have been retained or transferred to P, Q and R from
the second to the third week.
(4 marks)
d) Solve the matrix equation (xyz)B = (xyz) given that x + y + z = 1
(8 marks)
e) Interpret the result that you obtain in part (d) in relation to the
movement of customers between P, Q and R
(2marks)
(Total
20
marks)
Solution
a). Think of each row element as being the point from which the
customer originated and each column element as being the
destination e.g. 210 customers move from P to P, 60 move from P to Q
and 30 move from P to R. The sum of the elements of the first row
totalling 300, that is the number of customers originally with P.
Hence required matrix is
Lesson One
41
To
P 210 60 30 rowtotal300
From Q 50 200 0 rowtotal250
R 20
0 180
rowtotal200
b).
The requirement of this part is to express each element as a

decimal fraction of its corresponding row total. The second row, first
element is therefore 50/250, that is 0.2 and the second element is
therefore 200/250 that is 0.8.
Hence B =
0.7 0.2 0.1
0.2 0.8 0
0.1 0 0.9
0.7 0.2 0.1 0.7 0.2 0.1
0.2 0.8 0 0.2 0.8 0

0.1 0 0.9 0.1 0 0.9
c).
0.54 0.30 0.16
= 0.30 0.68 0.02
0.16 0.02 0.82
The result can be checked by the normal rules of matrix multiplication.
d).
0.7 0.2 0.1
y x X 0.2 0.8 0 = x
0.1 0 0.9
y z
This produces from the first row

0.7x + 0.2y + 0.1z = x
Which reduces to 0.2y + 0.1z = 0.3x
Or
2y + z = 3x ...(i)
Or
The second row produces,
Reducing to
0.2x + 0.8y = y
0.2x = 0.2 y
X = y ..(ii)
Or
The third row produces
Reducing to
0.1x + 0.9z = z
0.1x = 0.1z
42
Linear
X = z .
(iii)
At this point you will notice that condition h (ii) and condition (iii)
produce 2x + x = 3x when substituted into condition (i), we therefore
need extra condition x + y + z = 1 to solve the problem.
Thus
x+x+x=1
Or
3x = 1
That is
x = 13
Leading to
x = 13 ,
y = 13 ,
z = 13
e). In proportion terms this solution means that P, Q, and R will in the
long term each have one third of the total customers
Example 4
There are three types of breakfast meal available in supermarkets known
as brand BM1, brand BM2 and Brand BM3. In order to assess the
market, a survey was carried out by one of the manufacturers. After the
first month, the survey revealed that 20% of the customers purchasing
brand BM1 switched to BM2 and 10% of the customers purchasing brand
BM1 switched to BM3. similarly, after the first month of the customers
purchasing brand BM2, 25% switched to BM1 and 10% switched to BM3
and of the customers purchasing brand BM3 0.05% switched to BM1 and
15% switched to BM2
Required
i.
ii.
iii.
Display in a matrix S, the patterns of retention and transfers of

customers from the first to the second month, expressing
percentage in decimal form.
(2marks)
Multiply matrix S by itself (that is form S2)
(5
Marks)
Interpret the results you obtain in part ii with regard to customer
brand loyalty (3 marks)
Solution
The objective of the first part of the question was to test the candidates
ability to formulate and manipulate a matrix, then interpret the result of
such manipulation.
a. i. The matrix showing the pattern of retention and transfer from the
first to the second month is
Lesson One
43
BM1 BM2 BM3

0.70
S = 0.25
0.05
0.20
0.65
0.15
0.10
0.10
0.80
BM1
BM2
BM3
(The second element in the first row shows the 20% movement from
BM1 to BM2 and so on)
i.
The product of matrix S with itself is demonstrated as follows

0.70
0.25
0.05
0.20
0.65
0.15
0.10
0.70

0.10 0.25
0.05
0.80

0.20
0.65
0.15
0.10
0.10
0.80
0.5450
0.3425
0.2850
0.4875
0.1125
0.2275
0.1700
0.1700
0.6600
Where for example second element in the first row, that is 0.2850 is the
result of multiplying the corresponding elements of the first row of S by
the second column of S and summing the product.
0.2850
ii.
=
=
0.70 0.20 + 0.20 0.65 + 0.10 0.15

0.14 + 0.13 + 0.015 e.t.c.
The resulting matrix may be interpreted in the following way

Of the original customers who buy BM1, 54.5% will remain
loyal to the brand in month three, 28.5% will have switched to
BM2 and 17% will have switched to BM3.
Of the original customers who buy BM2, 48.7% will remain
loyal to the brand in month three 34.25% will have switched to
BM1 and 17% will have switched to BM3
Of the original customers who buy BM3, 66% will remain loyal
to the brand in month three 11.25% will have switched to BM1
and 22.75% will have switched to BM2
Alternatively
In month three 54.5% of the customers buying BM1 are
original customers. 34.5% came from BM2 originally and
remaining 11.25% have switched from BM3 and so on.
MARKOV CHAINS/PROCESSES
The Markov processes are defined as a set of trials which follow a certain
sequence which depend on a given set of probabilities known as
transition probabilities. These probabilities indicate how a particular
activity or product moves from one state to another.
Applications of Markov Chains in Business
The Markov processes or chains are frequently applied as follows:1. Brand Switching
44
Linear
By using the transitional probabilities we can be able to express the

manner in which consumers switch to their tastes from one product to
another.
2. Insurance industry
Markov analysis may be used to study the claims made by the insured
persons and also decide the level of premiums to be paid in future.
3. Movement of urban population
By formulating a transition matrix for the current population in the urban
areas, one can be able to determine what the population will be in say 5
years.
4. Movement of customers from one bank to another.
It is a fact that customers tend to look for efficient banks. Therefore at a
certain time when a given bank installs such machinery as computers it
will tend to attract a number of customer who will move from certain
banks to efficient ones.
PROPERTIES OF MARKOV CHAINS
1. Each outcome in a markov process belongs to a state space or
transition matrix. E.g.
S1
S1 P11
S2 P21
S3 P31
S2 S3
P12
P22
P32
P13
P23
P33
Where S, S2, S3 are states and P11 P12 e.t.c
are probabilities
2. The outcome of each trial depends of the immediate preceding
activities but not on the previous activities
BASIC TERMS IN MARKOV CHAINS
a) Probability Vector
This is a row matrix whose elements are non-negative and also they
add up to 1 e.g. u = 0.2, 0.1, 0.2, 0.5)
Example
Consider u =( , 0, - , 1/2 ) Not because is negative
v = ( , , 0, ) Not because the sum of the element <1
w= ( , , 0, )
Adds up to 1, each element is non
negative.
Therefore its a prob, vector
Lesson One
45
State the ones which are probability vectors

b) Stochastic matrix
A matrix whose row elements are all non negative and also add up to
1.
Example (i) M
0.1
0.0
=
0.5
0.3
0.2
0.7
0.1
0.4
0.4
0.2
0.3
0.1
0.3
0.1
0.1
0.2
Example ii) = Consider the following matrices
A=
2
3
1
1
2
4
1
1
3
3
0
B=
3
4
1
3
0
1
2
1
3
C=
1
1
6
2
3
1
3
A is not stochastic matrix because the element in the 2 nd row and 3rd
column is negative.
B is not Stochastic matrix because the elements in the second row do not
add up to 1
C is stochastic matrix because each element is non negative and they add
up to 1 in each row.
c) Regular stochastic matrix
A matrix P is said to be regular stochastic matrix if all the elements in
Pm are all positive, where m is a power, m = 1, 2, 3 e.t.c
Let A =
1
2
1
2
0
1
1
0
1
1
2
1
2
1
2
Where A is a Stochastic Matrix
1
1
2
1
2
3
4
1
2
3
4
3
4
5
8
Since the elements in A2 and A3 are all positive then A is regular

Stochastic matrix.
46
Linear
ABSORBING STATES
A state Si (I = 1, 2, 3 ) of a markov chain is called absorbing if the
system remains in the state, Si once it enters there. Thus a state, Si is
absorbing if and only if the ith row of the transition matrix p has a 1 on
the main diagonal and zeroes every where else. See the following
example.
The following matrix, P is a transition matrix of the markov chain.
S1 S2 S3 S4
P=
1
S1 4
S2 0
S3 1
2
S4
0
S5
0
4
0
1
4
0
0
1
0
4
0
1
4
0
S5
1
4
0
0
1
The States S2 and S5 are absorbing states since the 2 nd and 4th rows have
1 on the main diagonal.
REINFORCING QUESTIONS
QUESTION ONE
Determine
a) f(1)
b) f(-2)
for the following functions
1. f(x) = 5x + 2
2. f(x) = x2 + 3x+10
3. f(t) = 10 t + t3
4. f(u) =
QUESTION TWO
Solve the following simultaneous equations.
a) 2 x 5 y 20
4x y 4
b)
2x y 9
x 3 y 6
c)
12 x 4 y 18
4 x y 6
QUESTION THREE
A simple hypothetical economy of three industries A, B and C is
represented in the following table (data in millions of shillings).
User
Producer
A
B
C
Final
Demand
Total
Output
80
80
80
100
200
100
100
60
100
40
60
20
320
400
300
Determine the output vector for the economy if the final demand changes
to 60 for A, 60 for B and 60 for C
QUESTION FOUR
A tea blender uses tow types of tea, T1, and T2, to produce two blends,
B1 and B2 for sale. B1 uses 40% of available T1 and 60% of the available
T2 whilst B2 uses 50% of the available T1 and 25% of the available T2.
Required:
a) Given that t1 kilos of T1 and t2 of T2 are made available to produce

b1 kilos of B1 and b2 kilos of B2. Express the blending operation in
the matrix format.
b) If 400 kilos of T1 and 700 kilos of T2 were made available for
blending, what quantities of B1 and B2 would be produced?
c) If 600 kilos of B1 and 450 kilos of B2 were produced, use a matrix
method to determine what quantities of T1 and T2 would be used to
produce the blends.
QUESTION FIVE
2 2
3 -3
Let A =
a)
Find A2 and A3
b)
If F(x) = x3 3x2 2x + 41
Find F (A)
c)
Find the inverse of matrix A
QUESTION SIX
A childs toy is marketed in three sizes standard size contains 10 squares
(S), 15 triangles (T) and 6 hexagons (H). The deluxe set contains 15 S,
20 T, 6 H and 4 octagons (O). The super set contains 24 T, 8 H, 16 H, 16
S and 6 (O). Squares cost 12 pence to produce, triangles cost 8p,
hexagons cost 18p and octagons 22p.
The standard set is sold at 6, the deluxe set for 10 and super for 1.5.
The manufacturer produces 100 standard sets, 80 deluxe sets and 50
super sets per week.
Use matrix form and matrix multiplications to find:
The cost of producing each set.
The number of each shape required each week
Total expenditure on shapes each week
QUESTION SEVEN
Matrix N below shows the number of items of type A, B, and C in
warehouses y and X. Matrix p shows the cost in pence per day of storing
(S) and maintaining (M) one item each of A, B and C
48
B C
Y 10 12 50
W 60 0 20
S M
A 2 0.5
P = B 3 1.5
C 2 0.5
a) Evaluate the matrix (NXP) and say what it represents.

b) Stock movement occurs as follows:
At the start of the day 1:
Withdrawal of 2 type B from warehouse Y, 20 of type A from
warehouse W.
At the start of day 2:
Delivery of 7 type B and 10 of type C to warehouse Y and 15 of
type B to warehouse W.
Evaluate the total cost of storage and maintenance for days 1 and
2.
c) Write down without evaluating a matrix expression which could be
used to evaluate the storage and maintenance cost of items A, B
and C for the period from day 1 to 4. Allow for the stock
movements on days 1 and 2, as described in part (b). There were
no stock movements on days 3 and 4.
50
Sets Theory and Calculus
LESSON TWO
2. Sets Theory and Calculus
-
Sets and set theory

Calculus
Differentiation and integration of polynomial exponential and
logarithmic functions
Application of calculus to economic models
2.1
Sets and set theory
A set is a collection of distinct objects. We may consider all the ocean in
the world to be a set with the objects being whales, sea plants, sharks,
octopus etc, similarly all the fresh water lakes in Africa can form a set.
Supposing A to be a set
A = {4, 6, 8, 13}
The objects in the set, that is, the integers 4, 6, 8 and 13 are referred to
as the members or elements of the set. The elements of a set can be
listed in any order. For example,
A = {4, 6, 8, 13} = {8, 4, 13, 6}
Sets are always precisely defined. Each element occurs once and only
once in a set.
The notion is used to indicate membership of a set. represents non

membership. However, in order to represent the fact that one set is a
subject of another set, we use the notion . A set S is a subject of
another set T if every element in S is a member of T
Example
If A = {4, 6, 8, 13} then
i)
ii)
{4, 6, 8, 13} or 4 A; 16 A
{4, 8} A; {5, 7} A; A A
4
Methods of set representation

Capital letters are normally used to represent sets. However, there are
two different methods for representing members of a set:
i.
The descriptive method and
ii.
The enumerative method
The descriptive method involves the description of members of the set in

such a way that one can determine the elements of the set without
difficulty.
The enumerative method requires that one writes out all the members of
the set within the curly brackets.
50
Lesson Two
51
For example, the set of numbers 0, 1, 2, 3, 4, 5, 6 and 7 can be
represented ass follows
P = {0, 1, 2, 3, 4, 5, 6, 7} ,
P = {X/x = 0, 1, 27}
enumerative method
descriptive method
Or
P = {x/0 x 7}
52
Finite and infinite sets
A set can be classified as a finite or infinite set, depending upon the
number of elements it has. A finite set has a finite number of elements
whereas an infinite set has an infinite number of elements.
For example, set P below has ten elements and is therefore a finite set.
Set S, on the other hand, is an infinite set since it has an infinite number
of elements.
P = {2, 4, 620}
S = {1, 3, 5}
Universal set
The term refers to the set that contains all the elements that an analyst
wishes to study.
The notation U is generally used to denote universal sets
The null set or empty set
This is a set which contains no elements. It is normally designated by a
Greek letter , or { }.
The sets and { } are not the same thing since the former has no
elements in it, while the latter has one element in it, namely zero
Equal or equivalent sets
Two sets C and D are said to be equal if every member of set C belongs
to D and every member of set D also belongs to C
Complement of a set
The complement of set A is written as A. This set contains all those
elements of universal set which are not in A
Intersection and union
B C denotes the intersection of B and C. it is the set containing all
those elements, which belong to both B and C
If B = {5, 8, 11, 20, 25} and C = {1, 3, 5, 7, 9, 11, 13}
Then B C = {5, 11}
B C = {1, 3, 5, 7, 8, 9, 11, 13, 20 25}

SET OPERATIONS AND SOME LAWS OF SET THEORY
THE VENN DIAGRAM
A simple way of representing sets and relations between sets is by means
of the Venn diagram. Venn diagram consists of a rectangle that
represents the universal set. Subjects of the universal set are
represented by circles drawn within the rectangle, or the universe.
Suppose that the universal set is designated by U and the sets A, B and C
are subject of U.The Venn diagram below can be used to illustrate the
sets as follows
52
Lesson Two
53
U
B
A
C
Venn diagram below representing the intersection of set A and B or

A B = C is illustrated as follows
Intersection of sets
Example:
You are given the universal set
T = {1, 2, 3, 4, 5, 6, 7, 8}
And the following subjects of the universal set:
A = {3, 4, 5, 6,}
B = {1, 3, 4, 7, 8}
Determine the intersection of A and B
Solution
The intersection of A and B is the subject of T, containing elements that
belong to both A and B
A B = {3, 4, 5, 6,}
{1, 3, 4, 7, 8}
= {3, 4}
or
T
U
A
5
6
3
4
1
7
8
54
Example
Consider the following universal set T and its subjects C, D and E
T = {0, 2, 4, 6, 8, 10, 12}
C = {4, 8,}
D = {10, 2, 0}
E = {0}
Find
ii)
DE
CDE
iii)
Solution
ii)
D E = {10, 2, 0}
{0} = {0}
D E = Shaded area
ii) C D E = {4, 8} {10, 2, 0} {0} = { } =
T
D
C
E
Mutually exclusive or disjointed sets

Two sets are said to be disjointed or mutually exclusive if they have no
elements in common. Sets P and R below are disjointed
54
Lesson Two
55
Disjointed sets are represented by a null set in this case

P R =
The union of sets
Venn diagram representing the union of sets A and B or A B = Shaded
area is illustrated below;U
A B = Shaded area
Example
Consider the universal set T and its subsets A, B and C below:
T = {a, b, c, d e, f}
A = {a, d}
B = {b, c, f}
C = {a, c, e, f}
Find
ii)
iii)
iv)
v)
A B
AC
B C
A BC
Solution
A C = {a, d} {b, c, f} = {a, b, c, d, f}
i)
ii)
iii)
iv)
A C = {a, d} {a, c, e, f} = {a, c, d, e, f}

B C = {b, c, f} {a, c, e, f} = {a, b, c, e, f}
A B C = {a, d} {b, c, f } {a, c, e, f} = {a, b, c, d, e, f}
=T
56
Complement of a set
Venn diagram representing the complement of a set say A represented by
A1 is illustrated below.
A1
A1= shaded area

Example
For the universal set T = {1, 2, 3, 4, 5} and its subset A ={2, 3} and B
={5, }
Find
ii)
A1
(A1)1
(B1)1
iii)
iv)
Solution
i)
A1 ={2, 3}1 = {1, 4, 5}
ii)
(A1)1 =({2, 3}1)1 = {1, 4, 5}1={2, 3} = A
iii)
(B1)1=({5}1)1 = {1, 2, 3, 4}1={5} = B
Some Laws of Set Algebra
From the following Venn diagram where T is the universal set and A its
subset, we can deduce a number of laws.
T
i)
ii)
iii)
A = A
A T = T
A A = A
56
Lesson Two
57
iv)
v)
vi)
vii)
viii)
A A= A
A T= A
A A1 = T
A A1=
(A1)1 = A
Solving Problems Using Venn Diagrams

Example 1
Of the 20 girls in a form, 16 play hockey 12 play tennis and 4 play
basketball. Every girl plays at least one game and two play all the three.
How many play two and only two games.
Solution
N(e) = 20
n(H) = 16
n(T) = 12
16 x y 2
y
2
12 y z
2
x
4 x z
2
n(B) = 4
H = Hockey
T = Tennis
B = Basketball
Those who play two and only two games = x + y + z

Using the diagram
(14 x y) + (10 y z) +(2 x z ) + 2 + x + y+ z = 20
28 x y z = 20
x+y+z=8
Example 2
250 members of a certain society have voted to elect a new chairman.
Each member may vote for either one or two candidates. The candidate
elected is the one who polls most votes
Three candidates x, y z stood for election and when the votes were
counted, it was found that
- 59 voted for y only, 37 voted for z only
- 12 voted for x and y, 14 voted for x and z
58
-
147 voted for either x or y or both x and y but not for z

102 voted for y or z or both but not for x
Required
i)
How may voters did not vote
ii)
How many voters voted for x only
iii)
Who won the elections
Solution
N(e) = 250
12
P
14
59
Q
37
Z
P + 12 + 59 = 147 giving P = 76
Q + 59 + 37 = 102 giving Q = 6
i)
Those who did not vote

= 250 ( 76 + 12 + 14 + 59 + 6 + 37)
= 250 204 = 46
ii)
x = 76 + 12 + 14 = 102
y = 12 + 59 + 6 = 77
z = 37 + 14 + 6 = 57
iii)
X won the election
2.2
CALCULUS
Calculus is a branch of mathematics which explains how one variable
changes in relationship to another variable. It enables us to find the rate
of change of one variable with respect to another variable.
58
Lesson Two
59
Example
i.
The rate at which business revenue is increasing at a particular
stage when volume of sales is increasing.
ii.
The rate at which costs are changing at a particular stage when
volume of sales is given
iii.
The evaluation of rate of change can help us to identify when
the change in one variable reaches a maximum or minimum.
iv.
Calculus may be used in production management when the
production manager wants to know
a) How much is to be manufactured in order to maximize the
profits, revenues e.t.c
b) How much is to be produced in order to minimize the
production costs
Calculus is divided into two sections namely:
Differentiation and integration
Differentiation deals with the determination of the rates of change of
business activities or simply the process of finding the derivative of a
function.
Integration deals with the summation or totality of items produced over a
given period of time or simply the reverse of differentiation
The derivative and differentiation
The process of obtaining the derivative of a function or slope or gradient
is referred to as derivation or differentiation.
The derivative is denoted by
dy
dx
or f(x) and is given by dividing the
change in y variable by the change in x variable.

The derivative or slope or gradient of a line AB connecting points (x,y)
and (x+dx, y + dy) is given by
y
x
Change in y
Change in x
y dy y
x dx x
dy
dx
Where dy is a small change in y and dx is a small change in x variables.

Illustration
y
B = (x + dx, y +dy)
(y + dy)
A = (x,y)
A
B
d
y
60
Line AB
Y
dx
x
(x + dx)
Rules of Differentiation
1. The constant function rule
If given a function y = k where k is a constant then
dy
= 0
dx
Example
Find the derivative of (i) y = 5
Solution
i. y = 5
dx
dy = 0
Illustration
y=5
Slope = dy = o
dx
derivative of a constant function
2. Power function rule

If given a function y = xr
Then dy = rxr-1
dx
Example
Find dy for;
dx
60
Lesson Two
61
i.
ii.
iii.
iv.
y
y
y
y
=
=
=
=
x7
x2
x-3
x
Solution
i.
y = x7
dy = 7x
dx
ii.
7-1
= 7x6
y = x2
dy = 2 x(2 - 1)
dx
iii.
y = x-3
dy = -3x
dx
iv.
3-1
= -3x-4
y=x
dy = 1x
dx
1-1
= 1.x0= 1 (since X0=1)
3. Power function multiplied by a constant

If given y = Axr, then
dx
dy = rAXr-1
4. The sum rule

The derivative of the sum of two or more functions equals the sum of the
derivatives of the functions.
For instance
If H(x) = h(x) + g(x)
Then dy or H1 = h1(x) + g1(x)
dx
5. The difference rule
The derivative of the difference of two or more functions equals the
difference of the derivatives of the functions
If H () = h(x) g(x)
Then H1() = h1 (x) g1(x)
Examples.
Find the derivatives of
62
i.
y = 3x2 + 5x + 7
ii.
y = 4x2 2xb
Solution
i.
y = 3x2 + 5x + 7
dy = d(3x2) + d(5x) + d(7)
dx dx
dx
dx
= 6x + 5 + 0
= 6x + 5
ii.
y = 4x2 2xb
dy = d(4x2) - d(2xb )
dx dx
dx
= 8x 2bxb-1
6. The product rule both factors are functions
The derivative of the product of two functions equals the derivative of

the first function multiplied by the second function PLUS the derivative
of the second function multiplied by the first function.
If given H(x) = h(x) . g(x)
Then H1 (x) = h1(x) . g(x) + h(x) . g1(x)
Example
Find dy for
dx
i.
y = x2(x)
ii.
y = (x2+ 3) (2x3+ x2- 3)
Solution
i.
y = x2(x)
dy =
dx
(x) d (x2) + x2 d (x)

dx
dx
= x.2x + x2.1
= 2x2 + x2
= 3x2
Note that y = x2(x) = x3. Directly differentiating this we get 3x2.
62
Lesson Two
63
y = (x2+ 3) (2x3+ x2- 3)
ii.
d (x2+3) (2x3+ x2- 3) + (x2+3) d (2x3+ x2- 3)

dx
dx
dy =
dx
= 2x .(2x3+ x2- 3) + (x2+3) (6x2+2x)

= 10x4 + 4x3 + 18x2
7. Quotient Rule
The derivative of the quotient of two functions equals the derivative of
the numerator times the denominator MINUS the derivative of the
denominator times the numerator, all which are divided by the square of
the denominator
If given H (x) =
h x
g x
then H1(x) = h1(x). g(x) g1 (x). h (x)

(g (x) )2
For example
Find
i.
ii.
dy for
dx
x
3 x2
x
3x 7
Solutions
x
i.
3 x2
dy dx
d (3 x 2 )
.(3 x 2 )
.x
dx dy
dx
3 x
2
3 x 2 x . x
3 x
3 x 2 2x 2
3 x2
3 x 2 3 x 2
ii.
x3
3x 7
64
dy
dx
3x2 3x 7 3 x3 6x3 21x2

3x 7 2
3x 7 2
Example
A farmer of a large farm of poultry announced that egg production per
month follows the equation;
w = 3m3 m2
m2 + 10
Where w Total no of eggs produced per month
m amount in kilograms of layers mash feed.
Required
Determine the rate of change of w with respect to m (i.e. the rate at
which the number of eggs per month increase or decrease depending on
the rate at which the kilos of layers marsh are increased).
64
Lesson Two
65
Solution
Let u = 3m3 m2
du = 9m2 2m
dm
Let v = m2 + 10
dv = 2m
dm
dv = (m2 + 10) (9m2 2m) - 3m3 m2 (2m)

dm
(m2 + 10)2
= 9m4 + 90 m2 2m3 20m (6m4 - 2m3)
(m2 + 10)2
= 3m4 + 90 m2 20m
(m2 + 10)2
8. Chain Rule
This rule is generally applied in the determination of the derivatives of

composite functions, which can be defined as a function in which another
function can be considered to have taken the place of the independent
variable. The composite function is also referred to as a function of a
function.
It is normally of the form y = (2x 2 + 3)3. If we let u = (2x2 + 3), then y =
u3.
In order to differentiate such an equation we use the formula
dy
dx
dy
du
du
dx
Solution
y = (2x2 + 3)3
Let u = 2x2 + 3
du = 2x
Dx
Let y = u3
dy
du
= 3u2
dy = dy . du = 3u2 x 4x = 12xu2
dx
du dx
= 12x(2x2 + 3)2
66
Example
Consider the function
y = (x2 + 16x + 5)2
which can be decomposed into
y = u2 and u = x2 + 16x + 5. in this case y is a function of (x2 + 16x + 5)
Hence y = f(u) and u = g(x)
dy = dy . du
dx
du dx
= (2u) (2x +16)
= 2 (x2 + 16x + 5) (2x + 16)
9. The derivative of a function raised to power r; the
composite function rule.
The derivative of a function raised to power r equals to the power r times
the function which is raised by power (r-1), all of which is multiplied by
the derivative of the function
If y = {g(x)}r
Then dy = r{g(x)}r-1 . g1(x)
dx
For example
Find
dy given y = (3x2 + 4x)5
dx
Solution
dy = 5(3x2 + 4x)4 . (6x +4)
dx
Differentiation of an implicit function
An Implicit function is one of the y = x 2 y + 3x2 + 50. it is a function in
which the dependent variable (y) appears also on the right hand side.
To differentiate the above equation we use the differentiation method for
a product, quotient or function of a function.
Solution
y = x2 y + 3x2 + 50
dy = d (x2y) + d (3x2) d (50)
dx
dx
dx
dx
66
Lesson Two
67
dy = y (2x) + x2 dy 6x + 0
dx
dx
2xy + x2dy (x2 1) + 6x = 0

dx
dx
2xy + dy (x2 1) + 6x = 0
dx
dy (x2- 1) = -(2xy + 6x)

dx
dy = -2xy + 6x
dx
x2- 1
Partial derivatives
These derivatives are used when we want to investigate the effect of one
independent variable on the dependent variable.
For example, the revenues of a farmer may depend on 2 variable namely;
the amount of fertilizer applied and also the type of the natural soil.
Let = 30x2y + y2 + 50x + 60y
Where = annual revenue in 000
x = type of soil
y = amount of fertilizer applied
Required
Determine the rate of change of the with respect to x and y
Solution
= 30x2y + y2 + 50x + 60y
Differentiating with respect to x keeping y constant we have
d = 60xy + 50
dx
Differentiating with respect to y keeping x constant we have
d = 30x2 + 2y + 60
dy
Maxima, minima and points of inflexion
a) Test for relative maximum
Consider the following function of x whose graph is represented by the
figure below
y = f(x)
dy = f(x)
68
dx
68
Lesson Two
69
y
C
dy =0
dx
dy >0
dx
B
dy <0
dx
y= f(x)
x1
x2
x3
Relative maximum point

The graph of the function slopes upwards to the right between points A
and C and hence has a positive slope between these two points. The
function has a negative slope between points C and E. At point C, the
slope of the function is Zero. Between points x1 and x2
dy >0 Where x1 x < x2 and between x2 and x3 dy <0 Where
dx
dx
x2 < x x3. at point C, dy = 0
Thus the first test of a maximum points required that the first derivative
of a function equals zero or
dy = fx = 0
dx
The second text of a maximum point requires that the second derivative
of a function is negative or
d2y = f11 (x) < 0
dx2
Example
Determine the critical value for the following functions and find out the
critical value constitutes a maximum
y = x3 12x2 + 36x + 8
Solution
y = x3 12x2 + 36x + 8
then dy
= 3x2 24x + 36 +0
dx
70
iii.
The critical values for the function are obtained by equating the
first derivative of the function to zero, that is:
dy
= 0 or 3x2 24x + 36 = 0
dx
Hence (x-2) (x-6) = 0
And x = 2 or 6
The critical values for x are x = 2 or 6 and critical values for the function
are y = 40 or 8
ii. To ascertain whether these critical values of x will give rise to a
maximum, we apply the second text, that is
d2y
<0
d2x
dy
= 3x2 24x + 36 and
dx
d2y
= 6x - 24
d2x
a) When x = 2
Then d2y
= -12 <0
d2x
b) When x = 6
Then d2y
= +2 > 0
d2x
Hence a maximum occurs when x = 2, since this value of x satisfies the
second condition. X = 6 does not give rise to a local maximum
b) Tests for relative minimum
There are two tests for a relative minimum point
i.
The first derivative, that is
dy = f(x) = 0
dx
ii.
The second derivative, that is
d2y
= f(x) > 0
dx2
Example:
For the function
h(x) = 1/3 x3 + x2 35x + 10
Determine the critical values and find out whether these critical values
are maxima or minima. Determine the extreme values of the function
Solution
i.
Critical values
h(x) = 1/3 x3 + x2 35x + 10 and
h1(x) = x2 + 2x 35
by first text,
then h1(x) = x2 + 2x 35 = 0
or (x-5) (x+7) = 0
70
Lesson Two
71
Hence x = 5 or x = -7
ii.
The determinant of the maximum and the minimum points

requires that we test the value x = 5 and 7 by the second text
h11(x) = 2x + 2
a) When x = -7 h11(x) = -12 <0
b) When x = 5 h11(x) = 12>0
There x = -7 gives a maximum point and x = 5 gives a minimum
point.
iii.
Extreme values of the function
h(x) = 1/3 x3 + x2 35x + 10
when x = -7, h(x) = 189 2/3
when x = 5, h(x) = -98 1/3
The extreme values of the function are h(x) = 189 2/3 which is
a relative maximum and h(x) = -98 1/3 , a relative minimum
c) Points of inflexion
Given the following two graphs, points of inflexion can be determined at
points P and Q as follows:
y=g(x)
P
k1
Diagram (i)
y
y +f(x)
Q
72
k2
The points of inflexion will occur at point P when

g11(x) = 0
at
x = k1
11
g (x) < 0
at
x < k1
g11(x) > 0
at
x > k1
and at point Q when
f11(x) = 0
at
x = k1
f11(x) > 0
at
x < k1
11
f (x) < 0
at
x > k1
Example
Find the points of inflexion on the curve of the function
y= x3
Solution
The only possible inflexion points will occur where
d2y = 0
dx2
From the function given
dy = 3x2
and d2y = 6x
dx
dx2
Equating the second derivative to zero, we have
6x = 0 or x = 0
We test whether the point at which x = 0 is an inflexion point as follows
When x is slightly less than 0, d2y < 0 which means a downward
concavity
dx2
When x is slightly larger than 0, d2y > 0 which means an upward
concavity
dx2
Therefore we have a point of inflexion at point x = 0 because the
concavity of the curve changes as we pass from the left to the right of x
=0
Illustration
y=x3
point of
72
Lesson Two
73
inflexion
0
Example
1. The weekly revenue Sh. R of a small company if given by
R = 14 + 18x x3 Where x is the number of units produced.
12
Required
i.
Determine the number of units that maximize the revenue
ii.
Determine the maximum revenue
iii.
Determine the price per unit that will maximize revenue
Solution
i.
To find maximum or minimum value we use differential calculus
as follows
R = 14 + 81x x3
12
dR = 81 1 . 3x2
dx
12
d2R = 0 - 1 . 3.2x2 = -x
dx2
12
2
Put
dR = 0
i.e. 81 -x2 = 0
2
dx
4
Which gives x = 18 or x = -18
d2R = -x
dx2
2
when x = 18
value)
d2R = -9 which is negative (Indicating a maximum

dx2
Therefore at x = 18, the value of R is a maximum. Similarly at x = -18,

the value of R is a minimum. Therefore, the number of units that
maximize the revenue = 18 units
ii. The maximum revenue is given by
R = 14 + 81 + 18 (18)3
12
= Shs. 986
ii.
The price per unit to maximize the revenue is

986 = 54.78 or Shs.54.78
74
18
2.3
INTEGRATION
It is the reversal of differentiation
An integral can either be indefinite (when it has no numerical value) or
definite (have specific numerical values)
It is represented by the sign f(x)dx.
Rules of integration
i.
The integral of a constant

adx = ax +cwhere a = constant
Example
Find the following
a) 23dx
b) 2dx. (where is a variable independent of x, thus its
treated as constant).
Solution
i.
ii.
23dx = 23x + c
2dx. = 2 x + c
ii. The integral of x raised to the power n

xndx =
1 xn+1 + c
n+1
Example
Find the following integrals
a) x2dx
b) x-5/2 dx
Solution
i.
ii.
x2dx = 1/3 x3 + c
x-5/2 dx = - 2/3x 3/2 + c
3. Integral of a constant times a function

af(x)dx = a f(x) dx
Example
Determine the following integrals
i.
ax3dx
ii.
20x5dx
Solution
a) ax3dx = a x3dx
= a x4 + c
4
b) 20x5dx = 20x5dx
74
Lesson Two
75
= 20 x6 + c
6
4. Integral of sum of two or more functions
{f(x) + g(x)} dx = f(x)dx + g(x) dx
{f(x) + g(x) + h(x)} dx = f(x)dx + g(x) dx + h(x) dx
Example
Find the following
i.
(4x2 + x-3) dx
ii.
(x3/4 + 3/7 x- + x5)
Solution
i.
(4x2 + x-3) dx = 4x2 dx + x-3 dx
= 4 x3 + c
3
ii.
(x3/4 + 3/7 x- + x5) = x3/4 dx + 3/7 x- + x5dx
= 4 x7/4 + 6 x1/2 + 1 x6 + c
7
7
6
5. Integral of a difference
{f(x) - g(x)} dx = f(x)dx - g(x) dx
Definite integration
Definite integrals involve integration between specified limits, say a and
b
The integral baf(x)dx
Is a definite integral in which the limits of integration are a and b
The integrals is evaluated as follows
1. Compute the indefinite integral f(x)dx. Supposing it is f(x) +
c
2. Attach the limits of integration
3. Substitute b(the upper limit) and then substitute a (the
lower limit) for x.
4. Take the difference and the result is the numerical value for
the definite integral.
Applying these steps to the definite integral
f(x)dx = [f(x) + c] a
= [{f(b) + c}] - [{f(a) + c}]
= f(b) f(a)
Example
Evaluate
i.
(3x 2 + 3)dx
76
ii.
(x + 15)dx
Solution
a.
(3x 2 + 3)dx = [(x 3 + 3x + c)]
= (27 + 9 + c) (1 + 3 + c)
= 32
b.
(x + 15)dx = [( x2 + 15x + c)] 0

= (12 + 75 + c) (0 + 0 + c)
= 87
The numerical value of the definite integral
f(x)dx can be interpreted
as the area bounded by the function f(x), the horizontal axis, and x=a and
x=b see figure below
y=f(x)
f(x)
area under curve

Therefore
f(x)dx = A or area under the curve
Example
1. You are given the following marginal revenue function
MR = a a1q
76
Lesson Two
77
Find the corresponding total revenue function
Solution
Total revenue = MR.dq = a a1q).dq
= aq a1q2 + c
Example 2
A firm has the following marginal cost function
MC = a - a1q a2q2
Find its total cost function.
Solution
The total cost C is given by
C
= MC.dq
= (a + a1q + a2q2).dq
= aq +
a1 2
a
q + 2 q3 + C
2
3
Note: Exams focus: Note the difference between marginal function and
total function.
You differentiate total function to attain marginal
function, this is common in exams, total profit = total revenue total
cost.
3. Your company manufacturers large scale units. It has been shown that
the marginal (or variable) cost, which is the gradient of the total cost
curve, is (92 2x) Shs. thousands, where x is the number of units of
output per annum. The fixed costs are Shs. 800,000 per annum. It has
also been shown that the marginal revenue which is the gradient of the
total revenue is (112 2x) Shs. thousands.
Required
i.
Establish by integration the equation of the total cost curve
ii.
Establish by integration the equation of the total revenue curve
iii.
Establish the break even situation for your company
iv.
Determine the number of units of output that would
a) Maximize the total revenue and
b) Maximize the total costs, together with the maximum total
revenue and total costs
Solution
i.
First find the indefinite integral lacks limit points of the
marginal cost as the first step to obtaining the total cost curve
Thus (92 2x) dx = 92x x2 + c
Where c is constant
Since the total costs are the sum of variable costs and fixed costs, the
constant term in the integral represents the fixed costs, thus if Tc are the
total costs then,
Tc = 92x x2 + 800
Or Tc = 800 + 92x - x2
78
ii.
As in the above case, the first step in determining the total

revenue is to form the indefinite integral of the marginal
revenue
Thus (112 - 2x) dx = 112x x2 + c
Where c is a constant
The total revenue is zero if no items are sold, thus the constant is zero
and if Tr represents the total revenue, then
Tr = 112x x2
iii.
At break even the total revenue is equal to the total costs

Thus 112x x2 = 800 + 92x - x2
20x = 800
x = 40 units per annum
iv.
a) Tr = 112x x2
dTr
dx
= 112x x2
d2Tr
dx2
=-2
at the maximum point

dTr = 0
dx
that is
112 2x = 0
112 = 2x
Since d2Tr= - 2 this confirms the maximum

dx2
The maximum total revenue is Shs. (112 x 56 56 x 56) x 1000
= Shs. 3,136,000
ii. Tc = 800 + 92 x x2
dTc = 92 2x
dx
d2Tc = - 2
dx2
At this maximum point
dTc = 0
dx
78
Lesson Two
79
92 2x = 0
92 = 2x
since
d2Tc = - 2 this confirms the maximum
dx2
the maximum costs are Shs. (800 + 92 x 46 - 46 x 46) x 1000
= Shs. 2,916,000
80
QUESTION ONE
Find the derivative of
a) y = 6x x
1
x2
b)
c)
y 1 2x
d)
1
x
QUESTION TWO
A cost function is
Ksh.(c) = Q2 30Q + 200

Where Q = quantity of units produced
Find the point of minimum cost.
QUESTION THREE
250 members of a certain society have voted to elect a new chairman.
Each member may vote for either one or two candidates. The candidate
elected is the one who polls most votes.
Three candidates x, y, z stood for election and when the votes were
counted, it was found that,
59 voted for y only, 37 voted for z only
12 voted for x and y, 14 voted for x and z
147 voted for either x or y or both x and y but not for z
102 voted for y or z or both but not for x.
Required:
i)
How many voters did not vote?
ii)
How many voters voted for x only?
iii)
Who won the election?
QUESTION FOUR
The weekly revenue Ksh.R of a small company is given by:
R = 14 + 81x x3 where x is the number of units produced
12
Required:
80
Lesson Two
81
a) Determine the number of units that maximize the revenue.
b) Determine the maximum revenue.
c) Determine the price per unit that will maximize the revenue
82
QUESTION FIVE
A furniture firm has two operating departments; Production and sales.
The firmss operating costs are split between these two departments with
the resultant period of fixed costs of Shs.20,000 and Shs.6,000
respectively. The production department has a basic variable cost per
unit of Shs.6 plus additional variable cost per unit of Shs.0.0002 which
relates to all the manufactured items during the period. The sales
department has a variable cost per unit of Shs.2. The sales department
receives the finished goods from the production department and pay the
basic variable cost per unit plus 80% of the same.
NB:
Demand Q is given by the following function:
Q = 40,000 2,000P, where P is the selling price of the sales

department.
Required:
a) Calculate the quantity that maximizes the profits of the production
department.
b) Calculate the selling price that maximizes the profits of the sales
department.
c) Determine the firms profit as a result of adopting the quantity and
selling prices
in i and ii.
d) Determine the quantity and selling price that maximize the ships
profit. What is the amount of this profit?
QUESTION SIX
a) Describe how quadratic equations can be used in decision making.
b) The demand for a commodity is given by p = 400 q. The average
total cost of producing the commodity is given by
ATC
1000
100 5q q 2
q
where p is the price in shillings and q is

the quantity in kilograms.
Required
i) What does 1000 in the ATC equation represent economically?
(1 mark)
q
ii) Determine the output that leads to maximum profit and the profit
at the
level of output.
(9
marks)
c) Alpha industries sells two products, X and Y, in related markets, with
demand functions given by:
82
Lesson Two
83
Px 13 + 2X + Y = 0
Py 13 + X + 2Y = 0
The total cost, in shillings, is given by:
TC = X + Y
Required:
Determine the price and the output for each good which will
maximize profits.
(7 marks)
(Total: 20
marks)
QUESTION SEVEN
a) The following table shows the Fixed Cost (F) and the variable cost (V)
of producing 1 unit of X and 1 unit of Y:
Cost F
Cost V
X
5
4
Product
Y
8
(Shs 000)
12
When x units of X and y units of Y are produced, the total fixed cost is
Shs.640,000 and total variable cost is Shs.820,000.
Express this
information as a matrix equation and hence find the quantities of x and y
produced using matrix algebra.
(10 marks)
The marginal productivity of an industrial operation (the production of
electric furnaces) is given by:
f(x) = 60 + 10
x2
Where x is capitalization in millions of shillings. Given that, when the
capitalization is Shs. Million they can produce 62 of the furnaces per
week.
Required:
a) How many furnaces they will be able to produce if their capitalization
increased to Shs 10 million.
b) What does the term marginal of productivity mean?
(10 marks)
(Total: 20
marks)
Check your answers with those given in lesson 9 of the study pack
84
COMPREHESIVE ASSIGNMENT ONE
QUESTION ONE
a) Explain the importance of set theory in business.
(4 marks)
b) By use of matrix algebra, develop the Leontief inverse matrix.
(8 marks)
c) Digital Ltd. Manufactures and sells floppy disks at Nairobi Industrial
Area.
The average total cost (ATC) and Average Revenue (AR) (in thousands
of shillings)
of producing x floppy disks are given by the following functions:
ATC =
And
1 2 5
500
x x 50
2
2
x
AR = 800 2x2
Where: x is the number of floppy disks produced
Required:
i) The profit function
(3
marks)
ii) The number of floppy disks required to maximize profit
(3 marks)
iii) The maximum profit
(2
marks)
(Total: 20
marks)
QUESTION TWO
Define the following terms as used in Markov analysis:
Markov process
marks)
Equilibrium or steady state
marks)
Absorbing state
marks)
Closed state
marks)
(2
(2
(2
(2
The manufacturer of Tamu Soft drinks has been facing stiff competition
on its main brand Tamu-cola soda. The management is considering an
extensive advertising and rebranding campaign for Tamu-Cola soda. If
the current branding remains, the transition matrix of consumer between
Tamu-Cola and other brands will be as follows:
84
Lesson Two
85
To
TamuCola
0.85
Others
0.15
TamuFrom Cola
0.25
0.75
Others
The
advertising
rebranding campaign is expected to cost Sh.20 million each year.
and
There are 40 million consumers of soft drinks in the market and for each
consumer the average profitability is Sh.5 annually.
Required:
The equilibrium state proportion of consumer using Tamu-Cola before
the advertising campaign.
(4 marks)
ii)
The equilibrium state proportion of consumers using Tamu-Cola after
the advertising campaign.
(4 marks)
iii)
The expected annual profit increase or decrease after the advertising
campaign. Would you recommend the advertising campaign?
(4 marks)
(Total: 20
marks)
i)
QUESTION THREE
a) A market researcher investigating consumers preference for three
brands of beverages namely: coffee, tea and cocoa, in Ongata town
gathered the following information:
From a sample of 800 consumers, 230 took coffee, 245 took tea and
325 took cocoa, 30 took all the three beverages, 70 took coffee and
cocoa, 110 took coffee only, 185 took cocoa only.
Required:
i)
Present the above information in a Venn Diagram.
(4 marks)
ii)
The number of customers who took tea only.
(2 marks)
iii)
The number of customers who took coffee and tea only.
(2 marks)
iv)
The number of customers who took tea and cocoa only.
(2 marks)
v)
The number of customers who took none of the beverages.
(2 marks)
b)
i)
Explain the importance of the Chi-square significance test

(2 marks)
86
ii)
The number of books borrowed from Millennium town library

during a particular week was recorded as shown below:
Monda
y
132
Days of the
week
Number of
books borrowed
Tuesda
y
110
Wednesd
ay
128
Thursda
y
105
Frida
y
150
Total
625
Required:
Test the hypothesis that eh number of books borrowed does not depend
on the day of the week at the 1% significance level.
(6
marks)
(Total: 20
marks)
QUESTION FOUR
a) The general multiple linear regression equation is expressed as:
Yi = o + n
1 + X 1 + i
Where
Yi is the response variable
Xi are the explanatory variables
o is the constant
1 are the parameters, and
i is the error term
Required:
Express the above multiple linear regression equation in a matrix
form. Clearly indicate the size of each vector column and the matrix.
(10 marks)
b) Mambo Company Ltd. Manufactures five products V, W, X Y and Z.
The company has divided its sales team into three regions; A, B and
C. The Matrix Q below represent the expected sales quantities in
thousands for each product in each sales region for the coming year.
Q=
A
50
40
25
10
25
Region
B
C
20
35
30
10
42.5
5
15
35
17.5
22.5
V
W
X
Y
Z
products
Each product is manufactured using combinations of four standard

components. The matrix T below indicates the number of units of
each component used in producing each product.
86
Lesson Two
87
T=
Components
1
2
3
1
1
2
0
1
1
3
2
1
4
0
2
1
V
W
X
0
1
1
1
Y
Z
0
2
3
3
product
s
The manufacture of each component requires the use of certain

resources. The matrix M below indicates the quantities of the three
standard parts and the number of production labour hours and
assembly labour hours used to produce one unit of each component.
M=
Part
1
Part
2
Part
3
0
2
1
Productions
Labour
hours
2
4
1
Assembl
y
hours
1
3
6
2
0
1
1
3
2
1
2
3
component
s
4
The costs of the resources in matrix M are Part 1 Sh.20, Part 2 Sh.10,
Part 3 Sh.30 while each labour hour in the production and assembly
departments cost Sh.15 and Sh.5 respectively.
Required:
i) The total expected demand for each product.
(2
marks)
ii) The quantities of each component needed in the production
process.
(3 marks)
iii) The quantities of each resource required in the production.
(3 marks)
iv) The total cost of producing the required units of each product.
(2 marks)
(Total: 20
marks)
QUESTION FIVE
The Young Childrens Fund (YCF) is planning its annual fund-raising
campaign for its December school holiday camp for disadvantaged
children. Campaign expenditures will be incurred at a rate of Sh.10,000
per day. From past experience, it is known that contributions will be
high during the early stages of the campaign and will tend to fall off as
the campaign continues. The function describing the rate at which
contributions are received is:
88
C (t) = 100t2 + 200,000
Where t = days of the campaign
C (t) = rate at which contributions are received in shillings per day
The fund wants to maximize the net precedes from the campaign.
Required:
i) The number of days the campaign should be conducted to maximize
the
net proceeds.
(3
marks)
ii) The total campaign expenditure
(2
marks)
iii) The total contributions expected to be collected
(5
marks)
iv) Net proceeds from the campaign
(1
mark)
The national office of a car rental company is planning its maintenance
for the next year.
The companys management are interested in
determining the companys needs for certain repair parts. The company
rents saloon cars, station wagons and double cab pick-ups. The matrix N
shown below indicates the number of each type of vehicle available for
renting in the four regions of the country.
Saloons
N
160
150
Station
wagons
400
300
Double
cabs
500
200
100
120
100
400
150
300
Coast
Central
=
Western
Highland
s
Four repair parts of particular interest, because of their cost and

frequency of replacement, are fan belts, spark plugs, batteries and tyres.
On the basis of studies of maintenance records in different parts of the
country, the management have determined the average number of repair
parts needed per car during a year.
These are summarized in matrix R below:
Saloons
N
17
12
Station
wagons
16
8
Double
cabs
15
5
Fun belts
Plugs
9
4
7
7
5
6
Batteries
Tyres
88
Lesson Two
89
Required:
i) The total demand for each type of car.
(3
marks)
ii) The total number of each repair part required for the fleet.
(3 marks)
iii) If matrix C below contains the cost per unit in shillings for fan belts,
spark plugs, batteries and tyres, calculate the total cost s for all
repair parts. C = (1250,800,6500,8000). (3 marks)
(Total: 20
marks)
90
QUESTION SIX
a) Define the following terms as used in input-output analysis:
i) Transactions table.
(2
marks)
ii) Primary inputs.
marks)
iii) Technical coefficients.
marks)
(2
(2
b) Briefly explain the importance of input-output analysis.

(4 marks)
c) A small economy has three main industries which are steel, motor
vehicles and construction. The industries are interdependent. Each
unit of steel output requires 0.2 units from steel, 0.3 units from motor
vehicles and 0.4 units from construction. A unit of motor vehicles
output requires 0.2 units from steel, 0.4 units from motor vehicles and
0.2 units from construction. A unit of construction output requires
0.3 units from steel, 0.4 units from motor vehicles and 0.1 units from
construction. The final demand is 20 million units from steel. 50
million units from motor vehicles and 30 million units from
construction.
Required:
i) The technical coefficient matrix.
(2
marks)
ii) Total output of each industry, given that the Lentiefs inverse matrix is
1__
0.192
0.46
0.43
0.30
0.24
0.60
0.24
0.26
0.41
0.42
(3
marks)
iii) If the final demand from steel drops by 2 million units, and that from
motor vehicles increases by 10 million units, but there is no change in
the final demand from construction, what would be the change in the
total output of constructions?
(5 marks)
(Total: 20
marks)
QUESTION SEVEN
a) Explain the purpose of Venn diagram
(3 marks)
b) A market study taken at a local sporting goods store, Maua Wahome
Stores showed that of the 200 people interviewed, 60 owned tents,
90
Lesson Two
91
100 owned sleeping bags, 80 owned camping stoves, and 40 owned
both tents and camping stoves and 40 owned both sleeping bags and
camping stoves.
Required:
If 20 people interviewed owned a tent, a sleeping bag and a camping
stove, determent how many people owned only a camping stove. In
this case, it is possible for 30 people to own both a tent and a sleeping
bag, but not a campaign stoves.
(6 marks)
Under One Thousand Shillings Corner Store is planning to open a
new store on the corner of Main and Crescent Streets. It has asked
the Tomorrows Marketing company to do a market study of randomly
selected families within a five kilometers radius of the store. A month
the questions it wishes Tomorrows Marketing Company to ask each
home-owner are:
i)
Family income
ii)
Family size
iii)
Distance from home to the store site
iv)
Whether or not the family owns a car or uses public transport
Required:
For each of the four questions, develop a random variable of interest to
Under One Thousand Shillings Corner Store. Denote which of these
are discrete and which are continuous random variables.
(11 marks)
(Total: 20
marks)
QUESTION EIGHT
Two CPA students were discussing the relationship between average cost
and total cost. One student said that since average cost is obtained by
dividing the cost function by the number of units Q. It follows that the
derivative of the average cost is the same as marginal cost, since the
derivative of Q is
Required:
Comment on this analysis.
marks)
(4
Gatheru and Karibu Certified Public Accountants have recently started to

give business advice to their clients. Acting as consultants, they have
estimated the demand curve of a clients firm to be;
AR = 200 Q
Where AR is average revenue in millions of shillings and Q is the
output in units.
92
Investigations of the clients firms cost profile shows that marginal cost
(MC) is given by:
MC = Q 28Q + 211 (in millions of shillings)
Further investigations have shown that the firms cost when not
producing output is Sh.10 million.
Required:
i) The equation of total cost.
marks)
ii) The equation of total revenue
marks)
iii) An expression for profit
marks)
iv) The level of output that maximizes profit.
marks)
v) The equation of marginal revenue.
marks)
(5
(2
(2
(5
(2
(Total: 20
marks)
92
Lesson Three
93
LESSON THREE
3. Descriptive Statistics and Index Numbers
Contents
-
i.
ii.
iii.
iv.
v.
vi.
-
Application of statistics
Measures of centra tendency
i.
Arithmetic mean
ii.
Median
iii.
Mode
iv.
Geometric mean
v.
Harmonic mean
Measures of dispersion
Simple range
Quartile deviation
Mean deviation
Standard deviation
Coefficient of mean deviation
Coefficient of quartile deviation
Skew ness and Kurtosis
Indices
94
and Index Numbers
Descriptive Statistics
3.1
Statistics
a)
Definition: Statistics viewed as a subject is a process of collecting,

tabulating and analyzing numerical data upon which significant
conclusions are drawn.
Statistics may also be defined as numerical data, which has been,
collected from a given source and for a particular purpose e.g.
population statistics from the ministry of planning, Agricultural statistics
from the ministry of Agriculture
Statistics may also refer to the values, which have been obtained from
statistical calculations e.g. the mean, mode, range e.t.c.
b)
Application of statistics
1. Quality Control
Usually there is a quality control department in every industry which is
charged with the responsibility of ensuring that the products made do
meet the customers standards e.g. the Kenya bureau of standards (KeBS)
is one of the national institutions which on behalf of the government
inspects the various products to ensure that they do meet the customers
specification.
The KeBS together with other control department have developed quality
control charts. They use these charts to check whether the products are
up to standards or not.
2. Statistics may be used in making or ordering economic order
quantities (EOQ). It is important for a business manager to realize that it
is an economic cost if one orders a large quantity of items which have to
be stored for too long before they are sold. This is because the large
stock holds a lot of capital which could otherwise be used in buying other
items for sale.
It is also important to realize that the longer the items are stored in the
stores the more will be the storage costs
On the other hand if one orders a few items for sale he will incur
relatively low storage expenses but may not be able to satisfy all the
clients. These may loose their customers if the goods are out of stock.
Therefore it is advisable to work out the EOQ which will be sufficient for
the clients in a certain period before delivery.
The EOQ will also ensure that minimal costs are incurred in terms of
storage
3. Forecasting
Statistics is very important for business managers when predicting the
future of a business for example if a given business situation involves a
dependent and independent variables one can develop an equation which
can be used to predict the output under certain given conditions.
4. Human resource management
94
Lesson Three
95
Statistics may be used in efficient use of human resources for example
we may give questionnaires to workers to find out where the
management is weak
By compiling the statistics of those who were signing it may be found
useful to analyze such data to establish the causes of resignation thus
whether its by frustration or by choice.
3.2
Measures of Central Tendency
These are statistical values which tend to occur at the centre of any well
ordered set of data. Whenever these measures occur they do not indicate
the centre of that data. These measures are as follows:
i.
The arithmetic mean
ii.
The mode
iii.
The median
iv.
The geometric mean
v.
The harmonic mean
1.
The arithmetic mean
This is commonly known as average it is obtained by first of all summing

up the values given and by dividing the total value by the total no. of
observations.
X
i.e. mean
=
n
Where x = no. of values total
= summation
n = no of observations
Example
The mean of 60, 80, 90, 120
60+80+90+120
4
350
4
=87.5
The arithmetic mean is very useful because it represents the values of
most observations in the population.
The mean therefore describes the population quite well in terms of the
magnitudes attained by most of the members of the population
Computation of the mean from grouped Data i.e. in classes.
96
and Index Numbers
The following data was obtained from the manufacturers of electronic

cells. A sample of electronic cells was taken and the life spans were
recorded as shown in the following table.
Life span hrs
No. of cells
1600 1799
1800 1999
2000-2199
2300 2399
2400 2599
2600 2799
2800 2999
A = Assumed
Class MP(x)
XA=d
fd
(f)
25
1699.5
-600
-15000
32
1899.5
-400
-12800
46
2099.5
-200
-9200
58
2299.5(A)
0
0
40
2499.5
200
8000
30
2699.5
400
12000
7
2899.5
600
4200
mean, this is an arbitrary number selected from the data.
Arithmetic mean
assumed mean +
2299.5 +-53.78
fd
f
= 2299.5 +
12800
238
= 2245.72 hours
Example 2 (use of the coded method)
The following data was obtained from students who were registered in a
certain college.
The table shows the age distribution
Age (yrs)
No. of Students mid points
x-a = d
D/c = u
fu
(f)
(x)
15 19
21
17
-15
-3
-63
20 24
35
22
-10
-2
-70
25 29
38
27
-5
-1
-38
30 34
49
32(A)
0
0
0
35 39
31
37
+5
+
31
40 44
19
42
+10
+2
38
193
-102
Required calculate the mean age of the students using the coded method
Actual mean =
A(assumed mean) +
32 +
fu
f
102
5
193
= 29.36 years
96
Lesson Three
97
NB. The following statistical terms are commonly used in statistical
calculations. They must therefore be clearly understood.
i)
Class limits
These are numerical values which limits uq extended of a given class i.e.
all the observations in a given class are expected to fall within the
interval which is bounded by the class limits e.g. 15 & 19 are class limits
as in the table of the example above.
ii) Class boundaries
These are statistical boundaries, which separate one class from the
other. They are usually determined by adding the lower class limit to the
next upper class limit and dividing by 2 e.g. in the above table the class
19+20
boundary between 19 and 20 is 19.5 which is =
.
2
iii) Class Mid points
This are very important values which mark the center of a given class.
They are obtained by adding together the two limits of a given class and
dividing the result by 2.
iv) Class interval/width
This is the difference between an upper class boundary and lower class
boundary. The value usually measures the length of a given class.
2.
The mode
This is one of the measures of central tendency. The mode is defined

as a value within a frequency distribution which has the highest
frequency. Sometimes a single value may not exist as such in which
case we may refer to the class with the highest frequency. Such a
class is known as a modal class
The mode is a very important statistical value in business activities
quite often business firms tend to stock specific items which are
heavily on demand e.g. footwear, clothes, construction materials
(beams, wires, iron sheets e.t.c.
The mode can easily be determined form ungrouped data by
arranging the figures given and determining the one with the highest
frequency.
When determining the values of the mode from the grouped data
we may use the following methods;i. The graphical method which involves use of the histogram
ii. The computation method which involves use of formula
-
Example
In a social survey in which the main purpose was to establish the
intelligence quotient (IQ) of resident in a given area, the following
results were obtained as tabulated below:
98
and Index Numbers
IQ
1 20
21 40
41 60
61 80
81 100
101 120
121 140
No. of residents
6
18
32 fo
48 f1
27 f2
13
2
Upper class bound

20
40
60
80
100
120
140
CF
6
24
56
104
131
144
146
Required
Calculate the modal value of the IQs tabulated above using
i.
The graphical method and
ii.
Formular
98
Lesson Three
99
Graphical method
50
40
30
20
10
20
40
60
80
100
120
140
Value of the mode

Computation method
f1 f 0
c
2f1 f 0 f 2
Mode = L +
Where L = Lower class boundary of the class containing the mode

f0 = Frequency of the class below the modal class
f1 = Frequency of the class containing the mode
f2 = frequency of the class above the modal class
c = Class interval
Therefore Mode=60.50 +
48- 32 20
2 48 - 32- 27
= 69.14
3.
-
The median
This is a statistical value which is normally located at the center of a
given set of data which has been organized in the order of magnitude
or size e.g. consider the set 14, 17, 9, 8, 20, 32, 18, 14.5, 13. When
the data is ordered it will be 8, 9, 13, 14, 14.5, 17, 18, 20, 32
The middle number/median is 14.5
100
Statistics and Index Numbers
-
Descriptive
The importance of the median lies in the fact that it divides the data
into 2 equal halves. The no. of observations below and above the
median are equal.
In order to determine the value of the median from grouped data.
When data is grouped the median may be determined by using the
following methods
i.
Graphical method using the cumulative frequency curve
(ogive)
ii.
The formula
Example
Referring to the table in 105, determine the median using the methods
above
The graphical method
IQ
0 20
20 40
40 60
60 80
80 100
100 120
120 140
No of resid
6
18
32
48
27
13
2
146
UCB
20
40
60
80
100
120
140
Cumulative Frequency
6
24
56
104
131
144
146
xv
160
140
120
100
80
60
40
20
20
40
60
80
100
120
140
160
Value of the median
100
Lesson Three
101
The position of the median =
n+1 146+1
=
2
2
ii Computation
The formula used is
n+1
2 Cfbm
Median = L +
c
cfmc
Where L = Lower class boundary of the class containing the median

N = No of observations
Cfo= cfbm = Cumulative frequency of the class before that
containing
the median
F1 fmc = Frequency of the class containing the median
n+1
Therefore median=L + 2
=60+
73.5- 56
48
- Cfbm
cfmc
20
= 60 + 7.29
= 67.29
4.
-
Geometric mean
This is a measure of central tendency normally used to measure
industrial growth rates.
It is defined as the nth root of the product of n observations or
values
i.e. GM = n x 1 x 2 ... x n
Example
In 1995 five firms registered the following economic growth rates; 26%.
32% 41% 18% and 36%.
Required
Calculate the GM for the above values
102
Descriptive
GM= 5 2632411836
= 1 Log26+Log32+Log41+Log18+Log26
5
No. Log
26
32
41
18
36
1.4150
1.5052
1.6128
1.2533
1.5563
7.3446
Therefore Log of GM = 1/5 x 7.3446 = 1.46892
So GM = Antilog of 1.46892
= 29.43
5.
Harmonic mean
This is a measure of central tendency which is used to determine the

average growth rates for natural economies. It is defined as the
reciprocal of the average of the reciprocals of all the values given by HM.
HM =
1
1 ( 1 + 1 +..... 1
n x1
x2
xn
Example
The economic growth rates of five countries were given as 20%, 15%,
25%, 18% and 5%
Calculate the harmonic mean
1
The HM=
1 (1 +1 +1 +1 +1
5 20 15 25 10 5
1
0.2(0.05+0.07+0.04+0.10+0.2)
1
0.092
10.86%
6.
-
Weighted mean
This is the mean which uses arbitrarily given weights
It is a useful measure especially where assessment is being done yet
the conditions prevailing are not the same. This is particularly true
102
Lesson Three
103
when assessment of students is being done given that the subjects
being taken have different levels of difficulties.
Examples
The following table shows that marks scored by a student doing section 3
and 4 of CPA
Subject
STAD
BF
FA2
LAW
QT
FA3
Scores (x)
65
63
62
80
69
55
Weight (w)
50
40
45
35
55
60
w = 285
wx
3250
2520
2340
2800
3795
3300
wx = 18005
Weighted mean
Ewx
Ew
18005
285
63.17%
Merits and demerits of the measures of central tendency
The arithmetic mean
Merits
i.
ii.
iii.
iv.
It utilizes all the observations given

It is a very useful statistic in terms of applications. It has
several applications in business management e.g. hypothesis
testing, quality control e.t.c.
It is the best representative of a given set of data if such data
was obtained from a normal population
The a.m. can be determined accurately using mathematical
formulas
Demerits of the A.M.

i.
ii.
If the data is not drawn from a normal population, then the

a.m. may give a wrong impression about the population
In some situations, the a.m. may give unrealistic values
especially when dealing with discrete variables e.g. when
working out the average no. of children in a no. of families. It
may be found that the average is 4.4 which is unrealistic in
human beings
104
Descriptive
The mode
Merits
i.
ii.
iii.
iv.
It can be determined from incomplete data provided the

observations with the highest frequency are already known
The mode has several applications in business
The mode can be easily defined
It can be determined easily from a graph
Demerits
i.
ii.
iii.
If the data is quite large and ungrouped, determination of the

mode can be quite cumbersome
Use of the formula to calculate the mode is unfamiliar to most
business people
The mode may sometimes be non existents or there may be 2
mode for a given set of data. In such a case therefore a single
mode may not exist
The median
Merits
i.
ii.
iii.
iv.
v.
It shows the centre of a given set of data

Knowledge of the determination of the median may be
extended to determine the quantities
The median can easily be defined
It can be obtained easily from the cumulative frequency curve
It can be used in determining the degrees of skew ness see
later
Demerits
i.
ii.
iii.
In some situations where the no. of observations is even, the

value of the median obtained is usually imaginary
The computation of the median using the formular is not well
understood by most business men
In business environment the median has got very few
applications
The geometric mean

Merits
i.
ii.
It makes use of all the values given

It is the best measure for industrial growth rates
Demerits
i.
ii.
The determination of the GM by using logarithms is not familiar

process to all those expected to use it manager
If the data contains zeros or ve values, the GM ceases to exist
104
Lesson Three
105
The harmonic mean and weighted mean
Merits same as the arithmetic mean
Demerits same as the arithmetic mean
-
3.3
Measures of Dispersion
The measures of dispersion are very useful in statistical work
because the indicate whether the rest of the data are scattered
around the mean or away from the mean.
If the data is approximately dispersed around the mean then the
measure of dispersion obtained will be small therefore indicating
that the mean is a good representative of the sample data. But on
the other hand, if the figures are not closely located to the mean
then the measures of dispersion obtained will be relatively big
indicating that the mean does not represent the data sufficiently
The commonly used measures of dispersion are
a) The range
b) The absolute mean deviation
c) The standard deviation
d) The semi interquartile and quartile deviation
e) The 10th and 90th percentile range
f) Variance
a) The range
-
The range is defined as the difference between the highest and the
smallest values in a frequency distribution. This measure is not
very efficient because it utilizes only 2 values in a given frequency
distribution. However the smaller the value of the range, the less
dispersed the observations are from the arithmetic mean and vice
versa
The range is not commonly used in business management because
2 sets of data may yield the same range but end up having
different interpretations regarding the degree of dispersion
b) The absolute mean deviation

-
This is a useful measure of dispersion because it makes use of all

the values given see the following examples
Example 1
In a given exam the scores for 10 students were as follows
Student
A
B
C
D
E
F
Mark (x)
60
45
75
70
65
40
x-x
1.8
16.8
13.2
8.2
3.2
21.8
106
G
H
I
J
Descriptive
69
64
50
80
618
7.2
2.2
11.8
18.2
104.4
Required
Determine the absolute mean deviation
Mean, x =
618
10
Therefore
= 61.8
AMD =
/ X - X/ 104.4
=
=10.44
N
10
Example 2
The following data was obtained from a given financial institution. The
data refers to the loans given out in 1996 to several firms
Firms
(f)
fx
[x-x]
F[x-x]
Amount of
loan per firm
(x)
20000
60000
4157.9
60000
240000
35842.1
1
5
15000
12000
15000
60000
9157.9
12157.9
14000
84000
10157.9
fx =
459000
f/x x/
12473.7
0
143368.
40
9157.9
60789.5
0
60947.4
0
286736.
90
f = 19
Required
Calculate the mean deviation for the amount of items given
X'=
fx 459,000
=
= 24157.9
19
f
AMD =
/ X - X'/ 286736.90
=
19
f
=Shs15,091.40
106
Lesson Three
107
NB if the absolute mean deviation is relatively small it implies that the
data is more compact and therefore the arithmetic mean is a fair sample
representative.
c) The standard deviation
This is one of the most accurate measures of dispersion. It has the
following advantages;
i. It utilizes all the values given
ii. It makes use of both negative and positive values if they occur
iii.
The standard deviation reflects an accurate impression of how
much the sample data varies from the mean. This is because its
suitability can also be tasted using other statistical methods
-
Example
A sample comprises of the following observations; 14, 18, 17, 16, 25, 31
Determine the standard deviation of this sample
Observation.
x
14
18
17
16
25
31
121
X' =
121
6
[x-x)2
37.21
4.41
9.61
16.81
24.01
118.81
210.56
=20.1
standard deviation,
x x 2
n
286736.90
6
= 5.93
Alternative method
X2
196
324
289
256
625
961
x
14
18
17
16
25
31
121
x2
n
x
n
286736.90
6
108
=
Descriptive
265.1 121
2
6
6
= 5.93
Example 2
The following table shows the part-time rate per hour of a given no. of
laborers in the month of June 1997.
Rate per hr
(x) Shs
230
400
350
450
200
150
No. of
labourers (f)
7
6
2
1
8
11
35
Fx
Fx2
1610
2400
700
450
1600
1100
8410
370300
960000
245000
202500
320000
247500
2345300
Calculate the standard deviation from the above table showing how the
hourly payment were varying from the respective mean
=
fx - fx
ff
2345300 8410
35
35
67008.6 577372
9271.4
standard deviation,
= 96.29
Example 3 Grouped data
In business statistical work we usually encounter a set of grouped data.
In order to determine the standard deviation from such data, we use any
of the three following methods
i.
The long method
ii.
The shorter method
iii.
The loaded method
The above methods are used in the following examples
Example 3.1
108
Lesson Three
109
The quality controller in a given firm had an accurate record of all the
iron bars produced in may 1997. The following data shows those records
i.
Using long method
Bar lengths
(cm)
201 250
251 300
301 350
351 400
401 450
451 500
501 - 550
No. of bars(f)
25
36
49
80
51
42
30
313
Class mid
point (x)
225.5
275.5
325.5
375.5
425.5
475.5
525.5
fx
Fx2
5637.5
9918
15949.5
30040
21700.5
19971
15765
118981.50
1271256.25
2732409
5191562.25
11280020
9233562.75
9496210.50
8284507.50
47489526
Calculate the standard deviation of the lengths of the bars

=
fx - fx
ff
47489526 118981.50
313
313
standard deviation,
= 84.99 cm
ii.
Using the shorter method
Bar lengths
(cm)
201 250
251 300
301 350
351 400
401 450
451 500
501 - 550
No. of
bars(f)
25
36
49
80
51
42
30
313
mid point
(x)
225.5
275.5
325.5
375.5 (A)
425.5
475.5
525.5
x-A = d
fd
Fd2
-150
-100
-50
0
50
100
150
-3750
-3600
-2450
0
2550
4200
4500
1450
562500
360000
122500
0
127500
420000
675000
2267500
Calculate the standard deviation using the shorter method

Standard deviation,
fd
f
fd
110
Descriptive
2267500 1450
313
313
7244.40 21.50
7222.90
= 84.99 cm
iii.
Using coded method
Bar
lengths
(cm)
201 250
251 300
301 350
351 400
401 450
451 500
501 - 550
(f)
mid point (x)
x-A = d
d/c = u
fu
fu2
25
36
49
80
51
42
30
313
225.5
275.5
325.5
375.5 (A)
425.5
475.5
525.5
-150
-100
-50
0
50
100
150
-3
-2
-1
0
1
2
3
-75
-72
-49
0
51
84
90
29
225
144
49
0
51
168
270
907
C = 50
Standard deviation using the coded method. This is the most preferable
method among the three methods
fu - fu
ff
2
=c
907 29
313 313
= 50
= 50 1.6997
= 84.99
Variance
Square of the standard deviation is called variance.
d) The semi interquartile range
-
This is a measure of dispersion which involves the use of

quartile. A quartile is a mark or a value which lies at the
110
Lesson Three
111
boundary of a division when any given set of data is divided
into four equal divisions
- Each of such divisions normally carries 25% of all the
observations
- The semi interquartile range is a good measure of dispersion
because it shows how the rest of the data are generally spread
around the mean
- The quartiles normally used are three namely;
i. The lower quartile (first quartile Q1) this usually binds the
lower 25% of the data
ii. The median (second quartile Q2)
iii. The upper quartile (third quartile Q3)
The semi quartile range,
SIR =
Q3 - Q1
2
Example 1
The weights of 15 parcels recorded at the GPO were as follows:
16.2, 17, 20, 25(Q1) 29, 32.2, 35.8, 36.8(Q2) 40, 41, 42, 44(Q3) 49, 52,
55 (in kgs)
Required
Determine the semi interquartile range for the above data
SIR =
Q3 Q1
2
44 - 25
2
19
2
= 8.5
Example 2 (Grouped Data)

The following table shows the levels of retirement benefits given to a
group of workers in a given establishment.
Retirement benefits
000
20 29
30 39
40 49
50 59
60 69
70 79
80 89
No of
retirees (f)
50
69
70
90
52
40
11
UCB
cf
29.5
39.5
49.5
59.5
69.5
79.5
89.5
50
119
189
279
331
371
382
Required
i.
ii.
Determine the semi interquartile range for the above data

Determine the minimum value for the top ten per cent.(10%)
112
Descriptive
iii.
Determine the maximum value for the lower 40% of the
retirees
Solution
The lower quartile (Q1) lies on position
N +1
382+1
4
=95.75
the valueof Q1
=29.5+
(95.75- 50)
69
x 10
= 29.5 + 6.63
= 36.13
The upper quartile (Q3) lies on position
N+1
4
382 + 1
=
4
= 287.25
the value of Q3
= 59.5 +
287.25- 279
52
10
= 61.08
The semi interquartile range =
Q3- Q1
2
61.08 - 36.13
=
2
= 12.475
= 12,475
ii. The top 10% is equivalent to the lower 90% of the retirees
The position corresponding to the lower 90%
90
(n + 1) = 0.9 (382 + 1)
100
112
Lesson Three
113
= 0.9 x 383
= 344.7
the benefits (value) corresponding to the minimum value for top 10%
= 69.5 +
344.7- 331
40
x 10
= 72.925
= 72925
iii. The lower 40% corresponds to position
=
40
(382 + 1)
100
= 153.20
retirement benefits corresponding to its position
= 39.5 +
153.2-119
70
= 39.5 + 4.88
x 10
= 44.38
= 44380
e. The 10th 90th percentile range
This is a measure of dispersion which uses percentile. A percentile is a
value which separates one division from the other when a given data is
divided into 100 equal divisions.
This measure of dispersion is very important when calculating the coefficient of skew ness (see later)
Example
Using the above data for retirees calculate the 10 th = 90th percentile. The
tenth percentile 10th percentile lies on position
10
(382 + 1) = 0.1 x 383
100
= 38.3
the value corresponding to the tenth percentile
114
= 19.5 +
Descriptive
(38.3 x 10)
50
= 19.5 + 7.66
= 27.16
th
The 90 percentile lies on position
90
(382 + 1) = 0.9 x 383
100
= 344.7
the value corresponding to the 90th percentile
= 69.5 +
344.7- 331 x 10
40
= 69.5 + 3.425
= 72.925
the required value of the 10th 90th percentile = 72.925 27.16 =
45.765
Relative measures of dispersion
Definition:
A relative measure of dispersion is a statistical value which may be used
to compare variations in 2 or more samples.
The measures of dispersion are usually expressed as decimals or
percentages and usually they do not have any other units
Example
The average distance covered by vehicles in a motor rally may be given
as 2000 km with a standard deviation of 5 km.
In another competition set of vehicles covered 3000 km with a standard
deviation of 10 kms
NB: The 2 standard deviations given above are referred to as absolute
measures of dispersion. These are actual deviations of the measurements
from their respective mean
However, these are not very useful when comparing dispersions among
samples.
Therefore the following measures of dispersion are usually employed in
order to assess the degree of dispersion.
i.
Coefficient of mean deviation
=
ii.
Mean deviation
mean
Coefficient of quartile deviation
114
Lesson Three
115
1 Q3- Q1
= 2
Q3+Q1
Where Q1 = first quartile
Q2 = third quartile
iii.
Coefficient of standard deviation

=
iv.
Standard deviation
mean
Coefficient of variation
=
standard deviation
mean
100
Example (see information above)

First group of cars: mean = 2000 kms
Standard deviation = 5 kms
C.O.V
=5
x 100
2000
= 0.25%
Second group of cars: mean = 3000 kms
Standard deviation = 10kms
C.O.V
= 10 x 100
3000
= 0.33%
Conclusion
Since the coefficient of variation is greater in the 2 nd group, then in the
first group we may conclude that the distances covered in the 1 st group
are much closer to the mean that in the 2nd group.
Example 2
In a given farm located in the UK the average salary of the employees is
3500 with a standard deviation of 150
The same firm has a local branch in Kenya in which the average salaries
are Kshs 8500 with a standard deviation of Kshs.800
116
Descriptive
Determine the coefficient of variation in the 2 firms and briefly comment

on the degree of dispersion of the salaries in the 2 firms.
First firm in the UK
C.O.V
= 150
x 100
3500
= 4.29%
Second firm in Kenya
C.O.V
= 80
8500
x 100
= 9.4%
Conclusively, since 4.29% < 9.4% then the salaries offered by the firm in
UK are much closer to the mean given them in the case to the local
branch in Kenya
COMBINED MEAN AND STANDARD DEVIATION
Sometimes we may need to combine 2 or more samples say A and B. It is
therefore essential to know the new mean and the new standard
deviation of the combination of the samples.
Combined mean
Let m be the combined mean
Let x1 be the mean of first sample
Let x2 be the mean of the second sample
Let n1 be the size of the 1st sample
Let n2 be the size of the 2nd sample
Let s1 be the standard deviation of the 1st sample
Let s2 be the standard deviation of the 2nd sample
Combined mean =
n1x1 n2x2
n1 n2
Combined standard deviation
2
2
n1s1 n1 m x1 n2s2 n2 m xs
n1 n2
Example
A sample of 40 electric batteries gives a mean life span of 600 hrs with a
standard deviation of 20 hours.
Another sample of 50 electric batteries gives a mean lifespan of 520
hours with a standard deviation of 30 hours.
If these 2 samples were combined and used in a given project
simultaneously determined the combined new mean for the larger
sample and hence determine the combined or pulled standard deviation.
116
Lesson Three
117
Size
40(n1)
50 (n1)
s
600 hrs(x1) 20hrs (s1)
520 hrs (x2) 30 hrs (s2)
40 600 +50 520
Combined mean
=
40+50
50,000
90
=555.56
Combined standard deviation
=
=
{40(202)+40(555.56- 660)2 +50(30)2 +50( 555.56- 520)2

40+50
1600+78996.54+45000+63225.68
90
=47.52hrs
SKEWNESS
- This is a concept which is commonly used in statistical decision
making. It refers to the degree in which a given frequency curve is
deviating away from the normal distribution
- There are 2 types of skew ness namely
i.
Positive skew ness
ii.
Negative skew ness
i.
-
Positive Skew ness

This is the tendency of a given frequency curve leaning towards
the right. In a positively skewed distribution, the long tail
extended to the right.
Frequency
Normal distribution
Positively skewed frequency curve
Long tail
118
Descriptive
Mode
Median
mean
In this distribution one should note the following

i.
The mean is usually bigger than the mode and median
ii.
The median always occurs between the mode and mean
iii.
There are more observations below the mean than above the
mean
This frequency distribution as represented in the skewed distribution
curve is characteristic of the age distributions in the developing
countries
NEGATIVE SKEWNESS NEGATIVELY SKEWED DISTRIBUTION
This is an asymmetrical curve in which the long tail extends to the left
Negatively skewed frequency curve
Long tail
10
20
40
Mean
50
60
mode
70
80
AGE DISTRIBUTION
Median
NB: This frequency curve for the age distribution is characteristic of the
age distribution in developed countries
- The mode is usually bigger than the mean and median
- The median usually occurs in between the mean and mode
- The no. of observations above the mean are usually more than
those below the mean (see the shaded region)
MEASURES OF SKEWNESS
- These are numerical values which assist in evaluating the
degree of deviation of a frequency distribution from the normal
distribution.
- Following are the commonly used measures of skew ness.
1. Coefficient Skew ness
118
Lesson Three
119
= 3
mean- median
Standard deviation
2. Coefficient of skewness
mean- mode
Standard deviation
NB: These 2 coefficients above are also known as Pearsonian measures
of skewness.
3. Quartile Coefficient of skewness
Q3+Q1- 2Q2
=
Q3+Q1
Where Q1 = 1st quartile
Q2 = 2nd quartile
Q3 = 3rd quartile
NB: The Pearsonian coefficients of skew ness usually range between ve
3 and +ve 3. These are extreme value i.e. +ve 3 and ve 3 which
therefore indicate that a given frequency is negatively skewed and the
amount of skewness is quite high.
Similarly if the coefficient of skew ness is +ve it can be concluded that
the amount of skew ness of deviation from the normal distribution is
quite high and also the degree of frequency distribution is positively
skewed.
Example
The following information was obtained from an NGO which was giving
small loans to some small scale business enterprises in 1996. the loans
are in the form of thousands of Kshs.
fu
Fu2
UCB
cf
-15
d/c=
u
-3
-96
288
50.5
32
53
-10
-2
-124
248
55.5
94
97
58
-5
-1
-97
97
60.5
191
65
70
75
120
92
83
52
63A
68
73
78
0
5
10
15
0
+1
+2
+3
0
92
166
156
0
92
332
468
0
70.5
75.5
80.5
0
403
486
538
40
83
20
+4
160
640
85.5
57.8
21
88
25
+5
105
525
90.5
599
11
93
30
+6
66
396
95.5
610
428
3086
Loans
46
50
51
55
56
60
61
66
71
76
80
81
85
86
90
91
95
Midpoints(
x)
48
x-a=d
Units
(f)
32
62
610
120
Descriptive
Required
Using the Pearsonian measure of skew ness, calculate the coefficients of
skew ness and hence comment briefly on the nature of the distribution of
the loans.
fu
Arithmetic mean = Assumed mean +
f
4285
= 63 +
610
= 66.51
=c
fu - fu
ff
=5
3086 428
610 610
The standard deviation
= 10.68
The Position of the median lies m =
=
= 60.5 +
305.5-191
= 60.5 +
114.4
120
120
n+1
2
610+1
2
= 305.5
Median = 65.27
Therefore the Pearsonian coefficient
= 3
66.51- 65.27
10.68
= 0.348
Comment
The coefficient of skewness obtained suggests that the frequency
distribution of the loans given was positively skewed
This is because the coefficient itself is positive. But the skewness is not
very light i.e. 0.348 cf +3.00
However, the value obtained is more implying the degree of deviation of
the frequency distribution from the normal distribution is small
120
Lesson Three
121
Example 2
Using the above data calculate the quartile coefficient of skewness
Q3+Q1- 2Q2
Quartile coefficient of skewness =
Q3+Q1
The position of Q1 lies on
actual value Q1 =55. 5 +
610+1
4
=152.75
152.75- 94 5
97
= 58.53
The position of Q3 lies on
actual value Q3 =70.55 +
= 3
610+1 =458.25
4
458.25- 403
83
= 73.83
i.e. 2
610+1
= 305.5
4
305.5-191 5
60.5 +
120
The required coefficient of skew ness
73.83+58.53 2 65.27
=
73.83+58.53
= 0.013
Conclusion
Same as above when the Pearsonian coefficient was used
KURTOSIS
- This is a concept, which refers to the degree of peaked ness of
a given frequency distribution. The degree is normally
measured with reference to normal distribution.
- The concept of kurtosis is very useful in decision making
processes i.e. if is a frequency distribution happens to have
either a higher peak or a lower peak, then it should not be used
to make statistical inferences.
- Generally there are 3 types of kurtosis namely;i.
Leptokurtic
ii.
Mesokurtic
iii.
Platykurtic
122
Descriptive
Leptokurtic
a)
A frequency distribution which is lepkurtic has generally a
higher peak than that of the normal distribution. The
coefficient of kurtosis when determined will be found to be
more than 3. thus frequency distributions with a value of
more than 3 are definitely leptokurtic
b)
Some frequency distributions when plotted may produce a
curve similar to that of the normal distribution. Such
frequency distributions are referred to ass mesokurtic. The
degree of kurtosis is usually equal to 3
c)
When the frequency curve contacted produces a peak which
is lower that that of a normal distribution when such a curve
is said to be platykurtic. The coefficient of such is usually
less than 3
- It is necessary to calculate the numerical measure of kurtosis.
The commonly used measure of kurtosis is the percentile
coefficient of kurtosis. This coefficient is normally determined
using the following equation
Q3- Q1
Percentile measure of kurtosis, K (Kappa) = 12
P90- P10
Example
Refer to the table above for loans to small business firms/units
Required
Calculate the percentile coefficient of Kurtosis
90
P90 =
n+1 =0.9 610+1
100
= 0.9 (611)
= 549.9
The actual loan for a firm in this position
549.9- 538 x 5 = 81.99
(549.9) = 80.5 +
40
P10 =
10
(n + 1) = 0.1 (611) = 61.1
100
The actual loan value given to the firm on this position is

50.5 +
61.1 32
62
x 5 = 52.85
= 0.9 (611)
= 549.9
percentile measure of kurtosis
K(Kappa)
Q3- Q1
P90- P10
73.83- 58.53
81.99- 52.85
122
Lesson Three
123
= 0.26
Since 0.26 < 3, it can be concluded that the frequency distribution
exhibited by the distribution of loans is platykurtic
Kurtosis is also measured by moment statistics, which utilize the exact
value of each observation.
i. M1 the first moment = M1 =
M2 =
M3 =
M4 =
= Mean M1 or M1
M2 second moment about the mean M2 or f2

M2 = M2 M12
iii.
M3 third moment about the mean M3 (a measure of the
absolute skew ness)
M3 = M3 3M2M1 + 2M13
iv.
M4 fourth moment about the mean M4 (a measure of the
absolute Kurtosis)
M4 = M4 4M3M1 + 6M2M12 + 3M14
An alternative formula
ii.
M4 =
Moment coefficient of Kurtosis
x m
f
Where m is mean
M4
S4
Example
Find the moment coefficient of the following distribution
x
f
12
1
14
4
16
6
18
10
20
7
22
2
X
12
14
f
1
4
xf
12
56
(x-m)
-5.6
-3.6
(x-m)2
31.36
12.96
(x-m)2f
31.36
51.84
(x-m)4f
983.45
671.85
124
16
18
20
22
6
10
7
2
30
96
180
140
44
528
Descriptive
-1.6
.4
2.4
4.4
2.56
0.16
5.76
19.36
15.36
1.60
40.32
38.72
179.20
39.32
0.256
232.24
749.62
2,676.74
528
= 17.6
30
179.20
=
= 5.973
30
= 35.677
2
4
M4 =
x m
f
2,676.74
30
= 89.22
Moment coefficient of Kurtosis =
89.22
35.677
= 2.5
Note Coefficient of kurtosis can also be found using the method of

assumed mean.
3.4
Indices
An index number is an attempt to summarize a whole mass of data into
one figure. The single figure shows how one year differs from another
year.
It is a statistical devise used to measure the change in the level of prices,
wages output and other variables at given times, relative to their level at
an earlier time which is taken as the base for comparison purposes
Pn
A simple price index =
100 (an unweighted price index)
Po
Qn
100 (an unweighted quantity index)
Qo
Where pn is the price of a commodity in the current year (the year for
which the price index to be calculated)
A simple quantity index =
Where po is the price of the same commodity in the base year (the year
for comparison purposes)
Where Qn and Qo are defined in the same way
AGGREGATE PRICE INDEX NUMBERS AND QUANTITY INDEX
NUMBERS
PRICE INDEX
QUANTITY INDEX
124
Lesson Three
125
p q
Pq
p q
Pq
LASPEYRES INDEX
n o
q p
q p
q q
q p
n o
100
o o
PAASCHES INDEX
n n
n n
100
o o
Value index =
p q
Pq
n n
100
o o
100
100
o o
MODIFIED FORM OF THE LASPEYRES INDEX NUMBER

Laspeyres Price index =
pn
po
p q
w0 100
o e
Where w0 are the proportions of the total expected in the basic period.
This formula is frequently used to calculate retail price index.
CHANGING THE BASE OF THE INDEX
For comparison purposes if two series have different base years, it is
difficult to compare them directly. In such cases, it is necessary to
change the base year of one of the series (or both) so that both have the
same base.
It is also necessary to keep the index relevant to current conditions
hence the need to change the base from time to time.
Example;
Year
1985 1986 1984 1988 1989 1990 1991 1992
Price index 100
104
108
109
112
120
125
140
Suppose we wish to change the base year to 1989
We recalculate each index by expressing it as a percentage of 1989
1985
Previous index
100
1986
104
1987
108
1988
109
1989 (new base year)
112
1990
120
Recalculated index
100
100 = 89.3
112
104
100 = 92.9
112
108
100 = 96.4
112
109
100 = 97.3
112
112
100 = 100
112
120
100 = 107.1
112
126
1991
1992
Descriptive
125
125
140
112
140
112
100 = 111.6
100 = 125.0
When changing the base year, it is advisable to update the weights used
in the base year.
CHAIN BASED INDEX NUMBERS
A chain based index is one where the index is calculated every year using
the previous year as the base year. This type of index measures rate of
change from year to year.
This method is suitable where weights are changing rapidly and items
are constantly being brought into the index and unwanted items taken
out. It can be a price or quantity index
1985
1986
Previous index
100
104
1987
108
1988
109
1989
112
1990
120
1991
125
1992
140
Recalculated index
100
104
100 = 104
100
108
100 = 103.8
104
109
100 = 100.9
108
112
100 = 102.8
109
120
100 = 107.1
112
125
100 = 104.2
120
140
100 = 112
120
Recalculated index
100(1985 base year
104
100 = 104
100
108
100 = 1084
100
109
100 = 109
100
112
100 = 112
100
120
100 = 120
100
125
100 = 125
100
140
100 = 140
100
The fishers index

The fishers index acts as a compromise between Laspeyres index and
Paasche index. It is calculated as a geometric mean of the two indexes.
Retail price index
It is weighted average of price relatives based upon an average
household in the base year. The items consumed are divided into groups
such as food, housing, transport, alcoholic drinks, footwear, duel, light,
water, household goods, services e.t.c. each item included in the index is
given a weighting and a price relative to the base is calculated. Modified
form of laspeyres price index formula is used as a weighted arithmetic
mean of price relatives.
126
Lesson Three
127
I.e. Retail Price index =
pn
po
W0 100
The index is used by the Government as a guide in determining the

minimum wages, pension rates unemployed benefits (in UK e.t.c). Trade
unions use it as a basis for their wages claims.
DEFLATION
Indexes may be used to deflate time series so that comparisons between
periods may be made in real terms
It is a process of reducing a value measured in current period prices to
its equivalent in the base period prices. The deflated value is what would
have been necessary to purchase the same amount of goods as the
present value can purchase in the current period
Deflation Factor =
p q
p q
n n
100
0 n
Deflation of a time series

Year
Average monthly
earnings (shs)
1
5,000
2
5,500
Retail
index
100
120
6,000
140
6,500
170
7,200
200
Real earnings
5000 = 5000
100
5,500
=
120
4,583.3
100
6,000
=
140
4,285.7
100
6,500
=
170
3,823.5
100
7,200
=
200
3,600.0
The technique of index number construction

When preparing index numbers it is important to define
a) The exact purpose of the index
b) How the items are to be selected
c) The choice of the weights
d) The choice of the base
e) The type of average to be used
The base year should be as close to the normal trend as possible. The
best methods should be used for collection of data. The items should be
selected in such a way that they are a fair representation of all the
relevant items.
Due consideration should be given to the weighting of all items selected
128
Descriptive
The index of industrial production

It is a quantity index compiled by the government. It measures changes
in the volume of production in major industries. The index is a good
indication of the state of national economy.
It covers the following major industries in the UK
i.
Mining and quarrying
ii.
Manufacturing such as food, drinks and tobacco, chemicals,
metal manufacture, engineering e.t.c
iii.
Textile
iv.
Construction
v.
Gas electricity, water e.t.c
It excludes agriculture, fishing, trade, transport, finance and other such
industries.
Each industries order is given a weighting. The weighting is based on
average monthly production in each industry in a fixed base year. It gives
each item its relative importance amongst all other items and thus gives
a better estimate of the index for comparison purposes.
The Geometric Index (Industrial Share index)
This index is an index of 30 selected top industrial companies. It is
calculated by taking an unweighted geometric mean of the price
relatives of the selected shares.
Example
The share prices of ordinary shares of four companies on 1 st January
1990 and 1st January 1991 were as follows.
Share
Company
A
Company
B
Company
C
Company
D
Price on
1.1.1990
Shs 10
Price on
1.1.1991
Shs 12
Shs 12
Shs 15
Shs 20
Shs 25
Shs 5
Shs 6
Using an unweighted geometric index, calculate the index of share prices

at 1.1.1991 if 1.1.1990 is the base date, index 100
Solution
(12 x 15 x 25 x 6) = (27000)
10 12 20 5
12000
(27) = (2.25)
12
= 1.5
= 1.225
% increase = 22.5%
index = 122.5
128
Lesson Three
129
INFLATION
The inflation rate for a given period can be calculated using the following
formula;
Current retail price index
Inflation =
100
Retail price index in thebase year
MARSHAL HEDGE WORTH INDEX
Marshal Hedge worth index =
p p
p q
n
qn
qn
100
TESTS FOR AN IDEAL INDEX NUMBER

1. Factor Reversal Test
This test indicates that when the price index is multiplied with a quantity
index i.e. factors are reversed), it should result in the value index.
2. The time reversal test
If we reverse the time subscripts of a price or quantity index, the result
should be reciprocal of the original index.
130
Descriptive
QUESTION ONE
a) Distinguish between discrete and continuous data.
b) What is dispersion and what is the formula for the standard
deviation?
c) What is the measure of relative dispersion?
d) Draw diagrams showing positive and negative skewness
QUESTION TWO
The managers of an import agency are investigating the length of time
that customers take to pay their invoices, the normal terms for which are
30 days net. They have checked the payment record of 100 customers
chosen at random and have compiled the following table:
Payment in
Number of
customers
4
10
17
20
22
16
8
3
5 to 9 days
10 to 14 days
15 to 19 days
20 to 24 days
25 to 29 days
30 to 34 days
35 to 39 days
40 to 44 days
Required:
a) Calculate the arithmetic mean.
b) Calculate the standard deviation
c) Construct a histogram and insert the modal value.
d) Estimate the probability that an unpaid invoice chosen at random will
be between 30 and 39 days old.
QUESTION THREE
The price of the ordinary 25p shares of Manco PLC quoted on the stock
exchange, at the close of the business o successive Fridays is tabulated
below
126
125
128
124
127
120
127
126
127
122
122
113
117
114
106
105
112
114
111
121
129
130
120
116
116
119
122
123
131
135
131
134
127
128
142
138
136
140
137
130
Required
a) Group the above date into eight classes.
marks)
(4
130
Lesson Three
131
b) By constructing the ogive, calculate the median value, quartile values
and the
semi-quartile range.
(5
marks)
c) Calculate the mean and standard deviation of your frequency
distribution.
(7 marks)
d) Compare and contrast the values that you have obtained for:
i)
The median and mean
ii)
The semi-interquartile range and the standard deviation
(4 marks)
(Total:
20
marks)
132
Descriptive
QUESTION FOUR
Define the coefficient of variation.
The following table gives profits (in ten thousands of shillings) of two
supermarkets over a duration of one year.
Month
January
February
March
April
May
June
July
August
September
October
November
December
Supermarket A
65
48
15
28
41
59
41
10
24
56
92
120
Supermarket B
28
33
20
23
69
45
53
15
35
57
99
136
Required:
i)
Compute the coefficient of variation for each supermarket.
ii)
Indicate for which supermarket the variability of profits is relatively
greater.
QUESTION FIVE
Prodco PLC manufactures an item of domestic equipment which requires
a number of components which have varied as various modifications of
the model have been used. The following table shows the number of
components required together with the price over the last three years of
production.
COMPONEN
T
1982
Prices
A
B
C
D
3.63
2.11
10.03
4.01
Quantit
y
3
4
1
7
1983
Prices
4.00
3.10
10.36
5.23
Quantit
y
2
5
1
6
1984
Prices
4.49
3.26
12.05
5.21
Quantit
y
2
6
1
5
Required:
a) Establish the base weighted price indices for 1982 and 1983 based on
1981 for the item of equipment.
(8
marks)
b) Establish the current weighted price indices for 1982 and 1983 based
on
132
Lesson Three
133
1981 for the item of equipment.
(8
marks)
c) Using the results of (a) and (b) as illustrations, compare and contrast
Laspeyres and Paasche price index numbers.
(4 marks)
(Total:
20
marks)
QUESTION SIX
a) A company manufacturing a product known as 257 uses five
components in its assembly.
The quantities and prices of the components used to produce a unit of
K257 in 1982, 1983 and 1984 are tabulated as follows:
COMPONEN
T
A
B
C
D
E
i)
1982
Prices
10
6
5
9
50
Quantit
y
3.12
11.49
1.40
2.15
0.32
1983
Prices
12
7
8
9
53
Quantit
y
3.17
11.58
1.35
2.14
0.32
1984
Prices
14
5
9
10
57
Quantit
y
3.20
11.67
1.31
2.63
0.32
Required:
Calculate Laspyeres type price index number for the cost of one unit
of K257
for 1983 and 1984 based on 1982.
(6
marks)
ii)
Calculate Paasche type price index numbers for the cost of one unit of
K257
for 1983 and 1984 based on 1982.
(6
marks)
iii)
Compare and contrast the Laspeyre and Paasche price-index numbers

you
have obtained in (i) and (ii)
(3
marks)
A number of employers manufacturing plastic components used in
plumbing have formed themselves into an association for the purpose of
negotiating with the trade union for this industrial sector.
The negotiations cover pay and contributions in this sector.
Required:
134
Descriptive
Explain the usefulness of an index of Industrial Production and an index

of retail prices to both sides in a series of pay negotiations.
(5 marks)
(Total: 20
marks)
QUESTION SEVEN
The data given below indicates the prices and production of some
horticulatural products in Central Territory:
Produce
Cabbages
Tomatoes
Onions
Spinach
Production
(1000 boxes)
1980
1990
48,600
62,000
22,000
37,440
47,040
61,430
43,110
55,720
Price per box (Shs)

1980
100
220
180
130
1990
150
310
200
170
134
Lesson Three
135
Required:
Calculate the increase or decrease in prices from 1980 on the basis of
the following indices:
a)
b)
c)
d)
e)
Men relatives
Laspeyres index
Paasche index
Marshall Hedgeworth index
Fishers index.
136
Relationships and Forecasting
Measures of
LESSON FOUR
4. Measures of Relationships and Forecasting
-
Correlation
Regression analysis
Multiple Linear Regression
Time series analysis and forecasting
136
Lesson Four
137
4.1
Correlation and Regression
Correlation
This is an important statistical concept which refers to interrelationship
or association between variables.
The purpose of studying correlation is for one to be able to establish a
relationship, plan and control the inputs (independent variables) and the
output (dependent variables)
In business one may be interested to establish whether there exists a
relationship between the
i.
Amount of fertilizer applied on a given farm and the resulting
harvest
ii.
Amount of experience one has and the corresponding
performance
iii.
Amount of money spent on advertisement and the expected
incomes after sale of the goods/service
There are two methods that measure the degree of correlation between
two variables these are denoted by R and r.
(a) Coefficient of correlation denoted by r, this provides a measure
of the strength of association between two variables one the
dependent variable the other the independent variable r can range
between +1 and 1 for perfect positive correlation and perfect
negative correlation respectively with zero indicating no relation
i.e. for perfect positive correlation y increase linearly with x
increament.
(b) Rank correlation coefficient denoted by R is used to measure
association two sets of ranked or ordered data. R can also vary
from +1, perfect positive rank correlation and -1 perfect negative
rank correlation where O or any number near zero representing no
correlation.
SCATTER GRAPHS
- A scatter graph is a graph which comprises of points which have
been plotted but are not joined by line segments
- The pattern of the points will definitely reveal the types of
relationship existing between variables
- The following sketch graphs will greatly assist in the
interpretation of scatter graphs.
138
Measures of
Perfect positive correlation
y
Dependant variable
x
x
x
x
x
x
x
x
Independent variable
NB: For the above pattern, it is referred to as perfect because the points
may easily be represented by a single line graph e.g. when measuring
relationship between volumes of sales and profits in a company, the more
the company sales the higher the profits.
Perfect negative correlation
y
Quantity sold
x
x
X
x
x
x
x
x
x
10
20
Price
138
Lesson Four
139
This example considers volume of sale in relation to the price, the
cheaper the goods the bigger the sale.
High positive correlation
y
Dependant variable
xx
xx
x
x
xx
xx
xx
xx
x
xxx
x
x
independent variable
y
quantity sold
x
x
xx
x
xx
x
x
x
x
xx
x
price
140
Measures of
No correlation
600
x
x
400
x
x
x
200
x
x
20
30
40
50
0
10
h) Spurious Correlations
- in some rare situations when plotting the data for x and y we may
have a group showing either positive correlation or ve correlation
but when you analyze the data for x and y in normal life there may
be no convincing evidence that there is such a relationship. This
implies therefore that the relationship only exists in theory and
hence it is referred to as spurious or non sense e.g. when high
passrates of student show high relation with increased accidents.
Correlation coefficient
- These are numerical measures of the correlations existing between
the dependent and the independent variables
- These are better measures of correlation than scatter groups
- The range for correlation coefficients lies between +ve 1 and ve
1. A correlation coefficient of +1 implies that there is perfect
positive correlation. A value of ve shows that there is perfect
negative correlation. A value of 0 implies no correlation at all
- The following chart will be found useful in interpreting correlation
coefficients
140
Lesson Four
141
__ 1.0 }
}
Perfect +ve correlation

__ 0.5}
}
__0
Low positive correlation
}
}
Low negative correlation
__-0.5}
}
__-1.0}
High negative correlation

Perfect correlation
There are usually two types of correlation coefficients normally used

namely;Product Moment Coefficient (r)
It gives an indication of the strength of the linear relationship between
two variables.
r=
n xy x y
n x 2 x n y 2 y
2
note that this formula can be rearranged to have different outlooks but
the resultant is always the same.
Example
The following data was observed and it is required to establish if there
exists a relationship between the two.
X
15
24
25
30
35
40
45
65
70
75
Y
60
45
50
35
42
46
28
20
22
15
142
Solution
Compute the
X
15
24
25
30
35
40
45
65
70
75
X 424
r=
r=
Measures of
product moment coefficient of correlation (r)

Y
X2
Y2
XY
60
225
3,600
900
45
576
2,025
1,080
50
625
2,500
1,250
35
900
1,225
1,050
42
1,225
1,764
1,470
46
1,600
2,116
1,840
28
2,025
784
1,260
20
4,225
400
1,300
22
4,900
484
1,540
15
5,625
225
1,125
Y 363
21,926
15,123
XY 12,815
n xy x y
n x 2 x n y 2 y
2
10 12,815 424 363
10 21,926 424 10 15,123 363

2
25, 762
39, 484 19, 461
0.93
The correlation coefficient thus indicates a strong negative linear

association between the two variables.
Interpretation of r Problems in interpreting r values
NOTE:
A high value of r (+0.9 or 0.9) only shows a strong association
between the two variables but doesnt imply that there is a causal
relationship i.e. change in one variable causes change in the other it
is possible to find two variables which produce a high calculated r yet
they dont have a causal relationship. This is known as spurious or
nonsense correlation e.g. high pass rates in QT in Kenya and
increased inflation in Asian countries.
Also note that a low correlation coefficient doesnt imply lack of
relation between variable but lack of linear relationship between the
variables i.e. there could exist a curvilinear relation.
A further problem in interpretation arises from the fact that the r
value here measures the relationship between a single independent
variable and dependent variable, where as a particular variable may
be dependent on several independent variables (e.g. crop yield may
142
Lesson Four
143
be dependent on fertilizer used, soil exhaustion, soil acidity level,
season of the year, type of seed etc.) in which case multiple
correlation should be used instead.
The Rank Correlation Coefficient (R)
Also known as the spearman rank correlation coefficient, its purpose is to
establish whether there is any form of association between two variables
where the variables and arranged in a ranked form.
R=1-
6 d 2
n n 2 1
Where d = difference between the pairs of ranked values.

n = numbers of pairs of rankings
Example
A group of 8 accountancy students are tested in Quantitative Techniques
and Law II. Their rankings in the two tests were.
Student
Q. T. ranking Law
II d
d2
A
B
C
D
E
F
G
H
ranking
3
6
4
2
5
1
8
7
2
7
6
1
4
3
5
8
-1
1
2
-1
-1
2
-3
1
1
1
4
1
1
4
9
1
22
d = Q. T. ranking Law II ranking

R=1-
6 d 2
n n 1
2
6 22
8 82 1
= 0.74
Thus we conclude that there is a reasonable agreement between
students performances in the two types of tests.
NOTE: in this example, if we are given the actual marks then we
find r. R varies between +1 and -1.
Tied Rankings
A slight adjustment to the formula is made if some students tie and have
the same ranking the adjust is
t3 t
where t = number of tied rankings the adjusted formula
12
becomes
144
R=1-
Measures of
d
n n 1
2
t 3 t
12
Example
Assume that in our previous example student E & F achieved equal
marks in Q. T. and were given joint 3rd place.
Solution
Student
Q. T. ranking
Law
A
B
C
D
E
F
G
H
2
7
6
1
3
3
5
8
ranking
3
6
4
2
5
1
8
7
R = 1-
d
n n 1
2
t 3 t
12
d2
II d
-1
1
2
-1
-1
2
-3
1
1-
1
1
4
1
2
6
9
1
6 26 1 2 212 2
3
8 8 1
26 1 2
= 0.68
NOTE:
It is conventional to show the shared rankings as above, i.e.
E, & F take up the 3 rd and 4th rank which are shared between the
two as 3 each.
ii. Coefficient of Determination
This refers to the ratio of the explained variation to the total variation
and is used to measure the strength of the linear relationship. The
stronger the linear relationship the closer the ratio will be to one.
Coefficient determination =
Explained variation
Total variation
Example (Rank Correlation Coefficient)
In a beauty competition 2 assessors were asked to rank the 10
contestants using the professional assessment skills. The results
obtained were given as shown in the table below
144
Lesson Four
145
1st
assessor
6
1
3
7
8
2
4
5
10
9
Contestants
A
B
C
D
E
F
G
H
J
K
2nd assessor
5
3
4
6
7
1
8
2
9
10
REQUIRED
Calculate the rank correlation coefficient and hence comment briefly on
the value obtained
d
d2
A
B
C
D
E
F
G
H
J
K
6
1
3
7
8
2
4
5
10
9
5
3
4
6
7
1
8
2
9
10
1
-2
-1
1
1
1
-4
3
+1
-1
1
4
1
1
1
1
16
9
1
1
d2 = 36
The rank correlation coefficient R
6 d 2
R = 1 - n n2 1
6 36
= 1 - 10 102 1
=1-
216
990
= 1 0.22
= 0.78
Comment: since the correlation is 0.78 it implies that there is high
positive correlation between the ranks awarded to the contestants. 0.78
> 0 and 0.78 > 0.5
Contestan
t
1st
assesso
2nd
assessor
d2
146
A
B
C
D
E
F
G
H
r
1
5 (5.5)
3
2
4
5 (5.5)
7
8
Measures of
2
3
4
1
5
6.5
6.5
8
-1
2.5
-1
1
-1
-1
-0.5
0
1
6.25
1
1
1
1
0.25
0
d2 = 11.25
Required: Complete the rank correlation coefficient

R=
1-
6 d 2
n n 2 1
6 11.25
8 63
67.5
=1
504
=1-
= 1 0.13
= 0.87
This implies high positive correlation
Example (Rank Correlation Coefficient)
Sometimes numerical data which refers to the quantifiable variables may
be given after which a rank correlation coefficient may be worked out.
Is such a situation, the rank correlation coefficient will be determined
after the given variables have been converted into ranks. See the
following example;
Candidate
s
P
Q
R
Math
92
82
60
1
3
5(5.5
)
2
4
5(5.5
)
8
9
10
7
S
T
U
87
72
60
V
W
X
Y
52
50
47
59
Accounts
d2
67
88
58
5
1
7(7.5)
-4
2
-2
16
4
4
80
69
77
2
4
3
0
0
-2.50
0
0
6.25
58
60
32
54
7(7.5)
6
10
9
0.5
3
0
-2
0.25
9
0
4
d2 =
43.5
146
Lesson Four
147
Rank correlation r =
1-
=1-
6 43.5
10 102 1
=1
261
990
6 d 2
n n 2 1
= 1 0.26
= 0.74 (High positive correlation between
mathematics
marks and accounts)
Example
(Product moment correlation)
The following data was obtained during a social survey conducted in a
given urban area regarding the annual income of given families and the
corresponding expenditures.
Family
A
(x)Annual
income
000
420
(y)Annual
expenditur
e 000
360
380
390
148200
520
510
265200
610
500
305000
400
360
144000
320
290
92800
G
H
280
410
250
380
70000
155800
380
240
91200
300
4020
270
3550
K
Total
xy
151200
81000
1504400
x2
Y2
17640
0
14440
0
27040
0
37210
0
16000
0
10240
0
78400
16810
0
14440
0
90000
17066
00
12960
0
15210
0
26010
0
25000
0
12960
0
84100
62500
14440
0
57600
72900
13429
00
Required
Calculate the product moment correlation coefficient briefly comment on
the value obtained
The produce moment correlation
148
Measures of
n xy x y
r=
n x 2 x n y 2 y
2
Workings:
X =
4020
= 402
10
3550
355
10
10 1,504, 400 4020 3550
r=
10 1, 706, 600 40202 10 1,342,900 3550
= 0.89
Comment: The value obtained 0.89 suggests that the correlation between
annual income and annual expenditure is high and positive. This implies
that the more one earns the more one spends.
4.2
REGRESSION
This is a concept, which refers to the changes which occur in the
dependent variable as a result of changes occurring on the
independent variable.
- Knowledge of regression is particularly very useful in business
statistics where it is necessary to consider the corresponding
changes on dependant variables whenever independent variables
change
- It should be noted that most business activities involve a
dependent variable and either one or more independent variable.
Therefore knowledge of regression will enable a business
statistician to predict or estimate the expenditure value of a
dependant variable when given an independent variable e.g.
consider the above example for annual incomes and annual
expenditures. Using the regression techniques one can be able to
determined the estimated expenditure of a given family if the
annual income is known and vice versa
- The general equation used in simple regression analysis is as
follows
y = a + bx
Where y = Dependant variable
a= Interception y axis (constant)
b = Slope on the y axis
x = Independent variable
i.
The determination of the regression equation such as given
above is normally done by using a technique known as the
method of least squares.
Regression equation of y on x i.e. y = a + bx
-
Line of best fit
148
Lesson Four
149
x
x
x
x
x
x
x
The following sets of equations normally known as normal equation are

used to determine the equation of the above regression line when given a
set of data.
y = an + bx
xy = ax + bx2
Where y = Sum of y values
xy = sum of the product of x and y
x = sum of x values
x2= sum of the squares of the x values
a = The intercept on the y axis
b = Slope gradient line of y on x
NB: The above regression line is normally used in one way only i.e. it is
used to estimate the y values when the x values are given.
Regression line of x on y i.e. x = a + by
- The fact that regression lines can only be used in one way leads to
what is known as a regression paradox
- This means that the regression lines are not ordinary
mathematical line graphs which may be used to estimate the x and
y simultaneously
- Therefore one has to be careful when using regression lines as it
becomes necessary to develop an equation for x and y before doing
the estimation.
The following example will illustrate how regression lines are used
Example
An investment company advertised the sale of pieces of land at different
prices. The following table shows the pieces of land their acreage and
costs
Piece of
land
A
B
C
D
E
(x)Acreage
Hectares
2.3
1.7
4.2
3.3
5.2
(y) Cost
000
230
150
450
310
550
xy
x2
529
255
1890
1023
2860
5.29
2.89
17.64
10.89
27.04
150
F
G
H
J
6.0
7.3
8.4
5.6
x =44.0
590
740
850
530
y = 4400
Measures of
3540
5402
7140
2969
xy= 25607
36
53.29
70.56
31.36
2
x = 254.96
Required
Determine the regression equations of
i. y on x and hence estimate the cost of a piece of land with 4.5
hectares
ii. Estimate the expected average if the piece of land costs
900,000
y = an + bxy
xy = ax + bx2
By substituting of the appropriate values in the above equations we have
4400 = 9a + 44b .. (i)
25607 = 44a + 254.96b ..(ii)
By multiplying equation . (i) by 44 and equation (ii) by 9 we have
193600 = 396a + 1936b .. (iii)
230463 = 396a + 2294.64b ..(iv)
By subtraction of equation . (iii) from equation (iv) we have
36863 = 358.64b
102.78 = b
by substituting for b in .. (i)
4400 = 9a + 44( 102.78)
4400 4522.32 = 9a
122.32 = 9a
-13.59 = a
Therefore the equation of the regression line of y on x is
Y = 13.59 + 102.78x
When the acreage (hectares) is 4.5 then the cost
(y) = -13.59 + (102.78 x 4.5)
= 448.92
= 448, 920
Note that
Where the regression equation is given by
y= a + bx
Where a is the intercept on the y axis and
b is the slope of the line or regression coefficient
n is the sample size
then,
intercept a =
Slope b =
y b x
n
n xy x y
n x 2 x
150
Lesson Four
151
Example
The calculations for our sample size n = 10 are given below. The linear
regression model is y = a + bx
Table
xy
x2
y2
16
56.0
256
2.4
4.9
13
19
31.0
93.1
4.2
18
75.6
3.0
1.3
1.0
3.0
1.5
4.1
12
11
8
14
9
16
36.0
14.3
8.0
42.0
13.5
65.6
136
435.
3
xy
12.2
5
5.76
24.0
1
17.6
4
9.0
1.69
1.0
9.0
2.25
16.8
1
99.4
1
x2
Distance x
miles
3.5
Total 28.9
x
Time y mins
The Slope b =
169
361
324
144
121
64
196
81
256
1972
y2
10 435.3 28.9 136 422.6
10 99.41 28.92
158.9
= 2.66
and the intercept a =
136 2.66 28.9

10
= 5.91
We now insert these values in the linear model giving
y = 5.91 + 2.66x
or
Delivery time (mins) = 5.91 + 2.66 (delivery distance in miles)
The slope of the regression line is the estimated number of minutes per
mile needed for a delivery. The intercept is the estimated time to prepare
for the journey and to deliver the goods, that is the time needed for each
journey other than the actual traveling time.
PREDICTION WITHIN THE RANGE OF SAMPLE DATA
We can use the linear regression model to predict the mean of dependant
variable for any given value of independent variable
For example if the sample model is given by
152
Measures of
Time (min) = 5.91 + 2.66 (distance in miles)

Then the distance if 4.0 miles then our estimated mean time is
= 5.91 + 2.66 x 4.0 = 16.6 minutes
4.3
Multiple Linear Regression Models
There are situations in which there is more than one factor which
influence the dependent variable
Example
Cost of production per week in a large department
Factors
i.
Total numbers of hours worked
ii.
Raw material used during the week
iii.
Total number of items produced during the week
iv.
Number of hours spent on repair and maintenance
It is sensible to use all the identified factors to predict department costs
Scatter diagram will not give the relationship between the various
factors and total costs
The linear model for multiple linear regression if of the type; (which is
the line of best fit).
y = + b1x1 +b2x2 + + bnxn
We assume that errors or residuals are negligible.
In order to choose between the models we examine the values of the
multiple correlation coefficient r and the standard deviation of the
residuals .
A model which describes well the relationship between y and xs has
multiple correlation coefficient r close to and the value of which is
small.
Example
Odino chemicals limited are aware that its power costs are semi variable
cost and over the last six months these costs have shown the following
relationship with a standard measure of output.
Month
1
2
3
4
5
6
Output (standard
units)
12
18
19
20
24
30
Total power costs

000
6.2
8.0
8.6
10.4
10.2
12.4
Required
i.
Using the method of least squares, determine on appropriate
linear relationship between total power costs and output
ii.
If total power costs are related to both output and time (as
measured by the number of the month) the following least
squares regression equation is obtained
Power costs = 4.42 + (0.82) output + (0.10) month
152
Lesson Four
153
Where the regression coefficients (i.e. 0.82 and 0.10) have t
values 2.64 and 0.60 respectively and coefficient of multiple
correlation amounts to 0.976
Compare the relative merits of this fitted relationship with one
you determine in (a). Explain (without doing any further
analysis) how you might use the data to forecast total power
costs in seven months.
Solution
a)
Output (x)
12
18
19
20
24
30
Power costs
(y)
6.2
8.0
8.6
10.4
10.2
12.4
x2
y2
xy
144
324
361
400
576
900
38.44
64.00
73.96
108.16
104.04
153.76
74.40
144.00
163.40
208.00
244.80
y = 55.8
x2 = 2705
y2 =
542.36
xy=
1,206.60
x = 123
b=
372.00
n xy x y
n x 2 x
6 1206.6 123 55.8

=
6 2705 123
376.2
1101
= 0.342
a
1
(y by)
n
1
x (55.8 0.342) x 123
6
= 2.29
(Power costs) = 2.29 + 0.342 (output)

b. For linear regression calculated above, the coefficient of correlation r
is
154
r=
Measures of
6 1206.6 123 55.8

6 2705 123 123 6 542.36 55.8 55.8
376.2
1101140.52
= 0.96
This show a strong correlation between power cost and output. The
multiple correlation when both output and time are considered at the
same time is 0.976.
We observe that there has been very little increase in r which means
that inclusion of time variable does not improve the correlation
significantly
The value for time variable is only 0.60 which is insignificant as
compared with a t value of 2.64 for the output variable
In fact, if we work out correlation between output and time, there will be
a high correlation. Hence there is no necessity of taking both the
variables. Inclusion of time does improve the correlation coefficient but
by a very small amount.
If we use the linear regression analysis and attempt to find the linear
relationship between output and time i.e.
Month
1
2
3
4
5
6
Output
12
18
19
20
24
30
The value of b and a will turn out to be 3.11 and 9.6 i.e. relationship will
be of the form
Output = 9.6 + 3.11 month
For this equation forecast for 7th month will be
Output = 9.6 + 3.11 7
= 9.6 + 21.77
= 31.37 units
Using the equation , Power costs = 2.29 + 0.34 output
= 2.29 + 0.34 31.37
= 2.29 + 10.67
= 12.96 i.e. 12,960
Non Linear Relationships
In the scatter diagram and the correlation coefficient do not indicate
linear relationship, then the relationship may be non linear
Two such relationships are of peculiar interest
y = abx
154
Lesson Four
155
Both of these can be reduced to linear model. Simple or multiple linear
regression methods are then used to determine the values of the
coefficients
i.
Exponential model
y = abx
Take log of both sides
Log y = log a + log bx
Log x = log a + xlog b
Let log y = Y and log a = A and log b = B
Then Y = A + Bx. This is a linear regression model
ii.
Geometric model
y = axb
using the same technique as above
Log y = log a + blog x
Y = A + bX
Where Y = log
A = log a
X = log x
Using linear regression technique (the method of least squares), it is
possible to calculate the value of a and b
TIME SERIES AND ANALYSIS
This is the mathematical or statistical analysis on past data arranged in a
periodic sequence.
Decision making and planning in an organization involves forecasting
which is one of the series analysis.
Impediments in time series analysis
Accuracy of data in reflecting
a) Drastic changes e.g. in advent of a major competitor, period of war or
sudden change of taste.
b) For long term forecasting internal and external pressures makes
historical data less effective.
1.
Moving Average
Periodical data e.g. monthly sales may have random fluctuation every
month despite a general trend being evident. Moving average helps in
smoothing away these random changes.
A moving average is the forecast for a period that takes the average of
the previous periods.
Example:
The table below represents company sales, calculate 3 and 6 monthly
moving averages, for the data
Months
Sales
January
February
1200
1280
3 months moving
average
6 months moving
average
156
March
April
May
June
July
August
September
October
November
December
Measures of
1310
1270
1190
1290
1410
1360
1430
1280
1410
1390
1263
1287
1257
1250
1297
1353
1400
1357
1373
1257
1292
1305
1325
1327
1363
These are calculated as follows

Jan+Feb+Mar
Aprils forecast =
3
1200+1280+1310
=
3
Feb+Mar+Apr
Mays forecast =
3
1280+1310+1270
=
3
And so on
Similarly for 6 monthly moving average
July forecast =
Jan+Feb+Mar+Apr+May + Jun
6
=
And so on.
1200+1280+1310+1270+1190+1290
Note:
When plotting moving average on graphs the points are plotted as the
midpoint of the period of the average, e.g. in our example the forecast
for April (1263) is plotted on mid Feb.
Characteristics of moving average
1) The more the number of periods in the moving average, the
greater the smoothing effect.
2) Different moving averages produce different forecasts.
3) The more the randomness of data with underlying trend being
constant then the more the periods should be involved in the
moving averages.
Limitations of moving averages.
1) Equal weighing with disregard to how more recent data is more
relevant.
156
Lesson Four
157
2) Moving average ignores data outside the period of the average
thus it doesnt fully utilise available data.
3) Where there is an underlying seasonal variation, forecasting
with unadjusted moving average can be misleading.
2.
Exponential smoothing
This is a weighted moving average technique, its given by:
New forecast = Old forecast + (Latest Observation Old
forecast)
Where = Smoothing constant
This method involves automatic weighing of past data with weights that
decrease exponentially with time.
Example
Using the previous example and smoothing constant 0.3 generate
monthly forecasts
Months
Sales
Forecasts
= 0.3
January
1200
February
1280
1200
March
1310
1224
April
1270
1250
May
1190
1256
June
1290
1233
July
1410
1250
August
1360
1283
September
1430
1327
October
1280
1358
November
1410
1335
December
1390
1357
Solution
Since there were no forecasts before January we take Jan to be the
forecast for February.
Feb 1200
For March;
March forecast = Feb forecast + 0.3 ( Feb sales Feb forecast)
= 1200 + 0.3 (1280 1200)
=1224
Note:
The value lies between 0 and 1.
The higher the value the sensitive the forecast is to the current
status.
Characteristics of exponential smoothing
More weight is given to the most recent data.
All past data are incorporated unlike in moving averages.
Less data is needed to be stored unlike in periodic moving averages.
158
Measures of
Decomposition of time series

Time series has the following characteristics.
a)
A long term trend (T) tendency of the whole series to rise and fall.
b)
Seasonal variation (S) short term periodic fluctuations in values.
e.g. in Kenya maize yield is high in November and low in March or
matatus have better business on Friday and very low on Sundays.
c)
Cyclical variation (C) These are medium term changes caused by
factors which apply for a while then disappear, and come back
again in a repetitive cycle. e.g. drought hits Kenya every 7 years.
Note that cyclic variation has a longer term than seasonal
variation e.g. seasonal variation may occur once every year while
cyclic variation occurs once every several years.
d)
Random residual variation (R) These are non-recurring random
variations e.g. war, fire, coup e.t.c.
For accurate forecasts these aspects are qualified separately (i.e.
T,C,S and R) from data. This is known as time decomposition or
time series analysis
The separate elements are then combined to produce a forecast.
Time series models:
Additive Model
Time series value = T +S +C +R
Where S, C and R are expressed absolute value.
This model is best suited where the component factors are
independent e.g. where the seasonal variation is unaffected by
trend.
Multiplicative Model:
Time series value = T S C R
Where S, C and are expressed as percentage or proportions.
This model is best applied where characteristics interact e.g.
where high trends increase seasonal variations. Multiplicative
model is more commonly used in practice.
158
Lesson Four
159
Graphical illustration of the two models

Size of seasonal
variation increases with
increasing trend.
Size of seasonal variation

unaffected by increasing
trend.
Value
Value
Additive model more suitable

Multiplicative model more suitable
Of the four elements of time series the most important are trend and
seasonal variation. The following illustration shows how the trend (T)
and seasonal variation (S) are separated out from a time series and how
the calculated T and S values are used to prepare forecast. The process
of separating out the trend and seasonal variation is known
deseasonalising the data.
There are two approaches to this process: one is based on regression
through the actual data points and the other calculates the regression
line through moving average trend points. The method using the actual
data is demonstrated first followed by the moving average method.
1.
Time series analysis: trend and seasonal variation using

regression on the data
The following data will be used to illustrate how the trend and seasonal
variation are calculated.
Example 1
Year
1
2
3
4
Sales of widgets in 000s

Quarter
Quarter
Quarter
1
2
3
20
32
62
21
42
75
23
39
77
27
39
92
Quarter 4
29
31
48
53
160
Measures of
It will be apparent that there is a strong seasonal element in the above

data (low in Quarter 1 and high in Quarter 3) and there is a generally
upward trend.
The steps in analyzing the data and preparing a forecast are:
Step 1:
Calculate the trend in the data using the least squares

method.
Step 2:
Estimate the sales for each quarter

regression formula established in step 1.
Step 3:
Calculate the percentage variation of each quarters

actual sales from the estimates, obtained in step 2.
Step 4:
Average the percentage variations from step 3. This

establishes the average seasonal variations.
Step 5:
Prepare forecast based on trend percentage seasonal

variations.
using
the
Solution
Step 1
Calculate the trend in the data by calculating the linear regression line y
= a + bx.
Year 1
Year 2
Year 3
Year 4
x (sales)
xy
x2
x
(quarters)
1
2
3
4
20
32
62
29
20
64
186
116
1
4
9
16
5
6
7
8
21
42
75
31
105
252
525
248
25
36
49
64
9
10
11
12
23
39
77
38
207
390
847
576
81
100
121
144
13
14
15
16
27
39
92
53
351
546
1380
848
169
196
225
256
160
Lesson Four
161
x=136
y= 710
xy= 6661
x2=1496
Least square equations

y = an + bx
xy = ax + bx2
710 = 16a + 136b
6661 = 136a + 1496b
626 = 340b
b = 1.84 and substituting we obtain
a = 28.74
Trend line = 28.74 + 1.84x
Steps 2 and 3
Use the trend line to calculate the estimated sales for each quarter.
For example, the estimate for the first quarter in year 1 is
estimate = 28.74 + 1.84 (1) = 30.58
The actual value of sales is then expressed as a percentage of this
estimate. For example, actual sales in the first quarter were 20 so the
seasonal variation is
Actual
sales
20
%
65%
Estimate
30.58
Year
1
Year
2
Year
3
x
(quarters)
y (sales)
Trend
1
2
3
20
32
62
30.58
32.42
34.26
29
36.10
80
5
6
7
21
42
75
37.94
39.78
41.62
55
106
180
31
43.46
71
9
10
11
23
39
77
45.30
47.14
48.98
51
83
157
Actual
%
Trend
65
99
181
162
Year
4
Measures of
12
48
50.82
94
13
14
15
27
39
92
52.66
54.50
56.34
51
72
163
16
53
58.18
91
Trend estimates and percentage variations table.

Step 4
Average the percentage variations to find the average seasonal
variations.
162
Lesson Four
163
4=
Q1
%
65
55
51
51
222
56%
Q2
%
99
106
83
72
360
90%
Q3
%
181
180
157
163
681
170%
Q4
%
80
71
94
91
336
84%
These then are the average variations expected from the trend for each
of the quarters; for example, on average the first quarter of each year
will be 56% of the value of the trend. Because the variations have been
averaged, the amounts over 100% (Q3 in this example). This can be
checked by adding the average and verifying that they total 400% thus:
56% + 90% + 170% + 84% = 400%.
On occasions, roundings in the calculations will make slight adjustments
necessary to the average variations.
Step 5
Prepare final forecasts based on the trend line estimates from trend
estimates and percentages variation table (i.e. 30.58, 32.42, etc) and
the averaged seasonal variations from the table above. (i.e. 56%, 90%,
170% and 84%)
The seasonally adjusted forecast is calculated thus:
Seasonally adjusted forecast = Trend estimate Seasonal
variation%
X
(quarters)
Year 1
Year 2
Year 3
Y (sales)
1
2
3
4
20
32
62
29
Seasonally
adjusted
forecast
17.12
29.18
58.24
30.32
5
6
7
8
21
42
75
31
21.24
35.80
70.75
36.51
9
10
11
12
23
39
77
48
25.37
42.43
83.27
42.69
164
Year 4
13
14
15
16
Measures of
27
39
92
53
29.49
49.05
95.78
48.87
Seasonally adjusted forecasts

The forecasts are compared with the actual data to get some idea of how
good extrapolated forecasts might be. With further analysis they enable
us to quantify the residual variations.
Extrapolation using the trend and seasonal factors
Once the formulae above have been calculated, they can be used to
forecast (extrapolate) future sales. If it is required to estimate the sales
for the next year (i.e. Quarters 17, 18, 19 and 20 in our series) this is
done as follows:
Quarter 17
Basic trend = 28.74 + 1.84 (17)

= 60.02
Seasonal adjustment for a first quarter = 56%

Adjusted forecast = 60.02 56%
= 33.61
A similar process produces the following figures:
Adjusted forecasts
Notes:
a)
b)
c)
Quarter 18 = 55.67
19 = 108.29
20 = 55.05
Time series decomposition is not an adaptive forecasting system

like moving averages and exponential smoothing.
Forecasts produced by such an analysis should always be treated
with caution. Changing conditions and changing seasonal factors
make long term forecasting a difficult task.
The above illustration has been an example of a multiplicative
model. This is the seasonal variations were expressed in
percentage or proportionate terms. Similar steps would have
been necessary if the additive model had been used except that
the variations from the trend would have been the absolute
values. For example, the first two variations would have been
Q1: 20 30.58 = absolute variation = -10.58
Q2: 32 32.42 = absolute variation = - 0.42
And so on.
The absolute variations would have been averaged in the normal
way to find the average absolute variation, whether + or -, and
164
Lesson Four
165
these values would have been used to make the final seasonally
adjusted forecasts.
2.
Trend and seasonal variation using moving averages
When the correlation coefficient is low the method of calculating
the regression line through the actual data points should not be
used. This is because the regression line is too sensitive to
changes in the data values.
In such circumstances, calculating a regression line through the
moving average trend points is more robust and stable.
Example 1 is reworked below using this method and, because
there are many similarities to the earlier method, only the key
stages are shown.
x
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
3 point
moving
average (1)
20
32
62
29
21
42
75
31
23
39
77
48
27
39
92
53
Trend line
(2)
38
41
37.3
30.7
46
49.3
43
31
46.3
54.7
50.7
38
52.7
61.3
34.38
35.70
37.02
38.34
39.66
40.98
42.30
43.62
44.94
46.26
47.58
48.90
50.22
51.54
52.86
54.18
Actual
%
Trend
58
90
167
76
53
102
177
71
51
84
162
98
54
76
174
98
Trend estimates and percentage variations utilizing

moving averages
The first three moving average is calculated as follows
20 32 62
= 38 which is entered opposite period 2
3
The next calculated:
32 62 29
= 41, and so on
3
The regression line y = a + bx of the moving average values is

calculated in the normal manner and results in the following:
166
Measures of
y = 33.06 + 1.32x
This is used to calculate the trend line:
e.g.
For Period 1:y = 33.06 + 1.32(1) = 34.38

For Period 2:y = 33.06 + 1.32 (2) = 35.70
The percentage variations are averaged as previously shown, resulting in

the following values:
Average seasonal variation
%
Q1
54
Q2
89
Q3
170
Q4
86
The trend line and the average seasonal variations are then used in a
similar manner to that previously described.
For example, to extrapolate future sales for the next year (i.e. quarters
17, 18, 19 and 20) is as follows:
Quarter 17
Forecast sales = (33.06 + 1.32(17)) 0.54 =
29.97
A similar process produces the following figures:
Quarter
18 = 50.57
19 = 98.84
20 = 51.13
Forecast errors
Differences between actual results and predictions may arise from many
reasons. They may arise from random influences, normal sampling
errors, choice of the wrong forecasting system or alpha value or simply
that the future conditions turn out to be radically different from the past.
Whatever the cause(s) management wish to know the extend of the
forecast errors and various methods exist to calculate these methods.
A commonly used technique, appropriate to time series, is to calculate
the mean squared error of the deviations between forecast and actual
and choose the forecasting system and/or parameters which gives the
lowest value of mean squared errors, i.e. akin to the least squares
method of establishing a regression line.
Longer- term forecasting
Moving averages, exponential smoothing and decomposition methods
tend to be used for short to medium term forecasting. Longer term
forecasting is usually less detailed and is normally concerned with
forecasting the main trends on a year to year basis. Any of the
166
Lesson Four
167
techniques of regression analysis described in the preceding chapters
could be used depending on the assumptions about linearity or nonlinearity, the number of independent variables and so on. The least
squares regression approach is often used for trend forecasting.
Forecasting using least squares
Example 2
Data have been kept of sales over the last seven years
Year
1
2
3
4
5
6
7
Sales (in 000
14 17
15 23 18
22
27
units
It is required to forecast the sales for 8 years and to calculate the
coefficient of determination
Solution
The data are drawn on a time series graph where x, the independent
variable representing time, is represented on the horizontal axis in the
graph below. Note that, unlike a scatter diagram, the points are joined.
The least squares line of best fit will become the linear trend when
plotted on the graph.
168
Measures of
Sales in 000s
40
30
20
10
5
Years
Time Series Graph sales in 000s.

Example 3
As there are 7 pairs of readings n = 7 the data are set out as follows:
Years (x)
1
2
3
4
5
6
7
x=28
Sales (y)
14
17
15
23
18
22
27
y = 136
All calculations to two decimal places
xy
14
34
45
92
90
132
189
xy=596
x2
1
4
9
16
25
36
49
2
x = 140
136 = 7a + 28b
596 = 28a + 140b
Which reduces to
52 = 28b
b = 1.86
And substituting in one of the equations we obtain
168
Lesson Four
169
A = 12
Regression line = y = 12 + 1.86x
Or, in terms of the problem above :
Sales in (000s of units) = 12.00 + 1.86 (no of years)
To use this expression for forecasting, we merely need to insert the
number of the year required.
For example, 8th year sales
= 12 + 1.86 (8)
=26.88 i.e. 26888
units
170
Measures of
QUESTION ONE
a) What is meant by correlation?
b) Why is the co-efficient of determination calculated?
c) Define R.
QUESTION TWO
a) The following data has been collected regarding sales and advertising
expenditure.
Sales
(m)
8.5
9.2
7.9
8.6
9.4
10.1
Advertising
expenditure
( 000)
210
250
290
330
370
410
Plot the above data on a scatter diagram and, using judgment , decide
whether there is correlation between sales and advertising expenditure.
b) Calculate r for the data in a and interpret
c) Calculate r2 for the data in a and interpret
d) Find the values of a and b in the formula y = a + bx from the
following data relating to costs incurred at various output levels.
(Using a calculator and the direct formulae for a and b given in the
chapter).
Output
level
(units)
40
55
68
73
82
89
94
95
103
110
Cost incurred
( )
812
890
955
948
1050
1100
1160
1095
1250
1380
QUESTION THREE
170
Lesson Four
171
An analysis of representatives car expenses shows that the expenses are
dependent on the miles traveled (x) and the type of journey (x). the
general form is:
y = a = b1x1 + b2x2
Calculations have produced the following values (where y is expenses per
month)
y = 86 + 0.37x1 + 0.08x2
r2x1 = 0.78
r2x1 = 0.16
R = 0.88
Interpret these values
QUESTION FOUR
Past sales of widgets
Month
Actual
Sales
(units)
January
450
February
440
March
460
April
410
May
380
June
400
July
370
August
360
September 410
October
450
November
470
December
490
January
460
Forecasts produced by
3 monthly
6 monthly
Moving
moving
average
average
12 monthly
moving
average
450
437
417
397
383
377
380
407
443
470
424
423
410
397
388
395
410
425
Table 1
Any months forecast is the average of the proceedings n months actual
sales. For example, the 3 monthly moving average forecasts were
prepared as follows:
Aprils forecast
=
=
=
January
Sales
February
Sales
March
Sales
3
450 440 460

3
450
172
Mays forecast
=
=
=
Measures of
February
Sales
March
Sales
AprilSales
3
440 460 410

3
437
172
Lesson Four
173
QUESTION FIVE
The following data will be used to illustrate ho w the trend and seasonal
variation are calculated.
Year 1
2
3
4
Sales of widgets in 000s

Quarter 1
Quarter 2
Quarter 3
20
32
62
21
42
75
23
39
77
27
39
92
Quarter 4
29
31
48
53
It will be apparent that there is a strong seasonal element in the above

data (low in quarter 1 and high in Quarter 3) and that there is a general
upward trend.
QUESTION SIX
A.
The manager of a company are preparing revenue plans for the last
quarter of 1993/94 and for the first three quarters of 1994/5. The data
below refer to one of the main products:
Revenu
e
000
1990/91
1991/92
1992/93
1993/94
April-June
July-Sept
Oct-Dec
Jan-March
Quarter 1
000
49
50
51
50
Quarter 2
000
37
38
40
42
Quarter 3
000
58
59
60
61
Quarter 4
000
67
68
70
-
Required:
a) Calculate the four-quarterly moving average trend for this set of data.
b) Calculate the seasonal factors using either the additive model or the
multiplicative model, but not both.
c) Explain, but do not calculate how you would use the results in parts
(a) and (b) of this question to forecast the revenue for the last
quarter of 1993/4 and for the first three quarters of 1994/95.
B.
A company has a fleet of vehicles and is trying to predict the annual
maintenance cost per vehicle. The following data have been supplied for
a sample of vehicles:
Vehicle
number
Age in years
(x)
Maintenance
cost
Per annum
X 10
(y)
174
1
2
3
4
5
6
7
8
9
10
Measures of
2
8
6
8
10
4
4
2
6
10
60
132
100
120
150
84
90
68
104
140
Required:
a) Using the least squares technique calculate the values of a and b in
the equation
b) y = a + bx, to allow managers to predict the likely maintenance cost,
knowing the age of the vehicle.
c) Prepare a table of maintenance costs covering vehicles from 1 to 10
years of age, based on your calculations in (a).
d) Estimate the maintenance costs of a 12-year-old vehicle and comment
on the validity of making such an estimate.
QUESTION SEVEN
A company is building a model in order to forecast total costs based on
the level of output. The following data are available for last year:
Month
Output
000
units
(x)
16
20
23
25
25
19
16
12
19
Costs
000
(y)
January
170
February
240
March
260
April
300
May
280
June
230
July
200
August
160
Septembe
240
r
October
25
290
Novembe
28
350
Required:
r
a)
State
two
possible
December
12
200
reasons for the large
variation in output per month.
b) Plot a graph of output and costs, and comment on the relationship
observed.
174
Lesson Four
175
c) Using the least square technique, calculate the values of a an b in the
equation y = a + bx in order to predict costs given the output, and
explain the meaning of the calculated values.
d) Calculate the correlation coefficient between output and costs, and
comment on the value.
e) Prepare a forecast of the costs for the next two months, when output
will be 20,000 and 40,000 units respectively. Discuss the validity of
your forecast.
QUESTION EIGHT
Your company has been selling data base and spreadsheets for the last
four year and has found the business to vary with season. The quarterly
sales figures for the last four years are shown in table 6b1 and table 6b2
shows the deviation from the trend at the appropriate periods
176
Measures of
Table 6b1
Quarterly sales in 000s
Year
1983
1984
1985
1986
1987
Q1
Q2
360
430
500
590
Q3
530
750
660
710
Q4
354
395
509
521
Q1
Q2
Q3
-128
-145
-165
-37
12
43
276
153
153
Q4
-42
-93
-15
304
340
374
440
Table 6b2
Seasonal deviation from trend in 000s
Year
1983
1984
1985
1986
Required
i.
establish the trend figures from the data in the two tables
ii.
establish the seasonal variations for the four year period
iii.
plot the trend figures on a properly labeled time series graph
iv.
using your results from parts ii and iii forecast sales for 1987
quarter 2
QUESTION NINE
1. The directors of your company wish to make a serious study of the
heating costs of the **** block. The data for the last sixteen quarterly
periods are tabulated as follows.
Heating costs in
Quarter
Year
1980
1981
1982
1983
1984
Q1
Q2
Q3
1730
1950
1860
1910
1554
1595
1709
1721
1504
1540
1574
1640
Q4
1560
1630
1700
1790
Required
a) Assuming the additive model calculate the trend of heat costs
using the method of moving averages
b) Display the heating costs and the trend on a histogram ( a time
series graph)
c) Estimate the seasonal deviations from trend
176
Lesson Four
177
d) Estimate the heating costs for quarter IV of 1984 and comment
on any factors affecting the reliability of your forecast
178
Measures of
COMPREHESIVE ASSIGNMENT TWO

QUESTION ONE
a) In the just concluded higher education at Shoppers Paradise, Nairobi,
the College of Business Administration of Highland University states
in some of its promotional material that the average graduate of the
college earns over Sh.3 million a year. Assume, for simplicity, that
only four people have graduated to date; Sam, Tm, Jacqui and Mary
who earn Sh.1.6 million, Sh.1.8 million, Sh.1.8 million and Sh.2
million respectively in a year.
Required:
Compute the mean, median and the mode.
correct? (3 marks)
Is the colleges claim
b) Let us change our assumption about the number of graduates in (a)

above and instead assume that five people have graduated. They
consist of the four listed above and Suki who earns Sh.5.3 million per
year.
Required:
Compute the mean, median and the mode for the five graduates. Is
the colleges claim correct?
(3 marks)
c) Changing our assumption one more time about the number of
graduates, let us assume that six people have graduated. They
consist of the four original ones, Suki, who earns Sh.5.3 million a
year; and Bob who earns Sh.6.7 million a year.
Required:
i) Compute the mean, median and mode for the six graduates. Is the
colleges claim correct?
(2 marks)
ii) Comment on what happened to the mean, median and mode as you
moved from part (a) to (b) to (c) of this problem.
(2 marks)
iii) What do the results in (ii) above suggest about the relative stability
of the mean, median and the mode?
(2 marks)
iv) How do you feel about the ethics of this college in claiming that
their average graduates earn over Sh.3 million a year?
(2 marks)
d) Genuine athletic Company Ltd., manufactures weight-lifting
equipment. The companys top-of-the-line equipment are used in
events such as the Olympics and other prestigious professional
weight-lifting competitions. Consequently, it is very important that if
a barbell plat is stamped say, 50 kilogrammes, it weighs very close
178
Lesson Four
179
to 50 kilogrammes. In addition, a barbell plat must have a hole just
slightly larger than 1 centimeter in diameter so that it will slip onto
the 1 centimeter diameter bar easily but fit smoothly when it is in
place.
A recent sampling of barbell plates of 10 and 50 kilogrammes
revealed the following information:
i)
ii)
iii)
iv)
Weights of 10 kilogram plates had an arithmetic mean of 10.013

kilogrammes and a standard deviation of 0.124 kilogrammes.
Weights of 50 kilogram plates had an arithmetic mean of 50.032
kilogrammes and a standard deviation of 0.465 kilogrammes.
Diameters of holes in the 10 kilogram plates had an arithmetic
mean of 1.22 centimeters and a standard deviation of 0.187
centimeters.
Diameter of holes in eh 50 kilogram plates had an arithmetic mean
o f 1.20 centimeters and a standard deviation of 0.183
centimeters.
Required:
Determine whether the production process associated with one size of
barbell plant produced more variable results than the production
process associated with the other size.
(6 marks)
(Total: 20
marks)
QUESTION TWO
a) The index of industrial production in the Utopian country by July 2001
is given below:
Sector
Mining and
quarrying
Manufacturing:
Food, drink and
tobacco
Chemicals
Metal
Engineering
Textiles
Other manufacturing
Construction
- Gas, electricity and
water
Weight
41
July 2001 Index

(1994 = 100)
361
77
106
66
47
298
67
142
182
80
109
72
86
70
91
84
115
Required:
180
Measures of
i) Calculate the index of industrial production for all industries and

manufacturing industries.
(6 marks)
ii) Comment on your results.
(4
marks)
b) Explain some of the uses of index numbers.
(5 marks)
c) What are some of the limitations of index numbers?
(5 marks)
(Total: 20
marks)
QUESTION THREE
Leisure Publishers Ltd. recently published 20 romantic novels by 20
different authors. Sales ranged from just over 5,000 copies for one novel
about 24,000 copies for another novel. Before publishing, each novel
had been assessed by a reader who had given it a rating between 1 and
10. The managing director suspects that the main influence on sales is
the cover of the book. The illustrations on the front covers were drawn
either by artist A or artist B. the short description on the back cover of
the novel was written by either creditor C or editor D.
A multiple regression analysis was done using the following variables:
Y
Sales (million of shillings)
X1
1 if front cover is by artist A
2 if front cover is by artist B
X2
readers rating
X1
1 if the short description of the novel is by editor C
2 if the short description of the novel is by editor D
The computer analysis produced the following results:
Correlation coefficient
r = 0.921265
Standard error of estimate
= 2.04485
Analysis variance
Degrees of
freedom
Regressio
3
n
Residue
16
Individual analysis of variables
Variable
Coefficient
Constant
1
2
15.7588
-6.25485
0.0851136
Sum of
squares
375.37
Mean square
F ratio
125.12
29.923
66.903
1.1814
Standard
error
2.54389
0.961897
0.298272
F Value
38.375
42.284
0.081428
180
Lesson Four
181
3
5.86599
Correlation coefficients
1
-0.307729
1
0.922233
40.457741
0
0.123094
1
-0.674104
0.310838
0.627329
1
Required:
a) The regression equation.
(3
marks)
b) Does the regression analysis provide useful information? Explain.
(3 marks)
c) Explain whether the covers were more important for sales than
known quality of the novels.
(4 marks)
d) State with 95% confidence the difference in sales of a novel if its
cover illustrations were done by artist B instead of artist A.
(5 marks)
e) State with 95% confidence the difference in sales of a novel if its
short description was by editor D and not editor C.
(5 marks)
(Total:
20
marks)
QUESTION FOUR
a) Explain the difference between regression and correlation analysis .
(4 marks)
b) Explain why the existence of a significant correlation does not imply
causation.
(2 marks)
c) A bakery bakes cakes under the brand name super cakes. Irene
Juma, the manageress does not know the cost of each cake. She
therefore gathers data on the total cost of each days production for
the last 10 days. The results are shown in the table below;
182
Day
1
2
3
4
5
6
7
8
9
10
Measures of
Number of
cakes
(00 units)
22.5
21.0
27.5
21.5
30.0
20.0
24.0
26.5
18.3
17.0
Total cost
(Sh. 000)
23.0
21.6
23.3
24.0
28.2
22.4
23.1
25.3
20.1
16.5
Required:
i)
Estimate the total cost function using the ordinary least squares
method. State the fixed cost and unit cost.
(11 marks)
ii)
If each cake is sold at Sh.10, determine the break even number of

cakes.
(3 marks)
(Total: 20
marks)
QUESTION FIVE
Differentiate between additive model and the multiplicative model as
used in time series analysis.
(4 marks)
The sales data of XYZ Ltd. (in millions of shillings) for the years 2001 and
2004 inclusive are as given below:
Quarter
Year
2001
2002
2003
2004
1
40
42
46
54
2
64
84
78
78
3
124
150
154
184
4
58
62
96
106
Required:
i) The trend in the data using the least squares method.
(8 marks)
ii) The estimated sales for each quarter of year 2004.
(4 marks)
iii) The percentage variation of each quarters actual sales for year 2004.
(4 marks)
(Total: 20
marks)
182
Lesson Four
183
QUESTION SIX
a) Explain the following terms as used in index numbers:
i) Price index
marks)
ii) Quantity index
marks)
iii) Composite index
marks)
iv) Value index
marks)
(2
(2
(2
(2
b) The following prices and quantities reflect the average weekly

consumption pattern of a certain family for the years 2001 and 2002.
Year 2001
Price (p0)
Quantity
(q0)
Sh.
15
2
30
2
30
3
50
1
Item
Oranges (kg)
Milk (Litres)
Bread (Loafs)
Eggs (Dozens)
Year 2002
Price (p1)
Quantity
(q1)
Sh.
25
1
35
2
40
3
65
1
Required:
i) Price relatives for each item
marks)
ii) Laspeyres price index
marks)
iii) Paasche price index
marks)
(4
(4
(4
(Total: 20
marks)
QUESTION SEVEN
Explain three methods of fitting a trend in time series analysis.
(6 marks)
The quarterly sales data for Chuce hardware are given below:
Year
2000
2001
2002
2003
1
(Sh.
Million)
8.5
9.5
10.4
9.5
Quarter
2
3
(Sh.
(Sh.
Million)
Million)
10.4
7.5
12.2
8.8
13.5
9.7
11.7
8.4
4
(Sh.
Million)
11.8
13.6
13.1
12.9
184
2004
10.9
Measures of
13.7
10.1
15.0
Required:
(a)
The centred four-quarter moving averages.
marks)
(b)
The specific seasonal variation for each quarter
(3 marks)
(c)
The typical seasonal indices
marks)
(d)
Explain the third quarter typical seasonal index
(2 marks)
(6
(3
(Total: 20
marks)
184
Lesson Four
185
QUESTION EIGHT
a) A machine produces circular bolts and as a quality control test, 250
bolts were selected randomly and the diameter of their heads
measured as follows:
Diameter of
(cm)
0.9747
0.9750
0.9753
0.9756
0.9759
0.9762
0.9765
0.9768
0.9771
0.9774
0.9777
0.9780
-
head
0.9749
0.9752
0.9755
0.9758
0.9761
0.9764
0.9767
0.9770
0.9773
0.9776
0.9779
0.9782
Number of
components
2
6
8
15
42
68
49
25
18
12
4
1
Required:
b)
i)
Determine whether the customer is getting reasonable value if the
label on the circular bolt advertises that the average diameter of
the head is 0.97642 cm.
(8 marks)
ii)
In what situation would weighted mean be used?
(3 marks)
iii)
Describe briefly how to estimate the median on a grouped
frequency distribution graphically?
(3 marks)
iv)
Why is the mode not used extensively in statistical analysis?
(3 marks)
The standard deviation is the natural partner to the mean.
Explain
(3 marks)
(Total: 20
marks)
186
Lesson Five
LESSON FIVE
5. Probability
Contents
- Probability theory
- Bayes Theorem and conditional probability
- Permutations and combinations
- Discrete probability distributions
- Continuous probability distribution
186
Probability
187
5.1
PROBABILITY
Probability is a very popular concept in business management.
This is because it covers the risks which may be involved in certain
business situations. It is a fact that when a business investment is
being arranged, the outcome is usually uncertain. Therefore the
concept of probability may be used to describe the degree of
uncertainty of a particular business outcome
Probability may therefore be defied as the chances of a given
event occurring. Numerically, probability values range between 0
and 1. a probability of 0 implies that the event cannot occur at all.
A probability of 1 implies that the event will certainly occur.
Therefore other events have their probabilities with values lying
between 0 and 1
The formular used to determine probability is as follow
Probability (x) =
r
n
Favourable
outcomes
Totaloutcomes
Application of Probability in Business

1. Business games of chance e.g. Raffles Lotteries e.t.c.
2. Insurance firms: this is usually done when a new client or property is
being insured. The company has to be certain about the chances of
the insured risks occurring.
3. Business decision making regarding viability of projects thus the
projects with a greater probability has greater chances.
Example
A bag contains 80 balls of which 20 are red, 25 are blue and 35 are
white. A ball is picked at random what is the probability that the ball
picked is:
(i)
Red ball
(ii)
Black ball
(iii)
Red or Blue ball.
Solution
(i)
Probability of a red ball =

=
(ii)
(iii)
20
4
Number
of black
ballsinthebag
P B
Probability of black ball =
Totalnumber
of balls
0
0
=
80
P(R or B) =
20
80
or
25
80
80
Number
of redballs
inthebag
P R
Totalnumber
of ballsinthebag
20 25
80 80
9
16
Note: in probability or is replaced by a plus (+) sign. See addition

rule.
188
Lesson Five
Common terms
Events: an event is a possible outcome of an experiment or a result of a
trial or an observation.
Mutually exclusive events
A set of events is said to be mutually exclusive if the occurance of any
one of the events precludes the occurrence of any of the other events e.g.
when tossing a coin, the events are a head or a tail these are said to be
mutually exclusive since the occurrence of heads for instance implies
that tails cannot and has not occurred.
It can be represented in venn diagram as.
E1
E2
E1 E2 =
E1
E2
Non-mutually exclusive
events (independent
events)
E1 E2
Consider a survey in which a random sample of registered voters is
selected. For each voter selected their sex and political party affiliation
are noted. The events KANU and woman are not mutually exclusive
because the selection of KANU does not preclude the possibly that the
voter is also a woman.
Independent Events
Events are said to be independent when the occurance of any of the
events does not affect the occurrence of the other(s).
e.g. the outcome of tossing a coin is independent of the outcome of
the preceeding or succeeding toss.
188
Probability
189
Example
From a pack of playing cards what is the probability of;
(i)
Picking either a Diamond or a Heart mutually exclusive
(ii)
Picking eigher a Flower or an Ace endepent events
Solutions.
(i)
P(Diamond or Heart)
= P(Diamond) + P(Heart)
=
13 13 26
52 52 52
= 0.5
(ii)
P(Flower or Ace)
= P(Flower) + P(Ace) P(Flower and Ace)
=
=
13 4
1
52 52 52
4
52
= 0.31
Note: that the formula used incase of independent events is

different to the one of mutually exclusive.
Rules of Probability
(a)
Additional Rule This rule is used to calculate the probability of
two or more mutually exclusive events. In such circumstances the
probability of the separate events must be added.
Example
What is the probability of throwing a 3 or a 6 with a throw of a
die?
Solution
P(throwing a 3 or a 6) = 1 1 1
(b)
Multiplicative rule
This is used when there is a string of independent events for which
individual probability is known and it is required to know the
overall probability.
Example
What is the probability of a 3 and a 6 with two throws of a die?
Solution
P(throwing a 3) and P(6)
= P(3) and P(6) =
Note: 1)
1 1 1
6 6 36
In probability and is replaced by x multiplication.

190
Lesson Five
2)
P(x) and P(y) P(x and y) note that these two are
different. The first implies P(x) happening and P(y),
but if the order of which happened first is
unimportant then we have p(x and y).
In the example above:
P(3) and P(6) = 1
36
but
P(3 and 6) = P(3 followed by 6) or P(6 followed by 3)
= [P(3) P(6)] or [P(6) P(3)]
= 1
1 1
36 36 18
190
Probability
191
(c)
Conditional probability
This is the probability associated with combinations of events but
given that some prior result has already been achieved with one of
them.
Its expressed in the form of
P(x|y) = Probability of x given that y has already occurred.
P(x|y) =
P ( xy )
P( y)
conditional probability formula.
Example:
In a competitive examination. 30 candidates are to be selected. In all
600 candidates appear in a written test, and 100 will be called for the
interview.
(i)
What is the probability that a person will be called for the
interview?
(ii)
Determine the probability of a person getting selected if he has
been called for the interview?
(iii)
Probability that person is called for the interview and is selected?
Solution:
Let event A be that the person is called for the interview and event B that
he is selected.
(i)
(ii)
(iii)
P(A) =
100
600
= 1
30
P(B|A) =
100 10
P(AB) = P(A) P(B|A)

=
1 3 3 1
6 10 60 20
Example:
From past experience a machine is known to be set up correctly on 90%
of occasions. If the machine is set up correctly then 95% of good parts
are expected but if the machine is not set up correctly then the
probability of a good part is only 30%.
On a particular day the machine is set up and the first component
produced and found to be good. What is the probability that the machine
is set up correctly.
Solution:
This is displayed in the form of a probability
tree or diagram as follows:
CS GP
GP =
CS Correct
0.95
Setting
CS =
0.9
IS =
0.1
BP =
0.05
GP =
0.3
CS BP
IS Incorrect
Setting
IS
GP
GP Good
Product
BP = 0.7
IS
BP Bad Product
192
Lesson Five
P(CSGP) = 0.9 0.95 = 0.855

P(CSBP) = 0.9 0.05 = 0.045
P(ISGP) = 0.1 0.3 = 0.03
P(ISBP) = 0.1 0.7 = 0.07
1.00
- Probability of getting a good part (GP) = CSGP or ISGP
= CSGP + ISGP
= 0.855 + 0.03 = 0.885
Note: Good parts may be produced when the machine is correctly set up
and also when its incorrectly setup. In 1000 trials, 855 occasions when
its correctly setup and good parts produced (CSGP) and 30 occasions
when its incorrectly setup and good parts produced (ISGP).
- Probability that the machine is correctly set up after getting a good
part.
Number
of favourable
outcomes P(CSGP) 0.855
0.966
Totalpossible
outcomes
P(GP)
0.885
Or
= P(CS|GP) =
P(CSGP) 0.855
0.966
P(GP)
0.885
Example
In a class of 100 students, 36 are male are studying accounting, 9 are
male but not studying accounting, 42 are female and studying
accounting, 13 are female and are not studying accounting.
Use these data to deduce probabilities concerning a student drawn at
random.
Solution:
Male M
Female F
Total
P(M) =
Accounting
A
36
42
78
Not accounting
A
9
13
22
Total
45
55
100
45
0.45
100
192
Probability
193
P(F) =
55
0.55
100
78
0.78
P(A) =
100
22
0.22
P A =
100
P(M and A) = P(A and M) =
36
100
= 0.36
P(M and A ) = 0.09

P(F and A ) = 0.13
These probabilities can be express differently as;
P(M) = P(M and A) or P(M and A )
= 0.36 + 0.09 = 0.45
P(F) = P(F and A) or P(F and A )
= 0.42 + 0.13 = 0.55
P(A) = P(A and M) + P(A and F) = 0.36 + 0.42 = 0.78
P A = P( A and M) + P( A and F) = 0.09 + 0.13 = 0.22
Now calculate the probability that a student is studying accounting given
that he is male.
This is a conditional probability given as P(A|M)
P(A|M) =
P(AandM)
P(M)
0.36
0.80
0.45
From the formula above we get that,

P(A and M) = P(M) P(A|M) .. (i)
Note that P(A|M) P(M|A)
Since P(M|A) =
P A andM
P(A)
this is known as the Bayes rule.
Bayes rule/Theorem
This rule or theorem is given by
P(A|B) =
P A P B A
P(B)
Its used frequently in decision making where information is given in

form of condition probabilities and the reverse of these probabilities
must be found.
Example
Analysis of questionnaire complete by holiday makers showed that 0.75
classified their holiday as good at Malindi. The probability of hot
weather in the resort is 0.6. If the probability of regarding holiday as
good given hot weather is 0.9, what is the probability that there was hot
weather if a holiday maker considers his holiday good?
194
Lesson Five
Solution
P(A|B) =
P A P B A
P(B)
Let H = hot weather

G = Good
P(G) = 0.75 P(H) = 0.6 and P(G|H) = 0.9 (Probability of
regard holiday as good given hot weather)
Now the question requires us to get
P(H|G) = Probability of (there was) hot weather given that the
holiday has been rated as good).
=
0.6 0.9
P H P G H
P(G)
0.75
= 0.72.
Worked examples on probability
1. A machine comprises of 3 transformers A, B and C. The machine may
operate if at least 2 transformers are working. The probability of each
transformer working are given as shown below;
P(A) = 0.6, P(B) = 0.5, P(C) = 0.7
A mechanical engineer went to inspect the working conditions of those
transformers. Find the probabilities of having the following outcomes
i.
Only one transformer operating
ii.
Two transformers are operating
iii.
All three transformers are operating
iv.
None is operating
v.
At least 2 are operating
vi.
At most 2 are operating
Solution
P(A) =0.6
P(C) = 0.7
P( A ) = 0.4
P( C ) = 0.3
P(B) = 0.5
P(~B) = 0.5
i.
P(only one transformer is operating) is given by the following

possibilities
1st
2nd
3rd
P
(A
= 0.6 x 0.5 x 0.3 = 0.09
C)
B
P
(A
B
= 0.4 x 0.5 x 0.3 = 0.06
C)
P
(A
C)
= 0.4 x 0.5 x 0.7 = 0.14
B
P(Only one transformer working)
= 0.09 + 0.06 + 0.14 = 0.29
ii.
P
P
P
P(Only
P(only two transformers are operating) is

following possibilities.
1st
2nd
3rd
(A
B
= 0.6
C)
(A
C)
= 0.6
B
(A
B
C)
= 0.4
two transformers are operating)
given by the
x 0.5 x 0.3 = 0.09
x 0.5 x 0.7 = 0.21
x 0.5 x 0.7 = 0.14
194
Probability
195
iii.
= 0.09 + 0.21 + 0.14 = 0.44

P(all the three transformers are operating).
= P(A) x P(B) x P(C)
= 0.6 x 0.5 x 0.7
= 0.21
iv.
P(none of the transformers is operating).

= P( A ) x P( B ) x P( C )
= 0.4 x 0.5 x 0.3
= 0.06
v.
P(at least 2 working).

= P(exactly 2 working) + P(all three working)
= 0.44 + 0.21
= 0.65
vi.
P(at most 2 working).

= P(Zero working) + P(one working) + P(two working)
= 0.06 + 0.29 + 0.44
= 0.79
5.3
Permutations and Combination
Definition
Permutation
- This is an order arrangement of items in which the order must be
strictly observed
Example
Let x, y and z be any three items. Arrange these in all possible
permutations
1st
X
X
Y
Y
Z
Z
2nd
Y
Z
X
Z
Y
X
3rd
Z
Y
Z
X
X
Y
Six different permutations
196
Lesson Five
NB: The above 6 permutations are the maximum one can ever obtain in a
situation where there are only 3 items but if the number of items exceeds
3 then determining the no. of permutations by outlining as done above
may be cumbersome. Therefore we use a special formula to determine
such permutations. The formula is given below
The number of permutations of r items taken from a sample of n items
may be provided as nPr
n!
n - r !
! = factorial
E.g.
i.
3P3
=
=
=
ii.
5P3
=
=
=
iii.
7P5
=
=
=
=
3!
3 3 !
3 2 1
0!
NB 0! = 1
6
=6
1
5!
5 - 3 !
5 4 3 2 1
60
1 2
7!
7 - 5 !
7 6 5 4 3 2 1
2 1
5040
2
2520
Example
There are 6 contestants for the post of chairman secretary and treasurer.
These positions can be filled by any of the 6. Find the possible no. of
ways in which the 3 positions may be filled.
Solution
Chairman
Secretary
Treasurer
6
5
4
Therefore the no of ways of filing the three positions is 6 x 5 x 4 = 120
6P3
=
=
6!
6 - 3 !
6 5 4 3 2 1
3 2 1
720
6
120
196
Probability
197
Combinations
Definition
A combination is a group of times in which order is not important.
For a combination to hold at any given time it must comprise of the same
items but if a new item is added to the group or removed from the group
then we have a new combination
Example
3 items x, y and z will have 6 different permutation but only one
combination.
The following formular is usually used to determine the no. of
combinations in a given situation.
Cr
n!
r n - r !
Example
i.
Cr
=
=
=
=
ii.
C4
=
=
=
iii.
C3
8
7 8 7 !
8
7 !1!
8 7!
1 7!
6
6 6 4 !
6
6 !2 !
6 5 4!
4!
2 1
15
8
3 !5 !
=
=
8 7 6 5!
3 2 1 5!
56
Example
There is a committee to be selected comprising of 5 people from a group
of 5 men and 6 women. If the selection is randomly done. Find the
possibility of having the following possibilities (combinations)
i.
Three men and two women
ii.
At least one man and at least one woman must be in the
committee
iii.
One particular man and one particular woman must not be in
the committee (one man four women)
198
Lesson Five
Solution
i.
The committee size = 5 people
The group size = 5m + 6w
assuming no restrictions the committee can be selected in
11c5
the committee has to consist of 3m & 2w
these may be selected as follows.
5c3 x 6c2
P(committee 3m and 2w
=
=
=
=
5c3 6c2
11c5
5!
3! 2 !
6!
4!2!
5 4 3 2 1
3 2 1 2 1
11 !
5!6 !
6 5 4! 6!
5!
2 14!
11!
27
77
198
Probability
199
ii.
P(at least one man and at least one woman must be in the
committee)
The no. of possible combinations of selecting the committee
without any woman = 5C5
The probability of having a committee of five men only
5C 5
11C 5
1
462
the probability of having a committee of five women only

=
6C 5
11C 5
6!
11c6
5 !1!
6 5!
6!5!
5!1! 11 10 9 8 7 6!
6 5 4 3 2 1
=
=
11 10 9 8 7
1
77
P(at least one man and at least one woman)

= 1 {P(No man) + P(no woman)}
1
77 462
6 1
1 462
7
1 462
455
465
=1
=
=
=
iii.
P(one particular man and one particular woman must not be in

the committee would be determined as follows
The group size
=
5m + 6w
Committee size
=
5 people
Actual groups size from which to
Select the committee
=
4m + 5w
Committee
=
1m + 4w
The committee may be selected in 9c5
The one man may be selected in 4c1 ways
The four women may be selected in 5c4 ways
P(committee of 4w1man).
=
=
=
5c4 4c1
9c5
5!
6!
4 !1!
1! 3 !
5 4!
1!4!
4 3!
1 3!
9!
4 !5!
4!5!
9 8 7 6 5!
200
Lesson Five
=
10
63
5.4 DISCRETE PROBABILITY DISTRIBUTIONS

BINOMIAL PROBABILITY DISTRIBUTION
Binomial probability distribution is a set of probabilities for discrete
events. Discrete events are those whose results or outcomes can be
counted. Binomial probabilities are commonly encountered in business
situations e.g. in quality control activities the binomial probabilities are
frequently used especially when determining the probability of having a
certain no. of defective items in a given consignment.
- The binomial probability distribution is usually characterized by
the fact that the binomial events have to fulfill the following
properties
i.
Each event has 2 possible outcomes only known as success or
failure
ii.
The probability of each outcome is independent of the previous
outcomes
iii.
The sample size is generally fixed
iv.
The probabilities of success and failure tend to approach 0.5 if
the sample size increases
v.
The probabilities are given by the following equation
P(r) = nCr Pr ( 1- P)n-r
n!
r ! n - r !
Pr ( 1- P)n-r
Where P = Probability of success

r = no. of successes
n = sample size
q = 1 P = Probability of failure
Example 1
A medical survey was conducted in order to establish the proportion of
the population which was infected with cancer. The results indicated that
40% of the population were suffering from the disease.
A sample of 6 people was later taken and examined for the disease. Find
the probability that the following outcomes were observed
a) Only one person had the disease
b) Exactly two people had the disease
c) At most two people had the disease
d) At least two people had the disease
e) Three or four people had the disease
Solution
P(a persona having cancer)
=
P(a person not having cancer) =
a) P(only one person having cancer)
= 6c1 (0.4)(0.6)5
40%
60%
=
=
0.4
0.6
=P
=1P=q
200
Probability
201
=
6!
(0.4)1(0.6)5
5 !1!
= 0.1866
Note that from the formula
r n-r
n = sample size = 6
nCrP q :
p = 0.4
r = 1 = only one person having cancer
b) P(2 pple had the disease)
= 6c2 (0.4)2 (0.6)4
=
=
6!
(0.4) 2 (0.6)5
4!2!
6 5 4 !
4! 2 1
(0.4) 2 (0.6)5
= 15 x (0.4) 2 (0.6)5
= 0.311
c) P(at most 2) = P(0) + P(1) + P(2) = P(0) or P(1) or P(2)
So we calculate the probability of each and add them up.
P(0) = P(nobody having cancer)
= 6c0 (0.4) 0(0.6)6
=
6!
(0.4) 0(0.6)6
0 !6 !
= (0.6)6
= 0.0467
The probabilities of P(1) and P(2) have been worked out in part (a) and
(b)
Therefore P(at most 2) = 0.0467 + 0.1866 + 0.311 = 0.5443
d) P(at least 2)
= P(2) + P(3) + P(4) + P(5) + P(6)
= 1 [P(0) + P(1)] This is a shorter way of working out the
solution since
(P(0) + P(1) + P(2) + P(3) + P(4) + P(5) + P(6) = 1)
= 1 (0.0467 + 0.1866)
= 0.7667
e) P(3 or 4 people had the disease)
= P(3) +P(4)
= 6c3(0.4)3(0.6)3 + 6c4(0.4)4(0.6)2
=
6!
(0.4) 3(0.6)3
3!3!
6!
(0.4) 4(0.6)2
2! 4!
202
Lesson Five
= 6 5 4 3! (0.4) 3(0.6)3 + 6 5 4! (0.4) 4(0.6)2
3 2 1 3!
2 1 4!
= 20(0.4)3(0.6)3 + 15(0.4)4(0.6)2
= (20 0.013824) + (15 0.009216)
= 0.27648 + 0.13824
= 0.41472
202
Probability
203
Example 2
An insurance company takes a keen interest in the age at which a person
is insured. Consequently a survey conducted on prospective clients
indicated that for clients having the same age the probability that they
will be alive in 30 years time is
2 . This probability was established

3
using the actuarial tables. If a sample of 5 people was insured now, find
the probability of having the following possible outcomes in 30 years
a) All are alive
b) At least 3 are alive
c) At most one is alive
d) None is alive
e) At least 1 is alive
Sample size = 5
P(alive) =
3
1
P(not alive) =
a) P(all alive) = P(5)
5c52 1
3 3
5! 2 5 1 0
3
5!0! 3
23
32
243
b) P(at least 3 alive)

= P(3) + P(4) + P(5)
P(3)
5c32 1
3 3
5! 2 3 1 2
3
3!2! 3
5 4 3! 2 3 1 2
3
3!2 1 3
10 2 1
3 3
P(4)
80
243
5c42 1
3 3
5! 2 4 1 1
3
4!1! 3
204
Lesson Five
5 4! 2 4 1 1
3
4! 1! 3
80
243
P(at least 3 people alive)

=
80
80
32
+
+
243
243
243
192
243
c) P(at most one is alive)

= P(0) + P(1)
5c02 1 5c12 1
3 3
3 3
5! 2 0 1 5
5! 2 1 1 4
3
3
0!5! 3
4!1! 3
3 13
0
= 2
5 4! 2 1 1 4
3
4! 1! 3
10
234 + 243
11
243
d) P( none is alive)
5c02 1
3 3
5! 2 0 1 5
3
5!0! 3
1
243
e) P(at least one is alive)

= 1 P(non alive)
=1
=
242
1
243
243
POISSON PROBABILITY DISTRIBUTION

- This is a set of probabilities which is obtained for discrete events
which are described as being rare. Occasions similar to binominal
distribution but have very low probabilities and large sample size.
Examples of such are events in business are as follows:
i.
Telephone congestion at midnight
204
Probability
205
ii.
Traffic jams at certain roads at 9 oclock at night
iii.
Sales boom
iv.
Attaining an age of 100 years (Centurenean)
- Poisson probabilities are frequently applied in business situations
in order to determine the numerical probabilities of such events
occurring.
The formular used to determine such probabilities is as follows
e x
P(x) =
Where
X!
x= No. of successes
= mean no. of the successes in the sample ( =
np)
= lambda = np
e= 2.718
Example 1
A manufacturer assures his customers that the probability of having
defective item is 0.005. A sample of 1000 items was inspected. Find the
probabilities of having the following possible outcomes
i.
Only one is defective
ii.
At most 2 defective
iii.
More than 3 defective
e x
P(x) =
x!
( = np = 1000 0.005) = 5
i.
P(only one is defective) = P(1) = P(x = 1)
5
1
2.718
51
=
Note that 2.718-5=
5
2.718
1!
=
5
5
2.718
5
148.33
=
ii.
0.0337
P(at most 2 defective) = P(x 2)
=
P(0) + P(1) + P(2)
=
P(x = 0) =
2.718-5
1
2.718 5
e 5 50
0!
1
148.336
=
=
0.00674
P(x = 1) = 0.0337
P(x = 2)
2.7185 52
2!
206
Lesson Five
=
=
=
=
iii.
25
2 148.336
0.08427
P(x2) = 0.00674 + 0.0337 + 0.08427
0.012471
P(more than 3 defective) = P(x > 3)
= 1 P 0 P 1 P 2 P 3
BINOMIAL MATHEMATICAL PROPERTIES
1. The mean or expected value = n p = np
Where n = Sample Size
p = Probability of success
2. The variance = npq
Where q = probability of failure = 1 - p
3. The standard deviation = npq
Example
A firm manufacturing 45,000 units of nuts. The probability of having a
defective nut is 0.15
Calculate the following
i.
The expected no. of defective nuts
ii.
The variance and standard deviation of the defective nuts in a
daily consignment of 45,000
Solution
Sample size n = 45,000
P(defective) = 0.15 = p
P(non defective) = 0.85 = q
i.
the expected no of defective nuts
= 45,000 0.15 = 6,750
ii.
The variance = npq
= 45000 0.85 0.15
= 5737.50
The standard deviation = npq
= 5737.50
= 75.74
POISSON MATHEMATICAL PROPERTIES
1. The mean or expected value = np =
Where n = Sample Size
p = Probability of success
2. The variance = np =
3. Standard deviation = np=
Example
The probability of a rare disease striking a given population is 0.003. A
sample of 10000 was examined. Find the expected no. suffering from the
206
Probability
207
disease and hence determine the variance and the standard deviation for
the above problem
Solution
Sample size n = 10000
P(a person suffering from the disease) = 0.003 = p
expected number of people suffering from the disease
Mean = = 10000 0.003
= 30
= np =
variance = np = 30
Standard deviation = np =
= 30
= 5.477
5.5
PROBABILITY DISTRIBUTION FOR CONTINUOUS RANDOM

VARIABLES.
In a continuous distribution, the variable can take any value within a
specified range, e.g. 2.21 or 1.64 compared to the specific values taken
by a discrete variable e.g 1 or 3. The probability is represented by the
area under the probability density curve between the given values.
The uniform distribution, the normal probability distribution and the
exponential distribution are examples of a continuous distribution
- The normal distribution is a probability distribution which is used
to determine probabilities of continuous variables
Examples of continuous variables are
o Distances
o Times
o Weights
o Heights
o Capacity e.t.c
- Usually continuous variables are those, which can be measured by
using the appropriate units of measurement.
- Following are the properties of the normal distribution
1. The total area under the curve is = 1 which is equivalent to
the maximum value of probability
Line of symmetry
Normal probability
Distribution curve
Tail End
Tail End
Age
(Yrs)
208
Lesson Five
20
25
30
35
40
45
50
55
70
mean mode median

2. The line of symmetry divided the curve into two equal
halves
3. The two ends of the normal distribution curve continuously
approach the horizontal axis but they never cross it
4. The values of the mean, mode and median are all equal
NB: The above distribution curve is referred to as normal probability
distribution curve because if a frequency distribution curve is plotted
from measurements of a given sample drawn from a normal population
then a graph similar to the normal curve must be obtained.
- It should be noted that 68% of any population lies within one
standard deviation, 1
- 95% lies within two standard deviations 2
- 99% lies within three standard deviations 3
Where = standard deviation
STANDARDIZATION OF VARIABLES
- Before we use the normal distribution curve to determine
probabilities of the continuous variables, we need to standardize
the original units
of measurement, by using the following
formular.
Z=
Where = Value to be standardized
208
Probability
209
Z = Standardization of x
= population mean
= Standard deviation
Example
A sample of students had a mean age of 35 years with a standard
deviation of 5 years. A student was randomly picked from a group of 200
students. Find the probability that the age of the student turned out to be
as follows
i.
Lying between 35 and 40
ii.
iii.
iv.
Lying beyond 45 yrs
v.
Lying beyond 30 yrs
vi.
Lying below 25 years
Solution
i. The standardized value for 35 years
Z=
35 - 35
5
= 0
The standardized value for 40 years

Z=
40 - 35
=1
5
the area between Z = 0 and Z = 1 is 0.3413 (These values are

checked from the normal tables see appendix)
The value from standard normal curve tables.
When z = 0, p = 0
And when z = 1, p = 0.3413
Now the area under this curve is the area between z = 1 and z = 0
= 0.3413 0 = 0.3413
the probability age lying between 35 and 40 yrs is 0.3413
ii. 30 and 40 years

30 35
=
5

40 35
Z=
=
Z=
5
5
= -1
1
the area between Z = -1 and Z = 1 is

= 0.3413 (lying on the positive side of zero) + 0.3413 (lying on the
negative side of zero)
P = 0.6826
the probability age lying between 30 and 40 yrs is 0.6826
iii. 25 and 30 years
Z=

25 35
=
10
= -2
5
210
Lesson Five
Z=

30 35
=
= -1
the area between Z = -2 and Z = -1

Probability area corresponding to Z = -2
= 0.4772 (the z value to check from the tables is 2)
Probability area corresponding to Z = -1
= 0.3413 (the z value for this case is 1)
the probability that the age lies between 25 and 30 yrs
= 0.4772 0.3413 (The area under this curve)
P = 0.1359
iv. P(beyond 45 years) is determined as follow = P(x > 45)
45 35
10

Z=
=
=
=+2
5
5
Probability corresponding to Z = 2
between 35 and 45
P(Age > 45yrs) = 0.5000 0.4772
= 0.0228
= 0.4772 = probability of
The exponential distribution

The exponential distribution is of particular importance because of the
wide ranging nature of the practical situations in which it is used.
Examples
1. The length of time until an electronic devise fails
2. The time required to wait for the first emission of a particle
from a radio active source
3. The length of time between successive accidents in a large
factory
Assume that a probability density function f(x) is valid between the
values a and b, then
(i)..
f ( x) dx 1 i.e. The area under the curve is equal to 1
(ii).The
mean of the distribution E(x) = d x f(x) dx

(iii)
The variance of the distribution = E(x2) [E(x)]2
Where E(x2) = bd x2 f(x) dx
Example of continuous probability distribution function
The distribution of a random variable x has a probability density function
f(x) given by
F(x) = kx for 0 x 1
F(x) = 0 elsewhere
Where K is constant
i.
Show the value of K is 2
210
Probability
211
ii.
iii.
iv.
Find the mean of f(x)

Find the variance of f(x)
To find the median m, we need the value of m which makes
2 3 1
x]0
3
2
2
= ( 0) =
3
3
2
mean =
3
1
0 2x2 dx = [
iii.
Variance = bd x2 f(x) dx (mean) 2

= 01 x2 x 2x x dx (
=
4 1
=-
2 2
)
3
4
9
4
9
1
18
1
Variance =
18
iv. Let upper quartile be U and lower quartile L

= 00 f(x) dx =
=00 2xdx =
i.e.
= [x2]uo = Giving U2 =
Hence U
3
2
Similarly L0 f(x) dx =
L
i.e.
0 2xdx =
Giving L2 = and L =
Interquartile range
3
2
3 1]
0 f(x) dx =
show that the median is
v.
To find the interquartile range we need to evaluate the

following integrals and to subtract the second from the first
upper quartile
0 f(x) dx =
0 f(x) dx =
Lower quartile
Obtain the quartile range

Solution
= 10 kx dx = 1 (ba f(x) dx = 1)
212
Lesson Five
21
= kx 0 = 1
2
= [ k 0] = 1 i.e. K = 2
ii.
Mean = ba xf (x) dx
= 10 x X kx dx Where k = 2
Exponential distribution
Example
The mean life of an electrical component is 100 hours and its life has an
exponential distribution.
Find
a. The probability that it will last less than 60 hours
b. The probability that it will last more than 90
hours
Solution
A continuous random variable X has an exponential distribution, if for
some constant k (>0) it has the probability density function
F(x) =[Ke-kx, x 0]
[0, otherwise]
The function f(x) is positive for all values of x and the area under the
curve
0 f(x) dx = 0 ke-kx dx = 1
The mean of an exponential distribution with parameter K is 1/K and its
variance is 1/K2
a) P(x <60) = 600 1/100e 1/100x dx
[mean = 100 hours hences k
=)
[e1/100x ]600 = 1 e-0.6
=
0.45 (2dp)
b) P(x> 90 = 1 P(x 90)
= 1 - 900 1/100e 1/100x dx
= 1 - [e0.9]600 = e-0.9
=
0.41 (2dp)
The students t distribution
The students t distribution was presented by W. S. Gasset in 1908 under
the pen name of student. The t distribution is of great importance in the
so called small sample tests and is profoundly used in statistical
inference
The t distribution has a single parameter, known as the number of
degrees of freedom. It is denoted by the Greek symbol (read as nu). It
can be interpreted as the number of useful items of information
generated by a sample of given size. The degrees of freedom are sample
size less one (v= n-1)
Properties of t distribution
212
Probability
213
1.
2.
3.
4.
5.
The t distribution ranges from to first as does the

normal distribution
The t distribution like the standard normal distribution is
bell shaped and symmetrical around mean zero
The shapes of the t distribution changes as the number of
degrees of freedom changes
The t distribution is more platykurtic that the normal
distribution
The t distribution has a greater dispersion than the standard
normal distribution. As n gets larger the t distribution
approaches the normal distribution when n = 30 the
difference is very small
214
Lesson Five
Relation between the t distribution and standard normal distribution is
shown in the following diagram
Standard normal distribution

T distribution n = 15
T distribution n = 5
-4
-3
-2
-1
Note that the t distribution has different shapes depending on the size of
the sample. When the sample is quite small the height of the t
distribution is shorter than the normal distribution and the tails are
wider.
Assumptions of t distribution
1. The sample observations are random
2. The population standard deviation is known
3. Samples are draw from normal distribution
4. The size of sample is thirty or less n 30
Application of t distribution
Estimation of population mean from small samples
Test of hypothesis about the population mean
Test of hypothesis about the difference between two means
Chi Square distribution
Chi square was first used by Karl Pearson in 1900. It is denoted by the
Greek letter 2. it contains only one parameter, called the number of
degrees of freedom (d-f), where the term degree of freedom represents
the number of independent random variables that express the chi square
Properties
1.
Its critical values vary with the degree of freedom. For every
increase in the number of degrees of freedom there is a new
2 distribution.
214
Probability
215
2.
3.
4.
This possesses additional property so that when 21 and 22

are independent and have a chi square distribution with n1
and n2 degrees of from 21 + 22 will also be distributed as
a chi square distribution with n1 + n2 degrees of freedom
Where the difference is 3.0 and less the distribution of 2 is
skewed. But, for degrees of freedom greater than 30 in a
distribution, the values of 2 are normally distributed
The 2 function has only one parameter, the number of
degrees of freedom.
5.
=1
P(x)
=2
=3
=4
=5
10
2
6. 2 distribution is a continuous probability distribution which
has the value zero at its lower limit and extends to infinity in
the positive direction. Negative value of 2 is not possible
because the differences between the observed and expected
frequencies are always squared
F distribution or Variance ratio distribution
It was developed by R. A fisher in 1924 and is usually defined in terms of
the ratio of the variances of two normally distribution populations
It is used to test the hypothesis that the two normally distributed
populations have two equal variances
216
Lesson Five
F distribution ratio of the variances between two normally distributed
s12
population may be expressed as
s22
d12
d22
With 1 = n1 1 and 2 = n2 2 degrees of freedom

Where normal population means are unknown
N1 sample size of independent random 1
N2 sample size of independent random 2
S12 - Sample variance of 1
S22 sample variance of 2
d12 - Population variance of 1
d22 Population variance of 2
S12 and S22 are given by
S12 =
S22 =
if d
2
1
2
x1 x '1
as the unbiased estimator of d12
v1 n1 1
x 2 x'2 2
v2 n2 1
= d2
as the unbiased estimator of d22
S12
Largest estimate of variance
then the statistic F = 2 =
Smallest
estimate of variance
S2
F Distribution with n1 1 and n2 1 degrees of freedom. F distribution

depends on the degrees of freedom 1 for the numerator and 2 for the
denominator. It has parameters 1 and 2 such that for different values
of 1 and 2 we have different distributions.
Properties
1.
The shape of the f distribution depends upon the number of
degrees of freedom
2.
The mean and variance of the f distribution are
Mean = 1 for 2 >2
-v2 - 2
2 v1 v2 2
2V2
Variance
=
for 2 > 4
V1 V2 2 2 v2 4
3.
4.
The f distribution is positively skewed and its skew ness

decreases with increases in 1 and 2
The value of f must be positive or zero since variances are
squares and can never assume negative values
216
Probability
217
Assumptions
a) All sample observations are randomly selected and independent
b) The total variance of the various sources of variance should be
additive.
c) The ratio of S12 to S22 should be equal to or greater than 1
d) The population for each sample must be normally distributed with
identical mean of variance
e) F value can never be negative
218
Lesson Five
QUESTION ONE
The quality controller, Mr. Brooks, at Queensville Engineers has become
aware of the need for an acceptance sampling programme to check the
quality of bought-in components. This is of particular importance for a
problem the company is currently having with batches of pump shafts
bought in from a local supplier. Mr. Brooks proposes the following
criteria to assess whether or not to accept a large batch of pump shafts
from this supplier.
From each batch received take a random sample of 50 shafts, and accept
that batch if no more than two defectives are found in the sample.
Mr. Brooks needed to calculate the probability of accepting a batch P a ,
when the proportion of defectives in the batch, p, is small (under 10%,
say)
Required:
a)
Explain why the Poisson distribution is appropriate to
invstigate this situation.
b)
Using the Poisson distribution, determine the probability of
accepting a batch Pa, containing p=2% defectives if the method is
used.
c)
Determine Pa, for p = 0%, 5%, 10%, 15% and hence plot a
graph showing the relationship between Pa (on the vertical axis)
and p (on the horizontal axis) .
Use this graph to estimate
1)
The proportion of defectives which must not be
exceeded if the supplier needs to be 95% certain that the batch
will be accepted.
2)
The proportion of defectives in the batch for which
there is only a 5% probability of acceptance by Queensville.
Briefly outline the importance of these values to the supplier.
QUESTION TWO
A woven cloth is liable to contain faults and is subjected to an inspection
procedure. Any fault has a probability of 0.7 that it will be detected by
the procedure, independent of whether any other fault is detected or not.
Required:
a) If a piece of cloth contains three faults, A, B and C,
i)
Calculate the probability that A and C are detected, but that B
is undetected;
ii)
Calculate the probability that any two of A, B and C be
detected, the other fault being undetected;
iii)
State the relationship between your answers to parts (i) and (ii)
and give reasons for this.
218
Probability
219
b) Suppose now that, in addition to the inspection procedure given
above, there is a secondary check which has a probability of 0.6 of
detecting each fault missed by the first inspection procedure. This
probability of 0.6 applies independently to each and ever fault
undetected by the first procedure.
i)
Calculate the probability that a piece of cloth with one fault has
this fault undetected by both the inspection procedure and the
secondary check;
ii)
Calculate the probability that a piece of cloth with two faults
has one of these faults detected by either the inspection
procedure or the secondary check, and one fault undetected by
both;
iii)
Of the faults detected, what proportion are detected by the
inspection procedure and what proportion by the secondary
check?
QUESTION THREE
A company ha three production sections S 1,S2 and S3 which contribute
40%,35% and 25%, respectively, to total output. The following
percentages of faulty units have been observed:
2%
(0.02)
S1
3%
(0.03)
S2
4%
(0.04)
S3
There is a final check before output is dispatched. Calculate the
probability that a unit found faulty at this check has come from section 1,
S1
QUESTION FOUR
Assuming a Binomial Distribution what is the probability of a salesman
making 0,1,2,3,4,5 or 6 sales in 6 visits if the probability of making a sale
on a visit is 0.3?
Do not use tables for this question.
QUESTION FIVE
Records show that 60% of students pass their examinations at first
attempt. Using the normal approximation to the binomial, calculate the
probability that at least 65% of a group of 200 students will pass at the
first attempt.
QUESTION SIX
A batch of 5000 electric lamps has a mean life of 1000 hours and a
standard deviation of 75 hours. Assume a normal distribution.
a)
How many lamps will fail before 900 hours?
220
Lesson Five
b)
c)
d)
How many lamps will fail between 950 and 1000 hours?
What proportion of lamps will fail before 925 hours?
Given the same mean life, what would the standard
deviation have to be to ensure that no more than 20% of lamps
fail before 916 hours?
220
Sampling and Estimation

221
LESSON SIX
6. Sampling and Estimation
-
Sampling techniques
Central limit theorem
Sampling distribution of statistical parameters
Test of hypothesis
6.1
Methods of Sampling
a . Random or probability sampling methods
they include
i.
Simple random sampling
ii.
Stratified sampling
iii.
Systematic sampling
iv.
Multi stage sampling
b. Non random probability sampling methods
these consist of
i.
ii.
iii.
Judgment sampling
Quota sampling
Cluster sampling
Simple Random Sampling

This refers to the sampling technique in which each and every item of
the population is given an equal chance of being included in the sample.
Since selection of items in the sample depends entirely on chance, this
method is also called chance selection or representative sampling.
It is assumed that if the sample is chosen at random and if the size of the
sample is sufficiently large, it will represent all groups in the population
Random sampling is of 2 types; sampling with replacement and sampling
without replacement
Sampling is said to be with replacement when from a finite population a
sampling unit is drawn observed and then returned to the population
before another unit is drawn. The population in this case remains the
same and a sampling unit might be selected more than once
If on the other hand a sampling unit is chosen and not retuned to the
population after it has been observed the sampling is said to be without
replacement.
Random samples may be selected by the help of lottery method or table
of random numbers (such as tippets table of random numbers, fischer
and Yates numbers or Kendall and Babington smith numbers.)
Stratified sampling
In this case the population is divided into groups in such a way that units
within each group are as similar as possible in a process called
222
Lesson Six
stratification. The groups are called strata. Simple random samples from
each of the strata are collected and combined into a simple. This
technique of collecting a sample from a population is called stratified
sampling. Stratification may be by age, occupation income group e.t.c.
222

223
Systematic Sampling
This sampling is a part of simple random sampling in ascending or
descending orders. In systematic sampling a sample is drawn according
to some predetermined object. Suppose a population consists of 1000
units, then every tenth, 20 th or 50th item is selected. This method is very
easy and economical. It also saves a lot of time
Multistage sampling
This is similar to stratified sampling except division is done on
geographical/location basis, e.g. a country can be divided into provinces
and then survey is done in 4 towns in each province. This helps to cut
traveling costs for a surveyor.
Cluster Sampling
This is where a few geographical regions e.g. a location, town or village
are selected at random and say every single household or shop in that
area is interviewed this again cuts on costs.
Judgment Sampling
Here the interviewer selects whom to interview believing that their view
is more fundamental since they might be directly affected e.g. to find out
effects of public transport one may chose to interview only people who
dont own cars and travel frequently to work.
6.2
THE CENTRAL LIMIT THEOREM
The theory was introduced by De Moivre and according to it; if we
select a large number of simple random samples, say from any
population and determine the mean of each sample, the
distribution of these sample means will tend to be described by
the normal probability distribution with a mean and variance
2/n. This is true even of the population itself is not normal distribution.
Or the sampling distribution of sample means approaches to a normal
distribution irrespective of the distribution of population from where the
sample is taken and approximation to the normal distribution becomes
increasingly close with increase in sample sizes
Types of distribution
Population distribution
It refers to the distribution of the individual values of population. Its
mean is denoted by
Sample distribution
It is the distribution of the individual values of a single sample. Its mean
is generally written as x . it is not usually the same as
Distribution of Sample Means or sampling distribution
A sample of size n is taken from the parent population and mean of the
sample is calculated. This is repeated for a number of samples so that we
224
Lesson Six
have a distribution of sample means, which approaches a normal
distribution.
Standard errors of the mean
The series of sample means X 1 , X 2 , X 3 .. is normally distributed or
nearly so (according to the central limit theorem). It can be described by
its mean and its standard deviation. This standard deviation is known as
the standard error.
s
n
Note: this formular is satisfactory for larger samples and a large
population i.e. n > 30 and n > 5% of N.
- The word error is in place of deviation to emphasize that variation
among sample means is due to sampling errors.
- The smaller the standard error the greator the precision of the
sample value.
Standard error of the mean = Sx
6.3
Statistical inference
It is the process of drawing conclusions about attributes of a population
based upon information contained in a sample (taken from the
population).
It is divided into estimation of parameters and testing of hypothesis.
Symbols for statistic of population parameters are as follows.
Sample
Statistic
Arithmetic mean
Standard deviation
Number of items
s
n
Population
Parameter
Statistical estimation
It is the procedure of using statistic to estimate a population parameter
It is divided into point estimation (where an estimate of a population
parameter is given by a single number) and interval estimation (where
an estimate of a population is given by a range which the parameter may
be considered to lie) e.g. a bus meant to take a class of 100 students
(population N) for trip has a limit to the maximum weight of 600kg of
which it can carry, the teacher realizes he has to find out the weight of
the class but without enough time to weigh everyone he picks 25
students selected at random (sample n = 25). These students are
weighed and their average weight recorded as 64kg ( X - mean of a
sample) with a standard deviation (s), now using this the teacher intends
to estimate the average weight of the whole class ( population mean)
by using the statistical parameters standard deviation (s), and mean of
the sample ( x ).
224

225
(i)
(ii)
(iii)
(iv)
Characteristic of a good estimator

Unbiased: where the expected value of the statistic is equal
to the population parameter e.g. if the expected mean of a
sample is equal to the population mean
Consistency: where an estimator yields values more closely
approaching the population parameter as the sample
increases
Efficiency: where the estimator has smaller variance on
repeated sampling.
Sufficiency: where an estimator uses all the information
available in the data concerning a parameter
Confidence Interval
The interval estimate or a confidence interval consists of a range (an
upper confidence limit and lower confidence limit) within which we are
confident that a population parameter lies and we assign a probability
that this interval contains the true population value
The confidence limits are the outer limits to a confidence interval.
Confidence interval is the interval between the confidence limits. The
higher the confidence level the greater the confidence interval. For
example
A normal distribution has the following characteristic
i.
Sample mean 1.960 includes 95% of the population
ii.
Sample mean 2.588 includes 99% of the population
1.
LARGE SAMPLES
These are samples that contain a sample size greater than 30(i.e. n>30)
(a)
Estimation of population mean
Here we assume that if we take a large sample from a population then
the mean of the population is very close to the mean of the sample
Steps to follow to estimate the population mean includes
i.
Take a random sample of n items where (n>30)
ii.
Compute sample mean ( X ) and standard deviation (S)
iii.
Compute the standard error of the mean by using the following
formular
Sx =
iv.
v.
s
n
where S x = Standard error of mean

S = standard deviation of the sample
n = sample size
Choose a confidence level e.g. 95% or 99%
Estimate the population mean as under
Population mean = appropriate number XS x
Appropriate number means confidence level e.g. at 95%
confidence level is 1.96 this number is usually denoted by Z
and is obtained from the normal tables.
226
Lesson Six
Example
The quality department of a wire manufacturing company periodically
selects a sample of wire specimens in order to test for breaking strength.
Past experience has shown that the breaking strengths of a certain type
of wire are normally distributed with standard deviation of 200 kg. A
random sample of 64 specimens gave a mean of 6200 kgs. Find out the
population mean of 95% level of confidence
Solution
Population mean = 1.96 S x
Note that sample size is alredy n > 30 whereas s and x are given thus
step i), ii) and iv) are provided.
Here: X = 6200 kgs
Sx =
s
=
n
200
=
64
25
Population mean
= 6200 1.96(25)
= 6200 49
= 6151 to 6249
At 95% level of confidence, population mean will be in between 6151 and
6249
FINITE POPULATION CORRECTION FACTOR
If a given population is relatively of small size and sample size is more
than 5% of the population then the standard error should be adjusted by
multiplying it by the finite population correction factor
FPCF is given by
N n
n 1
where N = population size

n = sample size
Example
A manager wants an estimate of sales of salesmen in his company. A
random sample 100 out of 500 salesmen is selected and average sales
are found to be Shs. 75,000. if a sample standard deviation is Shs. 15000
then find out the population mean at 99% level of confidence
Solution
Here N = 500, n = 100, X = 75000 and S = 15000
Now
Standard error of mean
= Sx =
s
n
15000
x
100
N n
n 1
500 100
500 1
226

227
15000
400
x
10
499
15000
=
(0.895)
10
Sx
= 1342.50 at 99% level of confidence
Population mean
= X 2.58 S x
=shs 75000 2.58(1342.50)
=shs 75000 3464
= Shs 71536 to 78464
b)
Estimation of difference between two means
We know that the standard error of a sample is given by the value of the
standard deviation ()divided by the square root of the number of items
in the sample ( n ).
But, when given two samples, the standard errors is given by
S X
AX B =
S A2 S B2
n A nB
Also note that we do estimate the interval not from the mean but from
the difference between the two sample means i.e. X A X B .
The appropriate number of confidence level does not change
Thus the confidence interval is given by;
X A X B Confidence level S X X
= X
X B Z S X A X B
Example
Given two samples A and B of 100 and 400 items respectively, they have
the means X1 = 7 ad X 2 = 10 and standard deviations of 2 and 3
respectively. Construct confidence interval at 70% confidence level?
Solution
A
B
X1 = 7
X 2 = 10
n1 = 100
n2 = 400
S1 = 2
S2 = 3
The standard error of the samples A and B is given by
Sample
S X
AX B
25
=
400
=
=
4
9
100 400
5
20
0.25
228
Lesson Six
At 70% confidence level, then appropriate number is equal to 1.04 (as
read from the normal tables)
X 1 X 2 = 7 10 = - 3 = 3
We take the absolute value of the difference between the means e.g. the
value of /X/ = absolute value of X i.e. a positive value of X.
Confidence interval is therefore given by
= 3 1.04 (0.25 ) From the normal tables a z value of 1.04 gives
a value of 0.7.
= 3 0.26
= 3.26 and 2.974
Thus 2.974 X 3.26
Example 2
A comparison of the wearing out quality of two types of tyres was
obtained by road testing. Samples of 100 tyres were collected. The miles
traveled until wear out was recorded and the results given were as
follows
Tyres
T1
T2
Mean
X1 = 26400 miles X 2 = 25000 miles
Variance
S21= 1440000 miles
S22= 1960000 miles
Find a confidence interval at the confidence level of 70%
Solution
=
26400
X1
X 2 = 25000
Difference between the two means
X 1 X 2 = (26400 25000)
= 1,400
Again we take the absolute value of the difference between the two
means
We calculate the standard error as follows
S X
AX B
S12 S22
n1 n2
1, 440, 000 1,960, 000
100
100
=
184.4
Confidence level at 70% is read from the normal tables as 1.04 (Z =
1.04).
Thus the confidence interval is calculated as follows
= 1400 (1.04) (184.4)
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229
= 1400 191.77
or (1400 191.77) to (1400 + 191.77)
1,208.23 X 1591.77
c) Estimation of population proportions
This type of estimation applies at the times when information cannot be
given as a mean or as a measure but only as a fraction or percentage
The sampling theory stipulates that if repeated large random samples
are taken from a population, the sample proportion p will be normally
distributed with mean equal to the population proportion and standard
error equal to
Sp =
Pq
= Standard error for sampling of
n
population proportions
Where n is the sample size and q = 1 p.
The procedure for estimating a proportion is similar to that for
estimating a mean, we only have a different formular for calculating
standard error is different.
Example 1
In a sample of 800 candidates, 560 were male. Estimate the population
proportion at 95% confidence level.
Solution
Here
Sample proportion (P) =
560
= 0.70
800
q = 1 p = 1 0.70 = 0.30
n = 800
pq
=
n
0.70 0.30
800
Sp = 0.016
population proportion
= P 1.96 Sp where 1.96 = Z.
= 0.70 1.96 (0.016)
= 0.70 0.03
= 0.67 to 0.73
= between 67% to 73%
Example 2
230
Lesson Six
A sample of 600 accounts was taken to test the accuracy of posting and
balancing of accounts where in 45 mistakes were found. Find out the
population proportion. Use 99% level of confidence
Solution
Here
n = 600; p =
45
= 0.075
600
q = 1 0.075 = 0.925
Sp =
pq
=
n
0.075 0.925
600
= 0.011
Population proportion
= P 2.58 (Sp)
= 0.075 2.58 (0.011)
= 0.075 0.028
= 0.047 to 0.10
= between 4.7% to 10%
d) Estimation of difference between population proportions
Let the two proportions be given by P1 and P2, respectively
Then the difference (absolute) between the two proportions is given by
(P1 P2)
The standard error is given by
S P1 P2 =
p1n1 p2 n2
pq pq
where p =
and q = 1 - p
n1 n2
n1 n2
Then given the confidence level, the confidence interval between the two
population proportions is given by
(P1 P2) Confidence level S P1 P2
= (P1 P2) Z
Where P =
pq pq
n1 n2
p1n1 p2 n2
always remember to convert P1 & P2 to P.
n1 n2
2.
SMALL SAMPLES
(a)
Estimation of population mean
If the sample size is small (n<30) the arithmetic mean of small samples
are not normally distributed. In such circumstances, students t
distribution must be used to estimate the population mean.
230

231
In this case
Population mean = X ts x
X = Sample mean
Sx =
s
n
S = standard deviation of samples =
x x
n 1
for small samples.
n = sample size
v = n 1 degrees of freedom.
The value of t is obtained from students t distribution tables for the
required confidence level
Example
A random sample of 12 items is taken and is found to have a mean
weight of 50 grams and a standard deviation of 9 grams
What is the mean weight of population
a) with 95% confidence
b) with 99% confidence
Solution
X 50; S = 9; v = n 1 = 12 1 = 11;
Sx
s
9
n
12
= x ts x
At 95% confidence level
= 50 2.262
12
= 50 5.72 grams
Therefore we can state with 95% confidence that the population mean is
between 44.28 and 55.72 grams
At 99% confidence level
12
= 50 3.25
= 50 8.07 grams
Therefore we can state with 99% confidence that the population mean is
between 41.93 and 58.07 grams
Note: To use the t distribution tables it is important to find the degrees of
freedom (v = n 1). In the example above v = 12 1 = 11
232
Lesson Six
From the tables we find that at 95% confidence level against 11 and
under 0.05, the value of t = 2.201
6.4
Hypothesis Testing
Definition
- A hypothesis is a claim or an opinion about an item or issue. Therefore
it has to be tested statistically in order to establish whether it is correct
or not correct
- Whenever testing an hypothesis, one must fully understand the 2 basic
hypothesis to be tested namely
i.
The null hypothesis (H0)
ii.
The alternative hypothesis(H 1)
The null hypothesis
This is the hypothesis being tested, the belief of a certain characteristic
e.g. Kenya Bureau of Standards (KBS) may walk to a sugar making
company with an intention of confirming that the 2kgs bags of sugar
produced are actually 2kgs and not less, they conduct hypothesis testing
with the null hypothesis being: H0 = each bag weighs 2kgs. The testing
will set out to confirm this or to refute it.
The alternative hypothesis
While formulating a null hypothesis we also consider the fact that the
belief might be found to be untrue hence we will reject it. We therefore
formulate an alternative hypothesis which is a contradiction to the null
hypothesis, thus when we reject the null hypothesis we accept the
alternative hypothesis.
In our example the alternative hypothesis would be
H1 = each bag does not weigh 2kg
Acceptance and rejection regions
All possible values which a test statistic may either assume consistency
with the null hypothesis (acceptance region) or lead to the rejection of
the null hypothesis (rejection region or critical region)
The values which separate the rejection region from the acceptance
region are called critical values
Type I and type II errors
While testing hypothesis (H0) and deciding to either accept or reject a
null hypothesis, there are four possible occurrence.
a) Acceptance of a true hypothesis (correct decision) accepting the null
hypothesis and it happens to be the correct decision. Note that
statistics does not give absolute information, thus its conclusion could
be wrong only that the probability of it being right are high.
b) Rejection of a false hypothesis (correct decision).
c) Rejection of a true hypothesis (incorrect decision) this is called
type I error, with probability = .
d) Acceptance of a false hypothesis (incorrect decision) this is called
type II error, with probability = .
232

233
Levels of significance
A level of significance is a probability value which is used when
conducting tests of hypothesis. A level of significance is basically the
probability of one making an incorrect decision after the statistical
testing has been done. Usually such probability used are very small e.g.
1% or 5%
0.5000
0.4900
1% provision for errors
Critical value
or
5% = 0.05000
0.4500
Critical value (-1.65)
Critical region
NB: If the standardized value of the mean is less than 1.65 we reject the
null hypothesis (H0) and accept the alternative Hypothesis (H 1) but if the
standardized value of the mean is more than 1.65 we accept the null
hypothesis and reject the alternative hypothesis
The above sketch graph and level of significance are applicable when the
sample mean is < (i.e. less than the population mean)
234
Lesson Six
The following is used when sample mean > population mean
Acceptance region
Critical region
(rejection region)
5% = 0.05
Z = 1.65 (critical value)
NB: If the sample mean standardized value < 1.65, we accept the null
hypothesis but reject the alternative. If the sample mean value > 1.65 we
reject the null hypothesis and accept the alternative hypothesis
The above sketch is normally used when the sample mean given is
greater than the population mean
Accept null hyp( reject

Alternative hyp)
Reject null hyp
(accept alt hyp)
Reject null hyp

(accept alt hyp)
0.05% = 0.05
0.495
0.495
-2.58
0.5% = 0.05
+2.58
NB: if the standardized value of the sample mean is between 2.58 and
+2.58 accept the null hypothesis but otherwise reject it and therefore
accept the alternative hypothesis
234

235
TWO TAILED TESTS
A two tailed test is normally used in statistical work(tests of significance)
e.g. if a complaint lodged by the client is about a product not meeting
certain specifications i.e. the item will generate a complaint if its
measurements are below the lower tolerance limit or above the upper
tolerance limit
Region of acceptance
for
H0
Critical region
Critical region
15cm
17 cm
NB: Alternative hypothesis is usually rejected if the standardized value of

the sample mean lies beyond the tolerant limits (15cm and 17 cm).
ONE TAILED TEST
This is a test where the alternative hypothesis (H 1:) is only concerned
with one of the tails of the distribution e.g. to test a business complaint if
the complaint is above the measurements of item being shorter than is
required.
E.g. a manufacturer of a given brand of bread may state that the average
weight of the bread is 500 gms but if a consumer takes a sample and
weighs each of the pieces of bread and happens to have a mean of 450
gms he will definitely complain about the bread which is underweight.
The statistical analysis to be done will concentrate on the left tail of the
normal distribution in which one will have to establish whether 450 gms
being less than 500g is statistically significant. Such a test therefore is
referred to as one tailed test.
236
Lesson Six
left
On the other hand the test may compuliate on the right hand tail of the
normal distribution when this happens the major complaint is likely to do
with oversize items bought. Therefore the test is known as one tailed as
the focus is on one end of the normal distribution.
5%
level
significance
1%
level
significance
of
of
Number of standard
errors
Two tailed
One tailed
test
test
1.96
1.65
2.58
2.33
HYPOTHESIS TESTING PROCEDURE

Whenever a business complain comes up there is a recommended
procedure for conducting a statistical test. The purpose of such a test is
to establish whether the null hypothesis or alternative hypothesis is to be
accepted.
The following are steps normally adopted
1. Statement of the null and alternative hypothesis
2. Statement of the level of significance to be used.
3. Statement about the test statistic i.e. what is to be tested e.g. the
sample mean, sample proportion, difference between sample
means or sample proportions
4. Type of test whether two tailed or one tailed.
5. Statement on critical values using the appropriate level of
significance
6. Standardizing the test statistic
7. Conclusion showing whether to accept or reject the null
hypothesis
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237
STANDARD HYPOTHESIS TESTS
In principal, we can test the significance of any statistic related to any
probability distribution. However we will be interested in a few standard
cases. The sample statistics mean, proportion and variance, are related
to the normal, t, F, and chi squared distributions
Thus
238
Lesson Six
1. Normal test
Test a sample mean ( X ) against a population mean () (where
samples size n > 30 and population variance 2 is known) and sample
proportion, P(where sample size np >5 and nq >5 since in this case
the normal distribution can be used to approximate the binomial
distribution
2. t test
Tests a sample mean ( X ) against a population mean and especially
where the population variance is unknown and n < 30.
3. Variance ratio test or f test
It is used to compare population variances and it is used with samples
of any size drawn from normal populations.
4. Chi squared test
It can be sued to test the association between attributes or the
goodness of fit of an observed frequency distribution to a standard
distribution
Example 1
A certain NGO carried out a survey in a certain community in order to
establish the average at which the girls are married. The results of the
survey indicated that the marriage age for the girls is 19 years
In order to establish the validity of the mean marital age, a sample of 50
women was interviewed and the average age indicated that they got
married at the age of 16 years. However the different ages at which they
were married differed with the standard deviation of 2.1years
The sample data indicates that the marital age is less 19 years. Is this
conclusion true or not ?
Required
Conduct a statistical test to either support the above conclusion drawn
from the sample statistics i.e. the marriage age is less than 19 use a level
of significance of 5%
Solution
1. Null hypothesis
H0: (mean marital age) = 19 years
Alternative hypothesis
H1: (mean marital age) < 19 years
2. The level of significance is 5%
3. The test statistics is the sample mean age, X = 16 years
4. The critical value of the one tailed test (one tailed because the
alternative hypothesis is an inequality) at 5% level of significance
is 1.65
238

239
Acceptance region
Rejection region
- 1.65
5. The standardizes value of the sample mean is

X -
S
Z
=
where Sx =
Sx
n
Where,
X = Sample mean
= Population mean
S = sample standard deviation
n = sample size
z = standard value (as per computation)
The standard value Z must fall within the acceptance region for us
to accept the null hypothesis. Thus it must be > - 1.65 otherwise
we accept the alternative hypothesis.
Z
16 19
2.1
50
= - 10.1
6. Since 10.1 < -1.65, we reject the null hypothesis but accept the
alternative hypothesis at 5% level of significance i.e. the marriage
age in this community is significantly lower than 19 years
Example 2
A foreign company which manufactures electric bulbs has assured its
customers that the lifespan of the bulbs is 28 month with a standard
deviation of 4months
Recently the company embarked on a quality improvement research for
their product. After the research using new technology. A sample of 70
bulbs was tested and they gave a mean lifespan of 30.2 months
240
Lesson Six
Does this justify the research undertaken? Use 1% level of significance to
conduct a statistical test in order to establish the truth about the above
question.
Testing procedure
1. Null hypothesis H0: = 28
Alternative hypothesis H1: > 28
2. The level of significance is 1% (one tailed test)
3. The test statistics is the sample mean age, x = 30.2
4. The critical value of the one tailed test at 5% level of significance
is + 2.33
0.4900
1% = 0.01
2.33
5. The standardized value of the sample mean is
Z
X
Sx
30.2 28
4
70
= 4.6
6. Since 4.6 > 2.33, we reject the null hypothesis but accept the
alternative hypothesis at 1% level of significance i.e. the new
sample mean life span is statistically significant higher than the
population mean
Therefore the research undertaken was worth while or justified
Example 3
A construction firm has placed an order that they require a consignment
of wires which have a mean length of 10.5 meters with a standard
deviation of 1.7 m
The company which produces the wires delivered 90 wires, which had a
mean length of 9.2 m., The construction company rejected the
consignment on the grounds that they were different from the order
placed.
Required
Conduct a statistical test to indicate whether you support or not support
the action taken by the construction company at 5% level of significance.
240

241
Solution
Null hypothesis = 10.5 m
Alternative hypothesis 10.5 m
Level of significance be 5%
The test statistics is the sample mean X = 9.2m
The critical value of the two tailed test at 5% level of significance is
1.96 (two tailed test).
242
Lesson Six
- 1.96
+1.96
The standardized value of the test Z =

Z
X -
SX
9.2 10.5
1.7
90
= - 7.25
Since 7.25 < 1.96, reject the null hypothesis but accept the
alternative hypothesis at 5% level of significance i.e. the sample mean
is statistically different from the consignment ordered by the
construction company. Therefore support the action taken by the
construction company
TESTING THE DIFFERENCE BETWEEN TWO SAMPLE MEAN
(LARGE SAMPLES)
A large sample is defined as one which contains 30 or more items (n30)
Where n is the sample size
In a business those involved are constantly observant about the
standards or specifications of the item which they sell e.g. a trader may
receive a batch of items at one time and another batch at a later time at
the end he may have concluded that the two samples are different in
certain specifications e.g. mean weight mean lifespan, mean length e.t.c.
further it may become necessary to establish whether the observed
differences are statistically significant or not. If the difference are
statistically significant then it means that such differences must be
explained i.e. there are known causes but if they are not statistically
significant then it means that the difference observed have no known
causes and are mainly due to chance
If the differences are established to be statistically significant then it
implies that the complaints, which necessitated that kind of test, are
justified
Let X1 and X2 be any two samples whose sizes are n1 and n2 and mean X 1
and X 2. Standard deviation S1 and S2 respectively. In order to test the
242

243
difference between the two sample means, we apply the following
formular
Z
X1 X 2
S X1 X 2
where S X 1 X 2
S12 S22
n1 n2
Example 1
An agronomist was interested in the particular fertilize yield output. He
planted maize on 50 equal pieces of land and the mean harvest obtained
later was 60 bags per plot with a standard deviation of 1.5 bags. The
crops grew under natural circumstances and conditions without the soil
being treated with any fertilizer. The same agronomist carried out an
alternative experiment where he picked 60 plots in the same area and
planted the same plant of maize but a fertilizer was applied on these
plots. After the harvest it was established that the mean harvest was 63
bags per plot with a standard deviation of 1.3 bags
Required
Conduct a statistical test in order to establish whether there was a
significant difference between the mean harvest under the two types of
field conditions. Use 5% level of significance.
Solution
H0 : 1 = 2
H1 : 1 2
Critical values of the two tailed test at 5% level of significance are 1.96
The standardized value of the difference between sample means is given
by Z where
=
=
X1 X B
S X1 X 2
where S X 1 X 2 =
60 63
0.045 0.028
11.11
1.52 1.32
50
60
244
Lesson Six
- 1.96
+1.96
Since 11.11 < -1.96, we reject the null hypothesis but accept the
alternative hypothesis at 5% level of significance i.e. the difference
between the sample mean harvest is statistically significant. This implies
that the fertilizer had a positive effect on the harvest of maize
Note: You dont have to illustrate your solution with a diagram.
244

245
Example 2
An observation was made about reading abilities of males and females.
The observation lead to a conclusion that females are faster readers than
males. The observation was based on the times taken by both females
and males when reading out a list of names during graduation
ceremonies.
In order to investigate into the observation and the consequent
conclusion a sample of 200 men were given lists to read. On average
each man took 63 seconds with a standard deviation of 4 seconds
A sample of 250 women were also taken and asked to read the same list
of names. It was found that they on average took 62 second with a
standard deviation of 1 second.
Required
By conducting a statistical hypothesis testing at 1% level of significance
establish whether the sample data obtained does support earlier
observation or not
Solution
H0: 1 = 2
H1: 1 2
Critical values of the two tailed test is at 1% level of significance is 2.58.
Z
X1 X 2
S X1 X 2
63 62
42
200
1
250
2
3.45
Acceptance region
Rejection region
- 2.58
+2.58
+3.45
Since 3.45 > 2.33 reject the null hypothesis but accept the alternative
hypothesis at 1% level of significance i.e. there is a significant
246
Lesson Six
difference between the reading speed of Males and females, thus
females are actually faster readers.
TEST OF HYPOTHESIS ON PROPORTIONS
This follows a similar method to the one for means exept that the
standard error used in this case:
Sp =
Pq
n
Z score is calculated as, Z =
P
Sp
Where P = Proportion found
in the sample.
the hypothetical
proportion.
Example
A member of parliament (MP) claims that in his constituency only 50% of
the total youth population lacks university education. A local media
company wanted to acertain that claim thus they conducted a survey
taking a sample of 400 youths, of these 54% lacked university education.
Required:
At 5% level of significance confirm if the MPs claim is wrong.
Solution.
Note: This is a two tailed tests since we wish to test the hypothesis that
the hypothesis is different () and not against a specific
alternative hypothesis e.g. < less than or > more than.
H0 : = 50% of all youth in the constituency.
H1 : 50% of all youth in the constituency.
pq
0.5 x0.5
=
= 0.025
n
400
0.54 0.50
Z=
= 1.6
0.025
Sp =
at 5% level of significance for a two-tailored test the critical value is 1.96

since calculated Z value < tabulated value (1.96).
i.e. 1.6 < 1.96 we accept the null hypothesis.
Thus the MPs claim is accurate.
HYPOTHESIS TESTING OF THE DIFFERENCE BETWEEN
PROPORTIONS
Example
Ken industrial manufacturers have produced a perfume known as
fianchetto. In order to test its popularity in the market, the
manufacturer carried a random survey in Back rank city where 10,000
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247
consumers were interviewed after which 7,200 showed preference. The
manufacturer also moved to area Rook town where he interviewed
12,000 consumers out of which 1,0000 showed preference for the
product.
Required
Design a statistical test and hence use it to advice the manufacturer
regarding the differences in the proportion, at 5% level of significance.
Solution
H0 : 1 = 2
H1 : 1 2
The critical value for this two tailed test at 5% level of significance =
1.96.
Now Z =
P1 P2 1 2
S P1 P2
But since the null hypothesis is 1 = 2, the second part of the numerator
disappear i.e.
1 - 2 = 0 which will always be the case at this level.
Then Z =
P1 P2
S P1 P2
Where;
Sample 1
n1 =
10,000
Sample size
Sample proportion of
success
Population proportion of
success.
Now
S p1 p2 =
Where P =
P1 =
1.2
10
Sample 2
n2 =
12,000
P2 = 0.83
pq pq
n1 n2
p1n1 p2 n2
n1 n2
And q = 1 p
in our case
10, 000(0.72) 12, 000(0.83)
P=
10, 000 12, 000
248
Lesson Six
=
84, 000
22, 000
= 0.78
q = 0.22
0.78 0.22 0.78 0.22
S P1 P2
10, 000
12, 000
= 0.00894
0.72 0.83
Z=
0.00894
12.3
Since 12.3 > 1.96, we reject the null hypothesis but accept the
alternative. the differences between the proportions are statistically
significant. This implies that the perfume is much more popular in
Rook town than in Back rank city.
HYPOTHESIS TESTING ABOUT THE DIFFERENCE BETWEEN
TWO PROPORTIONS
Is used to test the difference between the proportions of a given attribute
found in two random samples.
The null hypothesis is that there is no difference between the population
proportions. It means two samples are from the same population.
Hence
H0 : 1 = 2
The best estimate of the standard error of the difference of P1 and P2 is
given by pooling the samples and finding the pooled sample proportions
(P) thus
p1n1 p2 n2
n1 n2
P=
Standard error of difference between proportions
S p1 p2
And Z =
pq pq
n1 n2
P1 P2
S p1 p2
Example
In a random sample of 100 persons taken from village A, 60 are found to
be consuming tea. In another sample of 200 persons taken from a village
B, 100 persons are found to be consuming tea. Do the data reveal
significant difference between the two villages so far as the habit of
taking tea is concerned?
Solution
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249
Let us take the hypothesis that there is no significant difference between
the two villages as far as the habit of taking tea is concerned i.e. 1 = 2
We are given
P1 = 0.6;
n1 = 100
P2 = 0.5;
n2 = 200
Appropriate statistic to be used here is given by
p1n1 p2 n2
n1 n2
0.6 100 0.5 200
=
100 200
= 0.53
= 1 0.53
= 0.47
pq pq
n1 n2
S P1 P2 =
=
0.53 0.47 0.53 0.47

100
200
= 0.0608
0.6 0.5
Z=
0.0608
= 1.64
Since the computed value of Z is less than the critical value of Z = 1.96
at 5% level of significance therefore we accept the hypothesis and
conclude that there is no significant difference in the habit of taking tea
in the two villages A and B
t distribution (students t distribution) tests of hypothesis (test
for small samples n < 30)
For small samples n < 30, the method used in hypothesis testing is
exactly similar to the one for large samples exept that t values are used
from t distribution at a given degree of freedom v, instead of z score, the
standard error Se statistic used is also different.
Note that v = n 1 for a single sample and n 1 + n2 2 where two sample
are involved.
a) Test of hypothesis about the population mean
When the population standard deviation (S) is known then the t statistic
is defined as
t
X
SX
where S X
S
n
Follows the students t distribution with (n-1) d.f. where

X = Sample mean
= Hypothesis population mean
250
Lesson Six
n = sample size
and S is the standard deviation of the sample calculated by the formula
S=
X X
n 1
for n < 30
If the calculated value of t exceeds the table value of t at a specified level

of significance, the null hypothesis is rejected.
Example
Ten oil tins are taken at random from an automatic filling machine. The
mean weight of the tins is 15.8 kg and the standard deviation is 0.5kg.
Does the sample mean differ significantly from the intended weight of
16kgs. Use 5% level of significance.
Solution
Given that n = 10; x = 15.8; S = 0.50; = 16; v = 9
H0 : = 16
H1 : 16
0.5
10
= SX
t
=
=
15.8 16
0.5
10
0.2
0.16
= -1.25
The table value for t for 9 d.f. at 5% level of significance is 2.26. the
computed value of t is smaller than the table value of t. therefore,
difference is insignificant and the null hypothesis is accepted.
b) Test of hypothesis about the difference between two means
The t test can be used under two assumptions when testing hypothesis
concerning the difference between the two means; that the two are
normally distributed (or near normally distributed) populations and that
the standard deviation of the two is the same or at any rate not
significantly different.
Appropriate test statistic to be used is
t
X1 X 2
S X X 2
1
at n1 + n2 2 d.f.
The standard deviation is obtained by pooling the two sample standard

deviation as shown below.
250

251
Sp =
n1 1 S12 n2 1 S22
n1 n2 2
Where S1 and S2 are standard deviation for sample 1 & 2

respectively.
Sp
Sp
and S X 2 =
n1
n2
Now S X 1 =
S X1X 2 =
S X2 S X2 2
1
n n2
Alternatively S X 1 X 2 = Sp 1
n1n2
Example
Two different types of drugs A and B were tried on certain patients for
increasing weights, 5 persons were given drug A and 7 persons were
given drug B. the increase in weight (in pounds) is given below
Drug A
Drug B
8
10
12
8
16
12
9
15
3
6
11
Do the two drugs differ significantly with regard to their effect in

increasing weight? (Given that v= 10; t0.05 = 2.23)
Solution
H0 : 1 = 2
H1 : 1 2
t=
X1 X 2
S X1X 2
Calculate for X 1 , X 2 and S

X1
X1 X 1
(X1 X 1 )2
8
-1
1
12
+3
9
13
+4
16
9
0
0
3
-6
36
X1 =
45
X1 =
(X1 X 1 ) =
0
X
n1
45
=9
5
X2
10
8
12
15
6
8
11
X2=
70
(X1 X 1 )2=
62
X2 =
X
n2
70
10
7
(X2 X 2 )
0
-2
+2
+5
-4
-2
+1
(X2 X 2 ) =
0
(X2 X )2
0
4
4
25
16
4
1
(X2 X 2 )2=
54
252
Lesson Six
S1 =
Sp =
62
= 3.94
4
S2 =
54
3
6
4 15.5 6 9
10
= 3.406
S X1X 2
75
11.6 11.6
or 3.406
5 7
5
7
= 1.99
t
X1 X 2
S X1X 2
9 10
1.99
= 0.50
Now t0.05 (at v = 10) = 2.23 > 0.5
Thus we accept the null hypothesis.
Hence there is no significant difference in the efficacy of the two drugs in
the matter of increasing weight
Example
Two salesmen A and B are working in a certain district. From a survey
conducted by the head office, the following results were obtained. State
whether there is any significant difference in the average sales between
the two salesmen at 5% level of significance.
252

253
No. of sales
Average sales in shs
Standard deviation in shs
Solution
H0 : 1 = 2
H1 : 1 2
Where
Sp =
A
20
170
20
B
18
205
25
n1 1 S12 n2 1 S22
n1 n2 2
S X 1 X 2 = Sp n1 n2
n1n2
Where: X 1 =170, X 2 = 205, n1 = 20, n2 = 18, S1 = 20, S2 = 25, V = 36
Sp =
19 202 17 252
20 18 2
= 22.5
38
S X 1 X 2 22.5
360
= 7.31
t=
170 205
7.31
= 4.79
t0.05(36) = 1.9 (Since d.f > 30 we use the normal tables)
The table value of t at 5% level of significance for 36 d.f. when d.f. >30,
that t distribution is the same as normal distribution is 1.9. since the
value computed value of t is more than the table value, we reject the null
hypothesis. Thus, we conclude that there is significant difference in the
average sales between the two salesmen
Testing the hypothesis equality of two variances
The test for equality of two population variances is based on the
variances in two independently selected random samples drawn from two
normal populations
Under the null hypothesis 12 22
254
Lesson Six
F=
s12
12
s22
22
F=
S12
which is the test statistic.
S 22
Now under the H0 : 12 22 it follows that
Which follows F distribution with V 1 and V2 degrees of freedom. The

larger sample variance is placed in the numerator and the smaller one in
the denominator
If the computed value of F exceeds the table value of F, we reject the null
hypothesis i.e. the alternate hypothesis is accepted
Example
In one sample of observations the sum of the squares of the deviations of
the sample values from sample mean was 120 and in the other sample of
12 observations it was 314. test whether the difference is significant at
5% level of significance
Solution
Given that n1 = 10, n2 = 12, (x1 X 1 )2 = 120
(x2 X 2 )2 = 314
Let us take the null hypothesis that the two samples are drawn from the
same normal population of equal variance
H0 : 12 22
H1: 12 22
Applying F test i.e.
F=
S12
S 22
X1 X 1
n1 1
X 2 X 2
n2 1
120
9
314
11
13.33
28.55
since the numerator should be greater than denominator

F=
28.55
13.33
254

255
The table value of F at 5% level of significance for V 1 = 9 and V2 = 3.11.
Since the calculated value of F is less than the table value, we accept the
hypothesis. The samples may have been drawn from the two population
having the same variances.
Chi square hypothesis tests (Non-parametric test)(X2)
They include amongst others
i.
Test for goodness of fit
ii.
Test for independence of attributes
iii.
Test of homogeneity
iv.
Test for population variance
The Chi square test (2) is used when comparing an actual (observed)
distribution with a hypothesized, or explained distribution.
2
It is given by; =
O E
E
Where O = Observed frequency
E = Expected frequency
The computed value of 2 is compared with that of tabulated 2 for a
given significance level and degrees of freedom.
i.
Test for goodness of fit
This tests are used when we want to determine whether an actual sample
distribution matches a known theoretical distribution
The null hypothesis usually states that the sample is drawn from the
theoretical population distribution and the alternate hypothesis usually
states that it is not.
Example
Mr. Nguku carried out a survey of 320 families in Ateka district, each
family had 5 children and they revealed the following distribution
No. of boys
5
4
3
2
1
0
No. of girls
0
1
2
3
4
5
No. of families
14
56
110
88
40
12
Is the result consistent with the hypothesis that male and female births
are equally probable at 5% level of significance?
Solution
If the distribution of gender is equal probable then the distribution
conforms to a binomial distribution with probability P(X) = .
Therefore
H0 = the observed number of boys conforms to a binomial
distribution with P =
H1 = The observations do not conform to a binomial distribution.
On the assumption that male and female births are equally probable the
probability of a male birth is P = . The expected number of families
can be calculated by the use of binomial distribution. The probability of
male births in a family of 5 is given by
P(x) = 5cX Px q5-x (for x = 0, 1, 2, 3, 4, 5,)
256
Lesson Six
= 5cX ( )5 (Since P = q = )
To get the expected frequencies, multiply P(x) by the total number N =
320. The calculations are shown below in the tables
x
P(x)
Expected frequency =
NP(x)
= 1 32
320 1 32 = 10
= 5 32
320 5 32 = 50
= 10 32
320 10 32 = 100
= 10 32
320 10 32 = 100
= 5 32
320 5 32 = 50
= 1 32
320 1 32 = 10
c0 ( ) 5
c1 ( ) 5
c2 ( ) 5
c3 ( ) 5
c4 ( ) 5
c5 ( ) 5
Arranging observed and expected frequencies in the following table and

calculating x2
O
E
(O E) 2
(O E) 2 /E
14
10
16
1.60
56
50
16
0.72
110
100
100
1.00
88
100
144
1.44
40
50
100
2.00
12
10
4
0.40
(0 E) 2 /E = 7.16
2
O E
= 7.16
The table of 2 for V = 6 1 = 5 at 5% level of significance is 11.07. The
computed value of 2 = 7.16 is less than the table value. Therefore the
hypothesis is accepted. Thus it can be concluded that male and female
births are equally probable.
ii)
Test of independence of attributes
This test disclosed whether there is any association or relationship
between two or more attributes or not. The following steps are required
to perform the test of hypothesis.
1. The null and alternative hypothesis are set as follows
H0: No association exists between the attributes
H1: an association exists between the attributes
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257
2. Under H0 an expected frequency E corresponding to each
cell in the contingency table is found by using the formula
E=
RC
n
Where R = a row total, C = a column total and n = sample

size
3. Based upon the observed values and corresponding
expected frequencies the 2 statistic is obtained using the
formular
2 =
O E
4. The characteristic of this distribution are defined by the

number of degrees of freedom (d.f.) which is given by
d.f. = (r-1) (c-1),
Where r is the number of rows and c is number of columns
corresponding to a chosen level of significance, the critical
value found from the chi squared table
5. The calculated value of 2 is compared with the tabulated
value 2 for (r-1) (c-1) degrees of freedom at a certain level
of significance. If the computed value of 2 is greater than
the tabulated value, the null hypothesis of independence is
rejected. Otherwise we accept it.
Example
A sample of 200 people where a particular devise was selected of these
100 were given a drug and the others were not given any drug. The
results are as follows
Drug
No drug
Total
Cured
65
55
120
Not cured
35
45
80
Total
100
100
200
Test whether the drug will be effective or not, at 5% level of significance.
Solution
Let us take the null hypothesis that the drug is not effective in curing the
disease.
Applying the 2 test
The expected cell frequencies are computed as follows
E11 =
R1C1
120 100
=
n
200
60
E12 =
R1C2
120 100
=
n
200
60
E21 =
R2C1
80 100
=
n
200
40
258
Lesson Six
E22 =
R2C2
80 100
=
n
200
40
The table of expected frequencies is as follows

60
60
40
40
100
100
O
65
35
35
45
(O E) 2
25
25
25
25
E
60
40
40
40
Arranging the observed frequencies

frequencies in the following table we get
2 =
O E
with
120
80
200
(O E) 2 /E
0.417
0.625
0.417
0.625
(O E) 2 /E = 2.084
their
corresponding
= 2.084
2
V= (r 1) (c-1) = (2 1) (2 1) = 1; tabulated ( 0.05) = 3.841
The calculated value of 2 is less than the table value. The hypothesis is
accepted. Hence the drug is not effective in curing the disease.
Test of homogeneity
It is concerned with the proposition that several populations are
homogenous with respect to some characteristic of interest e.g. one may
be interested in knowing if raw material available from several retailers
are homogenous. A random sample is drawn from each of the population
and the number in each of sample falling into each category is
determined. The sample data is displayed in a contingency table
The analytical procedure is the same as that discussed for the test of
independence
Example
A random sample of 400 persons was selected from each of three age
groups and each person was asked to specify which types of TV
programs be preferred. The results are shown in the following table
Type of program
Age group
Under 30
30 44
A
120
10
B
30
75
C
50
15
Total
200
100
258

259
45 and above
10
30
60
100
Total
140
135
125
400
Test the hypothesis that the populations are homogenous with respect to
the types of television program they prefer, at 5% level of significance.
Solution
Let us take hypothesis that the population are homogenous with respect
to different types of television program they prefer
Applying 2 test
O
E
(O E) 2
(O E) 2 /E
120
70.00
2500.00
35.7143
10
35.00
625.00
17.8571
10
35.00
625.00
17.8571
30
67.50
1406.25
20.8333
75
33.75
1701.56
50.4166
30
33.75
14.06
0.4166
50
62.50
156.25
2.500
15
31.25
264.06
8.4499
60
31.25
826.56
26.449
(O E) 2 /E = 180.4948
2 =
O E
The table value of 2 for 4d.f. at 5% level of significance is 9.488

The calculated value of 2 is greater than the table value. We reject the
hypothesis and concluded that the population are not homogenous with
respect to the type of TV programs preferred, thus the different age
groups vary in choice of TV programs.
260
Lesson Six
SUMMARY OF FORMULAE IN HYPOTHESIS
Testing
(a)
Hypothesis testing of mean

For n>30
Z=
S
X
Where S X
at level of significance.
SX
n
For n < 30
t=
S
X
where S X
SX
n
at n 1 d.f
level of significance
(b)
Difference between means

For n > 30
Z=
X1 X B
S X1X 2
Where S
X1X 2
S12 S22
n1 n2
At = level of significance
For n < 30
t=
X1 X 2
at n1 + n2 2 d.f
S X1X 2
where S X 1 X 2 S p
and S p
(c)
n1 1 S12 n2 1 S22
n1 n2 2
Hypothesis testing of proportions

Z=
P
Sp
Where: Sp =
(d)
n1 n2
n1n2
Pq
n
P = Proportion found in sample

q=1p
= hypothetical proportion
Difference between proportions
260

261
Z=
P1 P2
S P1 P2
Where:
pq pq
n1 n2
p1n1 p2 n2
p=
n1 n2
S P1 P2
(e)
q=1P
Chi-square test
X2 =
(f)
O E
Where O = observed frequency

Column total Row total
E=
= expected frequency
SampleSize
F test (variance test)
S12
F= 2
S2
here the bigger value between the standard deviations make the
numerator.
262
Lesson Six
QUESTION ONE
A firm purchases a very large quantity of metal off-cuts and wishes to
know the average weight of an off-cut. A random sample of 625 off-cuts is
weighed and it is found that the mean sample weight is 150 grams with a
sample standard deviation of 30 grams. What is the estimate of the
population mean and what is the standard error of the mean? What
would be the standard error if the sample size was 1225?
QUESTION TWO
A sample of 80 is drawn at random from a population of 800. The sample
standard deviation was found to be 6 grams.
- What is the finite population correction factor?
- What is the approximation of the correction factor?
- What is the standard error of the mean?
QUESTION THREE
State the Central Limit Theorem
QUESTION FOUR
a)
b)
c)
d)
e)
f)
What is statistical inference?

What is the purpose of estimation?
What are the properties of good estimators?
What is the standard error of the mean?
What are confident limits?
When is the Finite Population Correction Factor used? What is the
formula?
g) How are population proportions estimated?
h) What are the characteristics of the t distribution?
QUESTION FIVE
a) From a random sample of 529 televisions off the production line it
was found that each set had 8 faults on average with a standard
deviation of 3.45 faults.
What are the confidence limits for the production as a whole: at the
99% level; at the 95% level?
b) A random sample of 10 packets was taken and found to have a mean
weight of 50 grams and a standard deviation of 9 grams.
What is the mean weight of the population.
i. With 95%confidence.
ii. With 99% confidence?
262

263
QUESTION SIX
A market research agency takes a sample of 1000 people and finds that
200 know of Brand X. After an advertising campaign a further sample of
1091 people is taken and its found that 240 know of Brand X.
It is required to know if there has been an increase in the number of
people having an awareness of Brand X at the 5% level.
QUESTION SEVEN
The monthly bonuses of two groups of salesmen are being investigated to
see if there is a difference in the average bonus received. Random
samples of 12 and 9 are taken from the two groups and it can be
assumed that the bonuses in both groups are approximately normally
distributed and that the standard deviations are about the same. A same
level of significance is to be used.
The sample results were
n1=12
x1=1060
s1=63
n2=9
x2=970
s2=76
QUESTION EIGHT
Torch bulbs are packed in boxes of 5 and 100 boxes are selected
randomly to test for the number of defectives
Number of
Defectives
0
1
2
3
4
5
Number
of boxes
40
37
17
5
1
0
100
Total
defectives
0
37
34
15
4
0
90
The number of any individual bulb being a reject is

90*5 =0.18
100
and it is required to test at the 5% level whether the frequency of rejects
conforms to a binomial distribution.
QUESTION NINE
a) Define type I and type II errors.
b) What is a two-tail test?
c) What is the best estimate of the population standard deviation when
the two samples are taken
264
Lesson Six
QUESTION TEN
Express Packets guarantee 95%of their deliveries are on time. In a
recent week 80 deliveries were made and 6 were late and the
management says that, at the 95%level there has been a significant
improvement in deliveries.
Can the MDs statement be supported?
If not, at what level of confidence can it be supported?
A batch of weighing machines has been purchased and one machine
selected at random for testing. Ten weighing tests have been conducted
and the errors found noted as follows:
Test
1
2
3
4
5
6
7
8
9
10
Errors (gms)
4.6
8.2
2.1
6.3
5.0
3.6
1.4
4.1
7.0
4.5
The purchasing manager has previously accepted machines with a mean

error of 3.8 gms and asserts that these tests are below standard.
Test the assertions at 5% level.
QUESTION ELEVEN
In auditing it is often sufficient to investigate only a sample of the
accounts of a company.
a) Describe the advantages of taking a random sample as opposed to a
judgment sample
b) An auditor undertakes a preliminary spot check of the weekly wage
slips of the 50,000 manual workers of a large chemical firm to
estimate the percentage which include overtime payment. He takes a
random sample of 100 an finds 25 that do include overtime payments.
Required:
i)
Provide 905 confidence limits for the percentage of all wage slips
which include overtime payments.
ii)
How many wage slips need to be inspected if he wishes his
estimate to be within 5% of the true percentage with 95%
confidence?
c) The weekly wage amounts in , of the 25 employees who do have an
overtime payment are given the following table.
264

265
70
151
200
125
210
166
133
118
165
137
140
200
132
167
140
150
145
149
240
136
126
170
130
120
130
(You may use the summations x = 3,750, x2 = 591,900)

Required:
Determine unbiased point estimates of the mean and standard deviation
for this population.
d) The weekly wages of the sample of 75 employees who do not have an
overtime payment have a mean of X = 140 and standard deviation =
32.
266
Lesson Six
Required
Is there statistical evidence of a difference between the two sets of
wages? Interpret your answer and state any assumptions you make.
Check your answers with those given in lesson 9 of the study pack
266

267
COMPREHENSIVE ASSIGNMENT NO. 3
To be submitted after lesson 6
To be carried out under examination conditions and sent to the
Distance learning administrator for marking by the college
Examination paper
Time allowed: Three hours
questions
Answer
all
QUESTION ONE
a) Explain what is meant by the following terms as used in statistical
inference:
i) Statistical hypothesis;
(2
marks)
ii) Test of a hypothesis;
(2
marks)
iii) Type I error;
(2
marks)
iv) Type II error;
(2
marks)
v) Level of significance
(2
marks)
b) Cross Lines Group (CLG) has two factories in different parts of the
country. Their
Resources, including the labour force skills are regarded as identical
and both factories
Were built at the same time.
A random sample of output data during a given period has been taken
from each factory and converted to standard hours of output per
employee. The data are given below:
Factory
1
Factory
2
42
50
43
39
41
49
52
41
46
48
39
45
36
42
52
37
43
41
40
39
You are given that for factory 1 mean = 45.1 and variance = 20.10
and that for factory 2 mean = 41.4 and variance = 21.16.
Required:
i) Test the hypothesis that the mean standard hours for employees in
the two factories
is the same.
(7
marks)
268
Lesson Six
ii) Comment briefly on the conditions of the test and interpret the
outcome. (3 marks)
(Total:
20
marks)
QUESTION TWO
a) State clearly what is meant by two events being statistically
independent.
(2 marks)
b) In a certain factory which employs 500 men, 2% of all employees have
a minor accident in a given year.
Of these, 30% had safety
instructions whereas 80% of all employees had no safety instructions.
Required
Find the probability of an employee being accident-free given that he
had:
i) No safety instructions
(5
marks)
ii) Safety instructions
(5
marks)
c) An electric utility company has found that the weekly number of
occurrences of lightning striking the transformers is a Poisson
distribution with mean 0.4.
Required:
i) The probability that no transformer will be struck in a week.
(3 marks)
ii) The probability that at most two transformers will be struck in a week
(5 marks)
(Total:
20
marks)
QUESTION THREE
Explain the difference between the paired t-test and the two-sample ttest
(4 marks)
Trendy Tyres Ltd. Has introduced a new brand of tyres which in their
advertisements claim to be superior to their only competitor brand. The
Roadmaster Tyres. The brand manager of Roadmaster Tyres disputes
this claim which he says is an advertisement gimmick. The brand
managers of the two companies agree to run a road test for the brands.
Ten (10) saloon cars of uniform weight and identical specifications are to
be used for the test. Each car is fitted with both brands of tyres: One
brand at the front the other brand at the rear. The cars cover a distance
of 5,000 kilometers and the trend wear is recorded as follows:
Trend tyres
centimeters
Roadmaster tyres
Centimeters
268

269
1
2
3
4
5
6
7
8
9
10
1.08
1.06
1.24
1.20
1.17
1.21
1.18
1.10
1.22
1.60
1.12
1.09
1.16
1.24
1.23
1.25
1.20
1.15
1.19
1.13
Required:
i) Determine whether Trendy Tyres Ltd.s claim is true using = 0.01
(15 marks)
ii) What are the assumptions you have made in (i) above?
(1 mark)
(Total:
20
marks)
QUESTION FOUR
Kenear Commercial bank Ltd. commissioned a research whose results
indicated that automatic teller machines (ATM) reduces the cost of
routine banking transactions.
Following this information, the bank installed an ATM facility at the
premises of Joy Processing Company Ltd., which for the last several
months has exclusively been, used by JoyS 605 employees. Survey on
the usage of the ATM facility by 100 of the employees in a month
indicated the following:
270
Lesson Six
Number
of Frequency
times
ATM
used
0
20
1
32
2
20
3
13
4
10
5
5
Required:
a) An estimate of the proportion of Joys employees who do not use the
ATM facility in a month
(2 marks)
b)
i)
Determine the 95% confidence interval for the estimate in (a) above
(5 marks)
ii)
Can the bank be certain that at least 40% of Joys employees will
use the ATM facility?
(1 mark)
c) The number of ATM transactions on average an employee of Joy
makes per month
(3
marks)
d) Determine the 95% confidence interval of the mean number of
transactions made by an employee in a month.
(6 marks)
e) Is it possible that the population mean number of transactions is four?
Explain. (3 marks)
(Total:
20
marks)
QUESTION FIVE
State any five problems encountered in the construction of the consumer
price index. (5 marks)
An investment analyst gathered the following data on the 91-day
Treasury bill rates for the years 2003 and 2004.
Month
January
February
March
April
May
June
July
August
Treasury bill rates (%)

2003
2004
3.2
5.5
3.0
5.2
2.8
4.3
2.5
3.6
2.9
3.3
3.4
2.7
3.7
2.4
4.0
2.0
270

271
September
October
November
December
3.8
4.2
4.5
5.1
2.3
2.8
3.1
3.7
The analyst would like to determine if on average there was a significant

change in the Treasury bill rates over the two years.
Required:
i) The mean and variance of the Treasury bill rates for each year.
(10 marks)
ii) Determine if there is a significant difference in the average Treasury
bill rates (use a significance level of 1%)
(5 marks)
Note:
S2
n1 1 S12 n2 1 S22
n1 n2 2
(Total:
20
marks)
QUESTION SIX
a) Describe the characteristics of the following distributions:
i) Binomial distribution
marks)
ii) Poisson distribution.
marks)
(3
(3
b) High Grade Meat Ltd. Produces beef sausages and sells them to
various supermarket. In order to satisfy the industrys requirement,
the firm may only produces 0.2 per cent of sausages below a weight
of 80 grammes. The sausage producing machine operates with a
standard deviation of 0.5 grammes. The weights of the sausages are
normally distributed.
The firms weekly output is 300,000 sausages and the sausage
ingredients cost Sh.5.00 per 100 grammes. Sausages with weights in
excess of 82 grammes require additional ingredients costing Sh.2.50
per sausage.
Required:
i) The mean weight at which the machine should be set.
(4 marks)
ii) The firms weekly cost of production
(10 marks)
(Total:
marks)
QUESTION SEVEN
20
272
Lesson Six
a) The past records of Salama Industries indicate that about 4 out of 10
of the companys orders are for export. Further, their records
indicate that 48 per cent of all orders are for export in one particular
financial quarter. They expect to satisfy about 80 orders in the next
financial quarter.
Required:
Determine the probability that they will break their previous export
record.
(7 marks)
Explain why you have used the approach you have chosen to solve part
(i) above.
(2 marks)
b) Gear Tyre Company has just developed a new steel-belted radial tyre
that will be sold through a national chain of discount stores. Because
the tyre is a new product, the companys management believes that
the mileage guarantee offered with the tyre will be an important
factor in the consumer acceptance of the product. Before finalizing
the tyre mileage guarantee policy, the actual road test with the tyres
shows that the mean tyre mileage is = 36,500 kilometers and the
standard deviation is = 5,000 kilometers. In addition, the data
collected indicate that a normal distribution is a reasonable
assumption.
Required:
Gear Tyre Company will distribute the tyres if 20 per cent of the tyres
manufactured can be expected to last more than 40,000 kilometres.
Should the company distributed the tyres?
(4
marks)
ii)
The company will provide a discount on a new set of tyres if the
mileage on the original tyres does not exceed the mileage stated on
the guarantee.
i)
What should the guarantee mileage be if the company wants no

more
than 10% of the tyres to be eligible for the discount?
(4 marks)
c) Explain briefly some of the advantages of the standard normal
distribution.
(3 marks)
(Total:
20
marks)
QUESTION EIGHT
a) Explain the following terms used in statistical inference:
i)
Null hypothesis
marks)
ii)
Parametric test
marks)
(2
(2
272

273
iii)
iv)
Coefficient of correlation
Rank correlation coefficient
marks)
(2 marks
(2
b) State four areas that the chi-square distribution is used

(4 marks)
c) In an analysis of the results of telecommunication students, the
examining board classified the results as either credit, pass or
discontinued. Further, the board analyzed the students method of
study which was either full-time, part-time or private. An employee of
the board across-classified the examination results and the method of
study of 300 students. He then computed a test statistic of 42.28
Required:
i)
State the null and alternative hypotheses that should be tested.
(4 marks)
ii)
What conclusion can be drawn from the results of the data? (use
= 0.05)
(4 marks)
(Total:
20
marks)
274
Decision Theory
LESSON SEVEN
7. Decision Theory
-
Decision theory
Decision trees and sequential decisions
Game theory
7.1
Decision Theory
Types of decisions
There are many types of decision making
1. Decision making under uncertainty
These refer to situations where more than one outcome can result from
any single decision
2. Decision making under certainty
Whenever there exists only one outcome for a decision we are dealing
with this category e.g. linear programming, transportation assignment
and sequencing e.t.c.
3. Decision making using prior data
It occurs whenever it is possible to use past experience (prior data) to
develop probabilities for the occurrence of each data
4. Decision making without prior data
No past experience exists that can be used to derive outcome
probabilities in this case the decision maker uses his/her subjective
estimates of probabilities for various outcomes
Decision making under uncertainty
Several methods are used to make decision in circumstances where only
the pay offs are known and the likelihood of each state of nature are
known
a) Maximin Method
This criteria is based on the conservative approach to assume that the
worst possible is going to happen. The decision maker considers each
strategy and locates the minimum pay off for each and then selects that
alternative which maximizes the minimum payoff
Illustration
Rank the products A B and C applying the Maximin rule using the
following payoff table showing potential profits and loses which are
274
Lesson Seven
275
expected to arise from launching these three product in three market
conditions
(see table 1 below)
276
Decision Theory
Product A
Product B
Product C
Boom
condition
+8
-2
+16
Pay off table in 000s

Steady state Recession
1
+6
0
Mini profits
row minima
-10
-2
-26
-10
+12
-26
Table 1
Ranking the MAXIMIN rule = BAC
b) MAXIMAX method
This method is based on extreme optimism the decision maker selects
that particular strategy which corresponds to the maximum of the
maximum pay off for each strategy
Illustration
Using the above example
Max. profits rw maxima
Product A
+8
Product B
+12
Product C
+16
Ranking using the MAXIMAX method = CBA
c) MINIMAX regret method
This method assumes that the decision maker will experience regret
after he has made the decision and the events have occurred. The
decision maker selects the alternative which minimizes the maximum
possible regret.
Illustration
Product A
Product B
Product C
Regret table in 000s

Boom
Steady state Recessio
condition
n
8
5
22
18
0
0
0
6
38
Mini regret row

maxima
22
18
38
A regret table (table 2) is constructed based on the pay off table. The
regret is the opportunity loss from taking one decision given that a
certain contingency occurs in our example whether there is boom
steady state or recession
The ranking using MINIMAX regret method = BAC
d) The expected monetary value method
The expected pay off (profit) associated with a given combination of act
and event is obtained by multiplying the pay off for that act event
combination by the probability of occurrence of the given event. The
276
Lesson Seven
277
expected monetary value (EMV) of an act is the sum of all expected
conditional profits associated with that act
Example
A manager has a choice between
i.
A risky contract promising shs 7 million with probability 0.6 and
shs 4 million with probability 0.4 and
ii.
A diversified portfolio consisting of two contracts with
independent out comes each promising Shs 3.5 million with
probability 0.6 and shs 2 million with probability 0.4
Can you arrive at the decision using EMV method?
Solution
The conditional payoff table for the problem may be constructed as
below.
(Shillings in millions)
Event Ei Probability Conditional pay offs
Expected pay off
(Ei)
decision
decision
(i)
Contract (ii) Portfolio( Contract Portfolio
iii)
(i) x (ii)
(i) x (iii)
Ei
0.6
7
3.5
4.2
2.1
E2
0.4
4
2
1.6
0.8
EMV
5.8
2.9
Using the EMV method the manager must go in for the risky contract
which will yield him a higher expected monetary value of shs 5.8
million
e) Expected opportunity loss (EOL) method
This method is aimed at minimizing the expected opportunity loss
(OEL). The decision maker chooses the strategy with the minimum
expected opportunity loss
f) The Hurwiz method
This method was the concept of coefficient of optimism (or pessimism)
introduced by L. Hurwicz. The decision maker takes into account both
the maximum and minimum pay off for each alternative and assigns
them weights according to his degree of optimism (or pessimism). The
alternative which maximizes the sum of these weighted payoffs is then
selected
g) The Laplace method
This method uses all the information by assigning equal probabilities to
the possible payoffs for each action and then selecting that alternative
which corresponds to the maximum expected pay off
Example
278
Decision Theory
A company is considering investing in one of three investment
opportunities A, B and C under certain economic conditions. The payoff
matrix for this situation is economic condition
Investment
opportunities
A
B
C
5000
-2000
4000
7000
10000
4000
3000
6000
4000
Determine the best investment opportunity using the following criteria

i.
Maximin
ii. Maximax
iii. Minimax
iv. Hurwicz (Alpha = 0.3
Solution
Investment
opportunities
A
B
C
i.
Using the
ii.
iii.
A
B
C
Economic condition
1
2
3
Minimu
Maximum
m
5000
7000
3000
3000
7000
-2000
10000
6000
-2000
10000
4000
4000
4000
4000
4000
Maximin rule Highest minimum = 4000
Choose investment C
Using the Maximax rule Highest maximum = 10000
Choose investment B
Minimax Regret rule
1
0
7000
1000
3000
0
6000
3000
0
2000
Maxim
um
regret
3000
7000
6000
Choose the minimum of the maximum regret i.e. 3000

Choose investment A
iv.
Hurwicz rule: expected values
For A (7000 x 0.3) + (3000 x 0.7) = 2100 + 2100 = 4200
For B (10000 x 0.3) + (-2000 x 0.7) = 3000 + 1400 = 1600
For C (4000 x 0.3) + (4000 x 0.7) = 1200 + 2800 = 4000
Best outcome is 4200 choose investment A
Value of perfect information
It relates to the amount that we would pay for an item of information that
would enable us to forecast the exact conditions of the market and act
accordingly.
278
Lesson Seven
279
The expected value of perfect information EVPI is the expected outcome
with perfect information minus the expected outcome without perfect
information namely the maximum EMV
Example
From table 1 above and given that the probabilities are Boom 0.6, steady
state 0.3 and recession 0.1 then
When conditions of the market are; boom launch product C: profit = 16
When conditions of the market are; steady state launch product B: profit
= 6
When conditions of the market are; recession launch product B: profit =
12
The expected profit with perfect information will be
(16 x 0.6) + (6 x 0.3) + (12 x 0.1) = 12.6
our expected profit choosing product C is 7
the maximum price that we would pay for perfect information is 12.6 7
= 5.6
7.2
DECISION TREES AND SUB SEQUENTIAL DECISIONS
A decision tree is a graphic display of various decision alternatives and
the sequence of events as if they were branches of a tree.
-
The symbol
and
indicates the decision point and the
situation of uncertainty or event respectively. The node depicted by a

square is a decision node while outcome nodes are depicted by a
circle.
-
Decision nodes: points where choices exist between alternatives and

managerial decisions is made based on estimates and calculations of
the returns expected.
Outome nodes are points where the events depend on probabilities
Illustration of a tree diagram

Event
111
event
ACT
E1
A1
E2
D1
B1
D2
B2
C1
122
D3
A2
112
C2
121
131
280
Decision Theory
For example 111 represents the payoff of the act event combination A1
E1 B1
When probabilities of various events are known they are written along
the corresponding branches. Joint probabilities are obtained by
multiplying the probabilities along the branches
Example
Kauzi Agro mills ltd (KAM) is considering whether to enter a very
competitive market. In case KAM decided to enter this market it must
either install a new forging process or pay overtime wages to the entire
workers. In either case, the market entry could result in
i.
high sales
ii.
medium sales
iii.
low sales
iv.
no sales
a) Construct an appropriate tree diagram
b) Suppose the management of KAM has estimated that if they
enter the market there is a 60% chance of their
stakeholders approving the installation of the new forge.
(this means that there is a 40% chance of using overtime) a
random sample of the current market structure reveals that
KAM has a 40% chance of achieving high sales, a 30%
chance of achieving medium sales, a 20% chance of
achieving low sales and a 10% chance of achieving no sales.
Construct the appropriate probability tree and determine
the joint probabilities for various branches
c) Market analysts of KAM have indicated that a high level of
sales will yield shs 1,000,000 profit; a medium level of sales
will result in a shs 600000 profit a low level of sales will
result in a shs 200000 profit and a no sales level will case
KAM Act
a loss of shsAct/even
500000 apart from the cost of any
t
equipment. Entering the market will require a cash outlay
of
5 High
either shs 300000 to Install
purchase and install a forge
or
shs
sales
10000 for overtime expenses
should the second option be
forge
selected.
6 Medium
Draw the appropriate decision tree diagram
3
sales
Solution
7
a) The tree diagram for this problem is illustrated as follows Low
salesand
The 1st stage of drawing a tree diagram is to show all decision points
1 to right, concentrate first on the logic
outcome done from left
ofsales
the
8 No
problem and on probabilities or values involved. This is called forward
pass.
0
Use
The resultant is the figure below:
9 High
overtime
Outcome/event
sales
sto
p

Do not enter
1
0
Medium
sales
1
1
Low
sales
1
2
No sales
280
Lesson Seven
281
tree diagram
The entire sample space of act event choices is available to KAM are
summarized in the table shown below
Path
01
01
01
01
01
01
01
01
02
3
3
3
3
4
4
4
4
Summary of alternative Act event sequence

Enter market, install forge, high sales
Enter market, install forge, medium sales
Enter market, install forge, low sales
Enter market, install forge, no sales
Enter market, use overtime, high sales
Enter market, use overtime, medium sales
Pay
Enter market, use overtime, low sales
offs
Enter market, use overtime, no sales
HS = 0.24 =
Do not enter the market
0.4
5
6
7
8
9
10
11
12
1,000,000
Install
b) The appropriate probability forge
tree is(300,00
shown in the
below.
The
0.3 figure
MS
= 0.18
=
alternatives available to the management
of
KAM
ad
events
are
0)
3 are the result 600,000
identified. The joint probabilities
of the path
0.2
sequenceEnter
that is followed.
For example, the sequence enter
0.6
0.12 ==
market install
(0.2)LS== 0.12
Marketforge, low sales yields (0.6)0.1
200,000
probability to install forge and get low sales.
0.4
NS = 0.06 = 500,000
Use
overtime
(10,000)
4
Dont enter
Q
UANTITATIVE TECHNIQUES
market
0.4
0.3
0.2
0.1
HS = 0.16 =
1,000,000
MS = 0.12 =
600,000
LS = 0.08 =
200,000
NS = 0.04 = -
282
Decision Theory
(c)
The overall decision is determined after analysis of the expected

values at various points so the correct decision (with the highest
expected value is made. The stage is worked from right to left and
is known as the backward pass.
The expected value for a decision is the highest pay off
value where as the E.V for an outcome is the summation of
probability x pay off value of each branch. In both cases any
expenditure incurred due to the selection of the said option
is deducted.
In our case
Node
3
=
0.4 1,000,000 0.3 600,000 0.2 200,000 0.1 50,000
- 300,000
E.V. = 615,000 300,000 = 315,000
Node
0.4 1,000,000 0.3 600,000 0.2 200,000 0.1 50,000
- 10,000
E.V. = 615,000 10,000 = 605,000
Node 1 = (0.6 315,000) + (0.4 605,000)
E.V. = 431,000
Node 0 = The highest of (0;431,000)
Since not entering the market has a 0 expected
value
= 431,000 = thus the decision should be to
enter the market.
This is represented as below in a tree diagram.
282
Lesson Seven
283
Install
forge
3
Enter
Market
EV =
315,000
0.4
1,000,0
00
0.3
600,00
0
0.2
0.1
1
0
EV =
431,000
Dont enter
market
200,00
0
500,000
Use
overtime
4
EV =
605,000
0.4
0.3
0.2
0.1
1,000,0
00
600,00
0
200,000
500,000
0
BAYES THEORY AND DECISION TREES

He makes an application of Bayes Theorem to solve typical decision
problems. This is examined a lot so its important to clearly understand
it.
Example:
Magana creations is a company producing Ruy Lopez brand of cars. It is
contemplating launching a new model the guioco. There are several
possibilities that could be opted for.
- Continue producing Ruy Lopez which has profits declining at 10% per
annum on a compounding basis. Last year its profit was Shs. 60,000.
- Launch Guioco without any prior market research. If sales are high
annual profit is put at Shs. 90,000 with a probability which from past
data is put at 0.7. Low sales have 0.3 probability and estimated profit
of Shs. 30,000.
- Launch Guioco with prior market research costing Shs. 30,000 the
market research will indicate whether future sales are likely to be
good or bad. If the research indicates good then the management
will spend Shs. 35,000 more on capital equipment and this will
increase annual profits to Shs. 100,000 if sale are actually high if
however sales are actually low annual profits will drop to Shs. 25,000
284
Decision Theory
should market research indicate good but management not spend

more on promotion the profit levels will be as for 2nd scenario above.
If the research indicate bad then the management will scale down
their expectations to give annual profit of Shs. 50,000 when sales are
actually low, but because of capacity constrints if sales are high profit
will be Shs. 70,000.
Past history of the market research company indicated the following
results.
Actual sales
Predicted
sales level
High
0.8*
0.2
Good
Bad
Low
0.1
0.9
*When actual sales were high the market research company had
predicted good sales level 80% of the time.
Required:
Use a time horizon of 6 years to indicate to the management of the
company which option theory should adopt (Ignore the time value of
money).
Solution
(a)
First draw the decision tree diagram
Ruy
Lopez
(option 1)
High 0.7
GUIOC
O
(option
2)
90,000
Low 0.3
P(H/G)
Market
Researc
h
(option
3)
Extra
35,000
Good
E
Ba
d
60,000
(declining)
B
No
extra
0.9
5
P(L/G)
0.0
5
P(H/G)
0.9
5
P(L/G)
0.0
P(H/B)
5
0.3
4
P(L/B
)
0.6
6
30,000
100,00
0
25,0
00
90,0
00
30,000
70,0
00
50,0
00
284
Lesson Seven
285
Computations; note how probability figures are arrived at.

The decision tree dictates that the following probabilities need to be
calculated.
P(G)
P(B)
For market
research
286
Decision Theory
P(H/G)
P(L/G)
P(H/B)
P(L/B)
For sales
outcome;
P(G/H) = 0.8
P(B/H) = 0.2
P(G/L) = 0.1
P(B/L) = 0.9
P(H)
= 0.7
P(L)
= 0.3
Good
Bad
Given
P(G&H) = P(H)
P(G/H)
0.7 0.8 = 0.56
B&H = P(H) P(B/H)
0.7 0.2 = 0.14
High 0.7
P(G&L) = P(L)
P(G/L)
0.3 0.1 = 0.03
P(B&L) = P(L)
P(B/L)
0.3 0.9 = 0.27
Low 0.3
P(G) = P(G and H) + P(G and L)

= 0.56 + 0.03 = 0.59
P(B) = P(B and H) + P(B and L)
= 0.14 + 0.27 = 0.41
Note that P(G) + P(B) = 0.59 + 0.41 = 1.00
From Bayes rule;
P G/H P H 0.56
0.95
P G
0.59
P G/L P L 0.03
0.05
P(L/G) =
P G
0.59
P B/H P H 0.14
0.34
P(H/B) =
P B
0.41
P B/L P L 0.27
0.66
P(L/B) =
P B
0.41
P(H/G) =
Evaluating financial outcome:

Option 1:
Last year Shs. 60,000 profits
Year
1 = 60,000 0.9
=
2 = 60,000 0.92
=
3 = 60,000 0.93
Shs.
54,000.
0
48,000.
0
43,740.
286
Lesson Seven
287
=
4 = 60,000 0.94
=
5 = 60,000 0.95
=
6 = 60,000 0.96
=
0
39,366.
0
35,429.
5
31,88
6.5
253,02
2.0
Option 2
Expected value of Giuoco
Node (A): 0.7(90,000 6) + 0.3(30,000 6)
= 378,000 + 54,000 = Shs. 432,000
Note that the figures a multiplied by 6 to account for the 6 years.
Option 3
Expected value of market research
Node (B): 0.95(100,000 6) + 0.05(25,000 6)
= 570,000 + 7,500 = Shs. 577,500
Deduct Shs. 35,000 for extensions
= 542,500.
Node (C): 0.95(90,000 6) + 0.05(30,000 6)
= 513,000 + 9,000 = Shs. 522,000
Node 1:
Compare B and C
B is higher, thus = 542,000.
Node (D):
0.34(70,000 6) + 0.66(50,000 6)
142,800 + 198,000 = Shs. 340,800
Node 2:
Shs. 340,800 or 0 no launch
Node (E):
0.59 542,500 + 0.41 340,800

320,075 + 139,728 = Shs. 459,803
Less market research expenditure
459,803 30,000 = Shs. 429,803
Node 2:
Final decision summary

Option 1 EMV = 253,022
Therefore we chose option 2 since it has the highest EMV.

Advantages of decision trees
288
Decision Theory
1. it clearly brings out implicit assumptions and calculations for all to
see question and revise
2. it is easy to understand
Disadvantages
1. it assumes that the utility of money is linear with money
2. it is complicated by introduction of more variables and decision
alternatives
3. it is complicated by presence of interdependent alternatives and
dependent variables
7.3
Game Theory
Game theory is used to determine the optimum strategy in a competitive
situation
When two or more competitors are engaged in making decisions, it may
involve conflict of interest. In such a case the outcome depends not only
upon an individuals action but also upon the action of others. Both
competing sides face a similar problem. Hence game theory is a science
of conflict
Game theory does not concern itself with finding an optimum strategy
but it helps to improve the decision process.
Game theory has been used in business and industry to develop bidding
tactics, pricing policies, advertising strategies, timing of the introduction
of new models in the market e.t.c.
RULES OF GAME THEORY
i.
The number of competitors is finite
ii.
There is conflict of interests between the participants
iii.
Each of these participants has available to him a finite set of
available courses of action i.e. choices
iv.
The rules governing these choices are specified and known to all
players
While playing each player chooses a course of action from a list
of choices available to him
v.
the outcome of the game is affected by choices made by all of the
players. The choices are to be made simultaneously so that no
competitor knows his opponents choice until he is already
committed to his own
vi.
the outcome for all specific choices by all the players is known in
advance and numerically defined
When a competitive situation meets all these criteria above we call
it a game
NOTE: only in a few real life competitive situation can game theory be
applied because all the rules are difficult to apply at the same time to a
given situation.
Example
Two players X and Y have two alternatives. They show their choices by
pressing two types of buttons in front of them but they cannot se the
288
Lesson Seven
289
opponents move. It is assumed that both players have equal intelligence
and both intend to win the game.
This sort of simple game can be illustrated in tabular form as follows:
Player X
Button m
Button n
Player Y
Button R
X wins 2 points
Y wins 2 points
Button t
X wins 3 points
X wins 1 point
The game is biased against Y because if player X presses button m he

will always win. Hence Y will be forced to pres button r to cut down his
loses
Alternative example
Player X
Button m
Button n
Player Y
Button R
X wins 3 points
Y wins 2 points
Button t
Y wins 4 points
X wins 1 point
In this case X will not be able to press button m all the time in order to
win(or button n). similarly Y will not be able to press button r or button t
all the time in order to win. In such a situation each player will exercise
his choice for part of the time based on the probability
290
Decision Theory
Standard conventions in game theory
Consider the following table
Y
3
-4
X
-2
1
X
X
X
X
plays
plays
plays
plays
row
row
row
row
I, Y plays columns I, X wins 3 points

I, Y plays columns II, X looses 4 points
II, Y plays columns I, X looses 2 points
II, Y plays columns II, X wins 1 points
3, -4, -2, 1 are the known pay offs to X(X takes precedence over Y)
here the game has been represented in the form of a matrix. When the
games are expressed in this fashion the resulting matrix is commonly
known as PAYOFF MATRIX
STRATEGY
It refers to a total pattern of choices employed by any player. Strategy
could be pure or a mixed one
In a pure strategy, player X will play one row all of the time or player Y
will also play one of this columns all the time.
In a mixed strategy, player X will play each of his rows a certain portion
of the time and player Y will play each of his columns a certain portion of
the time.
VALUE OF THE GAME
The value of the game refers to the average pay off per play of the game
over an extended period of time
Example
Player Y
Player X
[3
4]
[-6
2]
in this game player X will play his first row on each play of the game.
Player y will have to play first column on each play of the game in order
to minimize his looses
so this games in favour of X and he wins 3 points on each play of the
game
this game is a game of pure strategy and the value of the game is 3
points in favour of X
Example
Determine the optimum strategies for the two players X and Y and find
the value of the game from the following pay off matrix
Player Y
[3
-1
4
2]
Player X
[-1
-3
-7
0]
[4
-7
3
-9]
290
Lesson Seven
291
strategy assume the worst and act accordingly
if X plays firs
if x plays first with is row then Y will pay with his 2 nd column to win 1
point similarly if X plays with his 2nd row then Y will play his 3rd column to
win 7 points and if x plays with his 3 rd row then Y will play his fourth
column to win 9 points
In this game X cannot win so he should adopt first row strategy in order
to minimize losses
This decision rule is known as maximum strategy i.e. X chooses the
highest of these minimum pay offs
Using the same reasoning from the point of view of y
If Y plays with his 1st column, then X will play his 3rd row to win 4 points
If Y plays with his 2nd column, then X will play his 1st row to lose 1 point
If Y plays with his 3rd column, then X will play his 1st row to win 4 points
If Y plays with his 4th column, then X will play his 1st row to win 2 points
Thus player Y will make the best of the situation by playing his 2 nd
column which is a Minimax strategy
This game is also a game of pure strategy and the value of the game is
1(win of 1 point per game to y) using matrix notation, the solution is
shown below
Player Y
Row minimum
[3
-1
4
2]
-1
player X
[-1
-3
-7
0]
-7
[4
-7
3
-9]
-9
column maximum 4
-1
4
2
In this case value of the game is 1
Minimum of the column maximums is 1
Maximum of the row is also 1
i.e.
Xs strategy is maximum strategy
Ys strategy is Minimax strategy
Saddle Point
The saddle point in a pay off matrix is one which is the smallest value in
its row and the larges value in its column. It is also known as equilibrium
point in the theory of games
Saddle point also gives the value of such a game. In a game having a
saddle point, the optimum strategy for both players is to pay the row or
column containing the saddle point
Note: if in a game there is no saddle point the players will resort to what
is known as mixed strategies.
Mixed Strategies
Example
Find the optimum strategies and the value of the game from the
following pay off matrix concerning two person game
Player Y
[1
4]
292
Decision Theory
player X
[5
3]
In this game there is no saddle point
Let Q be the proportion of time player X spends playing his 1 st row and 1Q be the proportion of time player X spends playing his 2 nd row
Similarly
Let R be the proportion of time player Y spends playing his 1 st column
and 1-R be the proportion of time player Y spends playing his second row
The following matrix shows this strategy
Player Y
[R
1-R]
Q
[1
4
]
Player X 1-Q
[5
3
]
Xs strategy
X will like to divide his play between his rows in such a way that his
expected winning or looses when Y plays the 1 st column will be equal to
his expected winning or losses when y plays the second column
Column 1
Proportion played
Q
1-Q
Points
1
5
Expected winnings
Q
5(1-Q)
Total = Q + 5(1 Q)
Column 2
Proportion played
Q
1-Q
Points
4
3
Total = 4Q + 3(1 Q)
Therefore Q + (1-Q)5
4Q +3(1-Q)
Giving Q = 2
and
(1-Q) = 3
Expected winnings
4Q
3(1-Q)
This means that player X should play his first row 2
his second row 3
th
th
of the time and
of the time
Using the same reasoning

1XR + 4(1-R)
=
5R +3(1-R)
Giving R = 1
(1-R) = 4
and
This means that player Y should divide hiss time between his first row
and second column in the ration 1:4
Player Y
[1
4 ]
5
[1
[5
2
5
Player X 3/5
]
]
292
Lesson Seven
293
Short cut method of determining mixed matrices
Player Y
[1
4
]
Player X
[5
3
]
Step I
Subtract the smaller pay off in each row from the larger one and smaller
pay off in each column from the larger one
[1
4]
41=3
[5
3]
53=2
51=4
43=1
294
Decision Theory
Step II
Interchange each of these pairs of subtracted numbers found in step I
Y
[1
4]
2
X
[5
3]
3
1
4
Thus player X plays his two rows in the ratio 2: 3
And player Y plays his columns in the ratio 1:4
This is the same result as calculated before
To determine the value of the game in mixed strategies
In a simple 2 x 2 game without a saddle point, each players strategy
consists of two probabilities denoting the portion of the time he spends
on each of his rows or columns. Since each player plays a random
pattern the probabilities are listed under
Pay off
1
Strategies which produce this pay

off
Row I column I
Row I column II
Row II column I
Row II column II
Expected value (or value of the game)

Pay off Probability p(x)
1
4
5
3
2
25
8
25
3
25
12
25
x p(x) = 85/25
= 17/5
3.4 is the value of the game
Joint
probability
2 1 2
5 5 25
2 4 8
5 5 25
3 1 3
5 5 25
3 4 12
5 5 25
Expected value x
(p(x)
25
32
25
15
25
36
25
= 3.4
Dominance
Dominated strategy is useful for reducing the size of the payoff table
294
Lesson Seven
295
Rule of dominance
i.
If all the element sin a column are greater than or equal to the
corresponding elements in another column, then the column is
dominated
ii.
Similarly if all the elements in a row are less than or equal to
the corresponding elements in another row, then the row is
dominated
Dominated rows and columns may be deleted which reduces
the size of the game
NB always look for dominance and saddle points when solving
a game
296
Decision Theory
Example
Determine the optimum strategies and the value of the game from the
following 2xm pay off matrix game for X and Y
Y
[6
3
-1
0
-3]
X
[3
2
-4
2
-1]
In this columns I, II, and IV are dominated by columns III and V hence Y
will not play these columns
So the game is reduce to 2 x 2 matrix hence this game can be solved
using methods already discussed
Y
[-1 -3]
X
[-4 -1]
GRAPHICAL METHOD
Graphical methods can be used in games with no saddle points and
having pay off m 2 or 2 n matrix
The aim is to substitute a much simpler 2 2 matrix for the original m
2 or 2 m matrix
Example I
following pay off matrix game.
[6
[3
Y
3
2
-1
-4
0
2
-3]
1]
Draw two vertical axes and plot two pay offs corresponding to each of
the five columns. The pay off numbers in the first row are plotted on axis
I and those in second row on axis II
296
Lesson Seven
297
Axis I
Axis II
2K
6A
-1
L -1
-2
-2
-3
-3
-4
-4
-5
-5
-1
-1
-6
-6
-2
-7
-7
-3
-8
-8
L -4
-9
-9
-2
-3 K
-4
Example I
Example II
Thus the two pay off number 6 and 3 in the first column are shown
respectively by point A on axis I and point B on axis II
On the two intersecting lines at the very bottom thickens them from
below to the point of intersection i.e. highest point on the boundary.
The thick lines on the graph KT and LT meet at T
The two lines passing through T identify the two critical moves of Y
which combined with X yield the following 2 2 matrix
Y
[-1
-3]
X
[-4
-1]
The value of the game and the optimum strategies can be calculated
using the methods described earlier
Example II
following pay off matrix concerning two person 4 2 game
Y
[-6
-2]
[-3
-4]
X
[2
-9]
[-7
-1]
298
Decision Theory
The method is similar to the previous example, except we thicken the
line segments which binds the figure from the top and taken the lowest
point the boundary
The segments KP, PM and ML drawn in thick lines bind the figure from
the top to and their lowest intersection M through which the two lines
pass defines the following 2 2 matrix relevant to our purpose
Y
[-3
-4]
X
[-7
-1]
The optimal strategies and the value of the game can now be calculated
Non Zero Sum Games
Until recently there was no satisfactory theory either to explain how
people should play non zero games or to describe how they actually play
such games
Nigel Howard (1966) developed a method which describes how most
people play non zero sum games involving any number of persons
Example
Each individual farmer can maximize his own income by maximizing the
amount of crops that he produces. When all farmers follow this policy the
supply exceeds demand and the prices fall. On the other hand they can
agree to reduce the production and keep the prices high
This creates a dilemma to the farmer
This is an example of a non zero sum game
Similarly marketing problems are non zero sum games as elements of
advertising come in. in such cases the market may be split in proportion
to the money spent on advertising multiplied by an effectieness factor
Prisoners Dilemma
It is a type of non zero sum game and derives its name from the following
story
The district attorney has two bank robbers in separate cells and offers
each a chance of confession. If one confesses and the other does not then
the confessor gets two years and the other one ten years. If both confess
they will get eight years each. If both refuse to confess there is only
evidence to ensure convictions on a lesser charge and each will receive 5
years
Another example
The table below is a pay off matrix for two large companies A and B.
initially they both have the same prices. Each consider cutting their
prices to gain market share and hence improve profit
Corporation B
maintain prices
Maintain prices
3,3 status quo
Decrease prices
1 , 4 B gets market
share and profit
(2,2) Both retain market
share but loose profit
Decrease
4, 1, A gains
prices
market share
profit STUDY PACK
STRATHMORE and
UNIVERSITY
298
Lesson Seven
299
Corporation A
The entries in the pay off matrix indicate the order of preference of the
players i.e. first A then B.
We may suppose that if both player study the situation, they will both
decide to play row I column I(3,3).
However
Suppose As reasoning is as follows
If B plays column I then I should play row 2 because I will increase my
gain to 4
In the same way Bs reasoning may be as follows
If A plays row I then I should play column 2 to get pay off 4 per play
If both play 2(row 2 column 2) each two receives a pay off of 2 only
In the long run pay off forms a new equilibrium point because if either
party departs from it without the other doing so he will be worse off
before he departed from it
Game theory seems to indicate that they should play (2,2) because it is
an equilibrium point but this is not intuitively satisfying. On the other
hand (3,3) is satisfying but does not appear to provide stability. Hence
the dilemma.
Theory of Metagames
This theory appears to describe how most people play non zero games
involving a number of persons
Prisoners dilemma is an example of this. The aim is to identify points at
which players actually tend to stabilize their play in non zero sum games.
This theory not only identifies equilibrium point missed by traditional
game theory in games that have one or more such points but also does so
in games in which traditional theory finds no such point
Its main aim is that each player is trying to maximize the minimum gain
of his opponent
ADVANTAGES AND LIMITATIONS OF GAME THEORY
Advantage
Game theory helps us to learn how to approach and understand a conflict
situation and to improve the decision making process
LIMITATIONS
1. Businessmen do not have all the knowledge required by the theory of
games. Most often they do not know all the strategies available to
them nor do they know all the strategies available to their rivals
2. there is a great deal of uncertainty. Hence we usually restrict
ourselves to those games with known outcomes
3. The implications of the Minimax strategy is that the businessman
minimizes the chance of maximum loss. For an ambitious business
man, this strategy is very conservative
300
Decision Theory
4. the techniques of solving games involving mixed strategies where pay
off matrices are rather large is very complicated
5. in non zero sum games, mathematical solutions are not always
possible. For example a reduction in the price of a commodity may
increase overall demand. It is also not necessary that demand units
will shift from one firm to another
300
Lesson Seven
301
QUESTION ONE
A company with an ageing product range is investigating the launch of a
new range. Their business analyst has mapped out several possible
scenarios which are given below.
Scenario 1
Continue with old range producing profits declining at 10% per annum
on a compounding basis. Last years profits were 60000 from this
range.
Scenario 2
Introduce a new range without any prior market research. If sales are
high, annual profit is put at 90000 with a probability, which from past
data is put at 0.7. If sales are low, annual profit is put at 30000, with a
probability of 0.3.
Scenario 3
Introduce a new range with prior market research costing 30000. The
market research will indicate whether future sales are likely to be good
or bad. If the research indicates good, then the management will
spend 35000 more on capital equipment and this will increase annual
profits to 100000 if sales are actually high. If however sales are actually
low, annual profits will drop to 25000. Should market research indicate
good and should management not spend more on promotion then profit
levels will be as for scenario 2.
If the research indicates bad then the management will scale down
their expectations to give annual profits of 50000 when sales are
actually low. However, if sales do turn out to be high, profits can only rise
to 70000because of capacity constraints. Past history of the market
research company indicates the following results.
Actual sales
Predict
ed
Sales
levels
High
Low
Good
*0.8
0.1
Bad
0.2
0.9
*When Actual sales were high the market research company had
predicted good sales levels 80% and so on.
Use a time Horizon of 6 years to indicate to the management of the
company which scenario they should adopt.
302
Decision Theory
Ignore the time value of money.
QUESTION TWO
1.
A construction company has a 1 million contract to complete a

building by 31 March 1995, but is experiencing delays due to the
complex design. The managers have to make a decision now
whether to continue as at present, or to employ specialistengineering consultants at a cost of 200000.
If the company continues as at present, it estimates there is only a
30% chance of completing the building on time, and that the delay
could be one two or three months, with equal probability. If the
building is late, there are penalties for each months delay (or part
of a month).
The managers believe that if they employ specialist-engineering
consultants, their chances of finishing the building on time will be
trebled. But if the building is stii late, it would only be one or two
months late, with equal probability.
Required
a)
To draw a tree diagram to represent this decision problem,
using squares for decision points, circles for random
outcomes, and including probabilities revenues and penalties;
b)
To analyse the tree using expected value techniques:
c)
To write a short report for the managers, with reasons and

comments, recommending which decision to make.
QUESTION THREE
Define minimax and maximax decision rules
QUESTION FOUR
A has two ammunition stores, one of which is twice as valuable as the
other. B is an attacker who can destroy an undefended store but he can
only attack one of them. A can only successfully defend one of them.
What would A do so as to maximize his return from the situation no
matter what B may do?
QUESTION FIVE
Determine the optimum strategies and the value of the game for the
following pay off matrix.
X
1
-2
Y
2
1
-1
1
302
Lesson Seven
303
2
304
Operation Research
LESSON EIGHT
8. Operation Research
-
Linear programming
Transport and Assignments
Network Analysis
8.1
Linear programming
Linear programming is a technique of decision making used by managers
to allocate limited resources eg machinery, raw materials and labor in
order to minimize costs or maximize production. Decision variable are
the amounts of each pot to be made in a given time period. Linear
programming assumes that the variable has a linear relationship.
Application of linear programming
Production department to decide the quantity of pots to be produced
subject to limited resources (constraints) eg labour, power, machine
hours, raw materials etc.
Marketing department: Allocation of salesmen to different sales regions
subject to their expected performance.
Human Resource: Scheduling personnels work hours and job description
to either maximize production or minimize cost.
Steps
in
solving
linear
programming
problems(problem
formulation)
1. Identify variables (eg product x and product y)
2. Identify the objective (To maximize contribution or to minimize cost),
and write down its mathematical presentation in terms of variables.
3. Identify the constraints (ie the limited resources shared among the
variables), and write down its mathematical representation in terms
of variables.
4. write down the objectives and the constraints in terms of the
variables.
These steps apply regardless of the number of the variables.
NOTE: If only two variables are involved, a graphical solution can be
used otherwise for multivariable problems, an algebraic method is
applied to find the solution.
Example:
Long castling breweries manufactures two brands of beer, Benko lager
and Benoni lager. Benko has a contribution of Sh.4 per unit and Benoni
has a contribution of Sh.3 per unit. Benko requires 30 machine minutes
and 30 labor minutes to manufacture a unit. Total available machine
hours per day are 12hrs whereas total available labor hours per day are
14hrs.
304
Lesson Eight
305
Required:
1. Formulate linear programming model.
2. How much of each brand should long castling produce if it wishes to
maximize its daily contribution assuming that all the lager produced
is sold.
Solution:
1.
Formulating a linear programming model
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Operation Research
Step 1: Identifying variables:
The variables here are the number of units of Benko and Benoni lager
produced by Long castling breweries per day; we can represent them as:
X1= a unit of Benko lager.
X2= a unit of Benoni lager.
Step 2: Identify the objective:
Definition: An objective is the desired result i.e. optimization of a
function dependent on decision variable and subject to some
constraints.
The objective of Long castling breweries is to maximize daily
contribution. Objective function is the formula that will give us the total
contribution in a day for both Benko lager and Benoni lager.
The information above can thus be represented in a tabular form as:
PRODUCT
(PER DAY)
Machine hours
Labor hours
Contribution
X1
0.5
0.5
4
X2
0.33
0.5
3
Maximum
available
hours/day
12
14
Objective function = 4X1 + 3X2

The objective is to maximize 4X1 + 3X2
Step 3: Identifying constraints (constraints formulation)
Definition:
Constraints
are
circumstances
that
govern
achievement of an objective.
Limitations must be quantified mathematically and they must be
linear.
For Long castling breweries we have limited machine hours (12hrs/day),
which must be shared among production of Benko and Benoni lagers.
Therefore production must be such that the numbers of machine hours
required is less than or equal to 12 hours per day.
0.5X1+0.5X2 12hrs
Similarly for labor hours we have:
0.5X1+0.5X2 14hrs
Non-Negativity: Its logical assumption to assume that the company
cannot manufacture negative amounts of a product, thus it can only
manufacture either zero product or more. Therefore we have: X10
X20
or
X1, X20
Thus the complete linear programming model is;
306
Lesson Eight
307
Maximize 4X1 + 3X2
Subject to the constraints;
0.5X1 + 0.33X2 12
0.5X1 + 0.5X2 14
X1, X2 0
Solving linear programming problems
The question requires us to optimize (in our case, maximize) the
objective (the contribution function), or in simple terms we are required
to solve the linear programming model.
Solving linear programming model entails finding the values of variables
that satisfy all inequalities simultaneously and optimize the objective.
Graphical solution
This method is used to solve LP models in case where only two variables
are involved. For more than two variables (multivariable) then the
simplex technique (algebraic method may be used).
Now in solving the problem above we first draw the axis, taking X 1 to be
the y axis and X2 to be the X axis.
X1
0
X2
Next we plot the scales on each axis to approximate the scales to use
then, we consider each constraint equation. We get the value of one of
variables putting the other variable to be zero and by substituting the
inequality or with equality sign (=).
For:
When
0.5X1 + 0.33X2 12
X1 = 0
0.5(0) + 0.33X2 = 12
0.33X2 = 12
X2 = 12/0.33 = 36
Therefore point to plot is (36, 0) >>Implying that when X2 = 36 then X1
=0
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Operation Research
When X2 = 0
0.5X1 + 0.33(0) = 12
0.5X1 = 12
X1 = 12/0.5 = 24
Therefore the point is (0, 24)
For
0.5X1 + 0.5X2 14
When X1 = 0
0.5(0) + 0.5X2 = 14
0.5X2 = 14
X2 = 14/0.5 = 28
When X2 = 0
0.5X1 + 0.5(0) = 14
0.5X1 = 14
X1 = 14/0.5 = 28
Comparing these values we see that X 2 ranges between 0-24-28,
therefore we can have the graph plotted as:
Next draw each limitation (constraint) as separate line on the graph.

For 0.5X1 + 0.33X2 12
The two points that represent this line are (36, 0) and (0, 24). This is
plotted as a straight line from 36 on X2 axis to 24 on X1 axis.
308
Lesson Eight
309
Now including the Non-Negativity constraints since no negative product

can be produced;
X1 0; x2 0
310
Operation Research
We must now consider how to choose the production which will maximize
contribution. This we do by plotting a line representing the objective
function (4x1 + 3x2).
First choose a convenient point inside the feasible region
eg X2(10) +3X1(20) = 40 +60
= Sh 100
All of the other product mixes that give a contribution of Sh.100 lies on
the line:
100 = 4X1 + 3X2 ......................................................(i)
<<This line is called a contribution line>>
Picking another point, say X2 =10 ad X1 = 20
Its contribution value is SH 110, thus give a contribution line of
110 = 4X1 + 3X2.........................................................(ii)
Plotting these two contribution lines to our graph we get two parallel
lines.
Until we reach the last feasible solution(s) before the line moves entirely
out of the feasible region.
310
Lesson Eight
311
Point X is the last feasible solution. Coordinates of this point give a

combination of the two lagers production volumes that fetches the
highest contribution.
Coordinates of point X can be read from the graph, but for precision they
are calculated by solving simultaneously the equations of the two points
that form point X.
The two constraints are called binding or limiting constraints. They are
the resources being fully used thus preventing daily contribution from
increasing further.
Therefore to get point x we solve:
0.5X1 + 0.33X2 = 12
.(i)
0.5X1 + 0.5X2 = 14
.(ii)
Since X is the intersection of these two constraints, solving by deducting
(i) from (ii) we get
0.17X2=2
X2 =11.76
And substituting X2 = 11.76 to equation (i) we get
X1 = 16.24
Therefore 11.76 units of Benko lager and 16.24 units of Benoni lager
need to be produced for maximum contribution.
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Operation Research
Contribution = 4(16.24) + 3(11.76) = 100.24
Assumption made in linear programming
Assumptions that are made to solve these types of problems are
that:
Certainly the parameters, decision variables and constraints are
known with certainty and but change.
Proportionality: all activities in linear programming problems are
proportional to the level of decision variables.
Divisibility: the solution to a linear programming problem does not
have to be an integer but for strictly whole number solutions, use
integer programming.
Non-negativity: no decision variable can be negative.
Additivity: the total of all activities in linear programming
problems are assumed to equal the sum of individual activities.
Special cases in linear programming
Infeasibility: This is when all constraints dont satisfy a particular
point thus there is no feasible solution.
Redundancy: A constraint is considered redundant if it does not
affect the feasible region. This happens in cases of excess
resources since it does not limit attainment of the objective.
Multiple optimal solutions: This occurs when the objective function
has the same slope as a binding constraint.
Minimizing problem
Example
A manufacturing company has acquired new machine for producing
product p at a rate of 25 units per hour with a 98% rate of efficiency. The
company requires to produce atleast 1800 units of p per day. The 10 old
machines that the company has, produce 15 units of p with a 95%
efficiency.
The cost of operating the new machine is Sh. 4 per hour and Sh. 3 per
hour for the old ones. The cost incurred due to inefficiency is Sh. 2 per
unit; Its government policy that at least 2 of the new machines must be
indulged into production.
The company wishes to optimally allocate the machines in order to
minimize the total manufacturing cost if the total available hours for
production in a day are 8 hours.
Solution
In minimizing problems we use (greater or equal to) type inequality.
Step 1: Identifying variables.
Since the problem requires us to appropriately allocate the machines in
order to minimize the costs thus our variables are the new machines and
the old machines, we can let;
X1 =new machines
312
Lesson Eight
313
X2=old machines
Step 2: Identify objectives:
The objective is to minimize manufacturing costs.
Total manufacturing cost per machine=Operating cost + (inefficiency
rate number of units cost of loss)
Therefore cost for new machines
Cost = 4+(0.02 25 2) = Sh. 5 per hour
=5 8= Sh. 40 per day]
Similarly for old machines
Cost = 3+(0.05152) = Sh. 4.5 per hour
=4.58=Sh. 36 per day
Therefore the objective function is to minimize 40X1 + 36X2
Step 3: Identifying constraint functions.
X1 8
X2 10
(25 8) X1 +(8 15) X2 1800 (This can be simplified further as)
200 X1 +120 X2 1800
(dividing through by 40)
5X1 +3 X2 45
X1 2
X1, X2 0
Thus the LP model is:
Minimize
40X1 + 36X2
Subject to:
X1 8
X2 10
5X1 +3 X2 45
X1 2
X1, X2 0
Plotting this on a graph we get:
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Operation Research
The line X1 2 does not affect the feasible region (doesnt cause
reduction of the feasible region), this constraint doesnt limit attainment
of the objective, thus its known as a redundant constraint.
Now picking a convenient point inside the feasible region, say (6, 10)
We get a total cost of
600 = (6(40)+10(36))
Thus the objective function line of
40X1 + 36X2 = 600
Moving this line parallel toward the origin to locate the last apex before
the line completely fall off the feasible region, we get:
Point X is the point of optimal solution

The binding constraints here are:
X1 8
And
5X1 +3 X2 45
Solving this to get coordinates of point X
5X1 +3 X2 = 45 (when X1 = 8)
40 + 3 X2 = 45
X2 = 5/3
Thus the solution is
X1 = 8
X2 = 5/3
Shadow or dual prices
314
Lesson Eight
315
Definition: A shadow price or a dual price is the amount increase or
decrease of the objective function when one more (or one less) of the
binding constraints is made available.
Consider example 1.
Maximize 4X1 + 3 X2
Subject to
0.5X1 + 0.33X2 12 (Machine hours)
0.5X1 + 0.5X2 14 (labor hours)
Starting with machine hours; lets assume that one more machine hour is
available (with labor hours remaining constant)
We get:
0.5X1 + 0.33X2 = 13
0.5X1 + 0.5X2 = 14
Solving this simultaneously we get the values of X 1 and X2 as
0.17 X2 = 1
X2 = 5.88
X1 = 22.12
Thus the contribution is
4(22.12) + 3(5.88) = Sh.106.12
Comparing this with its original contribution of Sh.100.24 (see example
1) we see increasing machine hours by one unit has increased
contribution by Sh.5.88, which is the shadow price per machine hour.
Note: This figure is also arrived at if we assume that machine hours are
reduced by 1 unit ie 12-1.
Similarly assuming that one more labor hour is made available, then
contribution change is:
0.5X1 + 0.33X2 = 12
0.5X1 + 0.5X2 = 15
Solving this simultaneously gives:
0.17 X2 =3
X2 = 17.65
X1 = 12.35
Which give a contribution of:
4(12.35) + 3(17.65) = Sh.102.35
The contribution change is Sh.2.11 which is the shadow price per labor
hour.
Note:
The shadow prices apply in so far as the constraint is binding for
example if more and more labor hours are available it will reach a point
where labor hours are no longer scarce thus labor hours cease to be a
binding constraint and its shadow price becomes a zero.(All non-binding
constraints have zero shadow price). Logically its senseless to pay more
to increase a resource, which is already abundant.
Interpretation of shadow prices
A shadow price of a binding constraint indicates to management how
much extra contribution will be gained by increasing a unit of the scarce
resource.
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Operation Research
In the example above Sh.2.11 is the shadow price for labor hours. This
implies that management is ready to pay up to Sh.2.11 extra per hour for
the extra hours ie say an employee is paid sh.5 per hour and one day he
works for two hours extra (overtime), the management is prepared to
pay up to sh.7.11 per hour for the two hours overtime worked.
Sensitivity Analysis
Definition: Sensitivity analysis is the test of how certain changes
in resources affect the optimal solution.
In sensitivity analysis we consider the effect of additional limiting or nonlimiting constraints.
We already know that adding more non-limiting constraints does not
change the optimal solution.
We also know that adding more binding constraints affects the objective
function.
Its very important for the management to know how much of a limit
resource can be made available until it has no effect on the objective
function (ie ceases to be a binding resource)
Considering example 1 with two assumptions:
i)
More labor hours become available
Therefore the binding constraints now are:
ii)
More labor hours become available
Therefore the binding constraints now are:
316
Lesson Eight
317
Plotting these two resulting graphs we see clearly that the labor hours
become available
TRANSPORTATION
A transportation problem deals with a number of sources of supply (e.g a
manufacturing company, warehouse) and a number of destinations (e,g
shops, houses). The usual objective is minimizing transportation costs of
supplying items from a set of source points to a set of destinations.
A major characteristic of this problem is the linearity requirement, i.e.
transport cost fom one point to another must be clearly defined, if it will
cost sh.50 to transport a bag from a warehouse to shop A then it will cost
sh.250 to transport 5 bags.
Assumptions
The model assumes a homogeneous
commodity
Total supply is equal to total demand
commodity,
one
type
of
Example 1
64 chambers, computer support firm has three branches at different
parts of the city, it receives orders for a total of 15 desktop computers
from four customers. In total in the three branches there are 15
machines available. the management wish to minimise delivery costs by
dispatching the computers from the appropriate branch for each
customer.
Details of the availabilities, 'requirements, and transport costs per filing
computer are given in the following table.
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Operation Research
Table 1
Custome Custome Custome Custome
Total
r
r
r
r
A
B
C
D
Computers
3
3
4
5
15
Branch X.
2
Sh.13
11
15
20
transportatio
n cost
Available Branch Y
6
Sh.17
14
12
13
per
unit
Branch Z
7
Sh.18
18
15
12
Total
15
Solution
Step 1 Make an initial feasible allocation of deliveries by selecting the
cheapest route first, and allocate as many as possible then the next
cheapest and so on. The result of such an allocation is as follows.
Table 2
Requirement
A
B
C
D
3
3
4
5
X
2 Units
2(1)
Available
Y
6 Units
1(4)
1(3)
4(2)
Z
7 Units
2(5)
5(2)
Note: the number in the table represent deliveries of cabinets and the
number in the brackets (1), (2), etc represent the sequence in which they
are inserted, lowest cost first i.e.
Sh.
1. 2 units X B sh.11/unit
Total cost 22
2. 4 units Y C sh.12/unit
Total cost 48
5 units Z D sh.12/unit
Totals cost 60
3. The next lowest cost move which is feasible i.e. doesnt exceed row
or column totals is 1 unit Y B sh.14/unit
14
4. similarly the next lowest feasible allocation 1
unit Y A sh.17/unit
5. finally to fulfill the row /column totals 2 units Z
A sh.18/unit
197
Step 2. Check solution obtained to see if it represents the minimum cost
possible. This is done by calculating shadow costs (i.e. an
imputed cost of not using a particular route) and comparing these
with the real transport costs to see whether a change of allocation
is desirable.
This is done as follows:
Calculate a nominal 'dispatch' and 'reception' cost for each occupied cell
by making an assumption that the transport cost per unit is capable of
being split between dispatch and reception costs thus:
318
Lesson Eight
319
D(X) + R(B) = 11
D(Y) + R(A) = 17
D(y) + R(B) = 14
D(Y) + R(C) = 12
DZ) + R(A) = 18
D(Z) + R(D) = 12
Where D(X), D(Y) and D(Z) represent Dispatch cost from depots X, Y and
Z, and R(A) R(B), R(C) and R(D) represent Reception costs at customers
A, B, C, D.
By convention the first depot is assigned the value of zero i.e. D(X) = 0
and this value is substituted in the first equation and then all the other
values can be obtained thus
R(A)
R(B)
R(C)
R(D)
= 14
= 11
= 9
=
8
D(X) = 0
D(Y) = 3
D(Z) = 4
Using these values the shadow costs of the unoccupied cells can be
calculated. The unoccupied cells are X : A, X : C, X : D, Y : D, Z : B, Z : C.
Shadow
costs
:. D(X) +
R(A)
D(X) + R(C)
D(X) + R(D)
=
D(Y) + R(D)
=
D(Z) + R(B)
D(Z) + R(C)
= 0 +
14 =
14
= 0 +
9 =
0 +
8 =
3 +
8 =
11
= 4 +
= 4 +
11 =
9 =
15
13
These computed 'shadow costs' are compared with the actual transport
costs (from Tab- I), Where the actual costs are less than shadow costs,
overall costs can be reduced by allocating units into that cell.
CellX:A
X:C
X:D
Y: D
Z:B
Z:C
Actual
cost
13
15
20
13
18
15
Shadow + Cost increase

cost
- Cost reduction
14
=
-1
9
=
+6
8
= + 12
11
=
+2
15
=
+3
13
=
+2
The meaning of this is that total costs could be reduced by sh.1 for
every unit that can be transferred into cell X : A. As there is a cost
reduction that can be made the solution , Table 2 is not optimum.
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Operation Research
Step 3: Make the maximum possible allocation of deliveries into the cell
where actual costs are less than shadow costs using occupied cells
i.e.
Cell X : A from Step 2, The number that can be allocated is governed by
the need to keep within the row and column totals. This is done as
follows:
320
Lesson Eight
321
Table 3
X
Y
Z
Available
A
3
+
12
2 Units
6 Units
7 Units
Requirement
B
C
3
4
21+
4
D
5
5
Table 3 is a reproduction of Table 2 with a number of + and - inserted.

These were inserted for the following reasons.
Cell X : A + indicates a transfer in as indicated in Step 2
Cell X : B - indicates a transfer out to maintain Row X total.
Cell Y : B + indicates a transfer in to maintain Column B total
Cell Y : A - indicates a transfer out to maintain Row Y and Column A
totals.
The maximum number than can be transferred into Cell X : A is the
lowest number in the
Minus cells i.e. cells Y : A, and X : B which is 1 unit.
Therefore 1 unit is transferred in the + and - sequence described above
resulting in the following table
Table 4
Available
X
Y
Z
2 Units
6 Units
7 Units
A
3
1
Requirement
B
C
3
4
1
2
4
D
5
5
The total cost of this solution is

Cell
Cell
Cell
Cell
Cell
Cell
X:A
X:B
Y:B
Y:C
Z:A
Z:D
1
1
2
4
2
5
unit @ sh.13
Unit @ sh.11
Units @ sh.14
Units @ sh.12
Units @ sh.18
Units @ sh.12
Sh.
= 13
= 11
= 28
= 48
= 36
= 60
196
The new total cost is sh.1 less than the total cost established in Step 1.
This is the result expected because it was calculated in Step 2 that sh.1
would be saved for every unit we were able to transfer to Cell X : A and
we were able to" transfer 1 unit only.
Notes: Always commence the + and - sequence with a + in the cell
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Operation Research
indicated by the (actual cost - shadow cost) calculation. Then put a - in
the occupied cell in the same row which has an occupied cell in its
column. Proceed until a - appears in the same column as the original +.
Step 4. Repeat Step 2 i.e. check that solution represents minimum cost.
Each of the processes in Step 2 are repeated using the latest
solution (Table 4) as a basis, thus: Nominal dispatch and reception
costs for each occupied cell.
D(X) + R(A) = 13
D(X) + R(B) = 11
D(y) + R(B) = 14
D(Y) + R(C) = 12
DZ) + R(A) = 18
D(Z) + R(D) = 12
On setting D(X) to be 0, the rest of the values are
found to be
R(A) = 13
D(X) = 0
R(B) = 11
D(Y) = 3
R(C) = 9
D(Z) = 5
R(D) = 7
Using these values the shadow costs of the unoccupied cells are
calculated. The unoccupied cells are X:C , X:D, Y:A, Y:D, Z:B, and Z:C
Therefore;
D(X) + R(C) = 9
D(X) + R(D) = 7
D(Y) + R(A) = 16
D(Y) + R(D) = 10
D(Z) + R(B) = 16
D(Z) + R(C) = 14
The computed shadow costs are compared with actual costs to see if any
reduction in cost is possible.
Actual
Cell
X :C
X:D
Y:A
Y:D
Z:B
Z:C
Shadow
cost
+ Cost
increase
- Cost
reduction
cost
15
9=
+6
20
17
13
18
15
7=
16 =
10 =
16 =
14 =
+13
+1
+3
+2
+1
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Lesson Eight
323
It will be seen that all the answers are positive, therefore no further cost
reduction is possible and optimum has been reached.
thus the optimal solution is represented by table 4
UNEQUAL SUPPLY AND DEMAND QUANTITIES
Consider the following example.
Example 2
Wanjiru books supplies is a firm dealing with import of books and it has
three stores strategically situated around the country. Yesterday the
company received orders to supply 100 books from 4 schools, of the
books ordered the firm has 110 books in stock. The firm wishes to
minimize cost and its seeking your advice, advise.
Below is a table of availability and requirement;
Store I
Store II
Available Store III
Total
Required
Sch. A Sch. B Sch. C Sch. D
Total
Books
25
25
42
8
100
40
Sh.3
16
9
transport
costs per
20
Sh.1
9
3
8
Book
50
Sh.4
5
2
5
110
Solution
Step 1: add a dummy destination to table 5 with zero transport costs
and requirements equal to the surplus availability.
Store I
Store II
Available Store III
Total
Sch. A
Books
25
40
Sh.3
20
Sh.1
50
Sh.4
110
Require
d
Sch. B Sch. C Sch. D Dummy
Total
25
42
8
10
100
0
16
9
transport
costs per
9
3
8
0
Book
5
2
5
0
Step 2. Now that the quantity available equals the quantity required
(because of insertion of the dummy) the solution can proceed in
exactly the same manner described in the first example. First set
up an initial feasible solution
Available
I
II
III
40
20
50
A
25
5(4)
20(1)
Requirement
B
C
D
25
42
8
17(6)
8(3)
8(5)
42(2)
Dummy
10
10(7)
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Operation Research
The numbers in the table represent the allocations made and the
numbers in brackets represent the sequence they were inserted based on
lowest cost and the necessity to maintain row/column totals. The residue
of 10 was allocated to the dummy. The cost of this allocation is
Sh.
Sh.
IA
5 units @ 3
15
IB
17 units @ 16
272
ID
8units @ 2
16
IDummy
10 units @ zero cost
IIA
20 units @ 1
20
IIIB
8 units @ 5
40
IIIC
42 units @ 2
84
447
Step 3. Check solution to see if it represents the minimum cost possible
in the same manner as previously described i.e.
Dispatch & Reception Costs of used routes:
D(I) + R(A)
=3
D(I) + R(B)
= 16
D(I) + R(D)
=2
D(I) + R(Dummy) =
12
D(II) + R(A)
=1
D(III) + R(B)
=5
D(III) + R(C)
=2
Setting D(I) at zero the following values are be obtained
R(A)
=3
R(B)
=16
R(C)
=13
R(D)
=2
R(Dummy) =0
D(I) =0
D(I) =-2
D(III) =-11
Using these values the shadow costs of the unused routes can be
calculated .The unused routes are I:C,II:B,II:C,II:D,II:Dummy,III:D,and
Dummy
D (I) +
D (II). +
D (II). +
D (II) +
R(C)
R (B)
R(C)
R (D)
=
=
=
=
Shadow
Costs
0+13
-2+16
-2+13
-2+ 2
=13
=14
=11
=0
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Lesson Eight
325
D (II) +
D (III) +
D (III) +
D (III) +
R (Dummy)
R (A)
R (D)
R (Dummy)
=
=
=
=
-2+0
-11+3
-11+2
-11+0
=-2
=-8
=-9
=-11
The shadow costs are then deducted from actual costs

It will be seen that total cost can be reduced by 8 per unit for every unit
that can be transferred into Cell II:C
Step4.Make the maximum possible allocation of deliveries into Cell
II:C.This is done by inserting a sequence of +and -,maintaining
row and column totals.
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Operation Research
Availab
le
I
II
40
20
III
50
Requirements
A
B
25
255+
17208+
C
42
D
8
8
Dummy
10
10
42-
The maximum transferable number is the lowest number in the minus

cell, i.e. 17. after the transfer is made we get;
Availab
le
I
II
40
20
III
50
A
25
22
3
B
250
C
42
D
8
8
Dummy
10
10
17
25
25
Step 3 is repeated again to check if the cost is minimum after setting

D(I) = 0.
In our case after deducting shadow costs from actual costs we find that
there are no more negative numbers thus we deduce from the last table
that the minimum transportation cost is,
(223) + (82) + (100) + (31) + (173) + (255) + (252) = Sh.311
Maximization using Transportation
Transportation problems are usually minimizing problems, on occasions
problems are framed so that the objective is to make the allocations from
sources to destinations in a manner which maximizes contribution or
profit. These problems are dealt with similar to minimizing problems but
the reverse of it. i.e.
a) Make initial feasible allocation on basis of maximum contribution
first, then next highest and so on.
b) For optimum, the differences between actual and shadow
contributions for the unused routes should be all negative. If not,
make allocation into cell with the largest positive difference.
c) In case there are more items available than are required, a dummy
destination with zero contribution should be introduced and the
maximizing procedure in a). followed
8.2
Assignment Models
The following example will be used as a basis of the step-by-step
explanation.
Example 1
A company employs services engineers based at various locations
throughout the country to service and repair their equipment installed in
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Lesson Eight
327
customers premises. Four requests for services have been received and
the company finds that four engineers are available. The distances each
of the engineers is from the various customers in the following table and
the company wishes to assign engineers to customers to minimise the
total distances to be travelled.
Customers
Alf
W
25
X
18
Y
23
Bill
38
15
53
Charlie
15
17
41
Dave
26
28
36
Z
1
4
2
3
3
0
2
9
Step 1. Reduce each column by the smallest figure in that column. The
smallest figures are 15, 15, 23 and 14 and deducting these values from
each element in the columns produces the following table.
Table 2
W
A
B
C
D
X
10
23
0
11
Y
3
0
2
13
Z
0
30
18
13
0
9
16
15
Step 2 Reduce each row by the smallest figure in that row.

The smallest figures are 0, 0, 0 and 11 and deducting these values gives
the following table.
W
10
23
0
0
A
B
C
D
Table 3
X
Y
3
0
0
30
2
18
2
2
Z
0
9
16
4
Note: Where the smallest value in a row is zero (i.e. as in rows A, B and
C above) the rows is, of course, unchanged.
Step 3 Cover all the zero in the table 3 by the minimum possible number
of lines. The lines may be horizontal or vertical.
Table 4
W
A
X
10
Y
3
Z
0
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Operation Research
B
C
D
23
0
0
0
2
2
30
18
2
9
16
4
Note: Line 3, covering Row B, could equally well have been drawn
covering column X.
Step 4.Compare the number of lines with the number of assignments to
be made (in this example there are 3 lines and 4 assignments).If the
number of line equals the number of assignments to be made go to step
6.
If the number of lines is less than the number of assignments to be made
(i.e. as in this example which has three lines and four assignments) then
a) Find the smallest uncovered element from step 3, called X (in
Table 4 this value is 2).
b) Subtract X to every element in the matrix.
c) Add back to every element covered by a line. If an element is
covered by two lines, for example, cell A: W in Table 4, X is added
twice.
Note: The effect of these steps is that X is subtracted from all
uncovered by one line remain unchanged, and elements covered by
two lines are increased by X.
Note: The effect of these steps is that X is subtracted from all
uncovered elements, elements covered but one line remains
unchanged, and elements covered by two lines are increased by X.
Carrying out this procedure on Table 4 produces the following results:
In Table 4 the smallest elements is 2. New table is
Table
A
B
C
D
12
25
0
0
3
0
0
0
0
30
16
0
0
9
14
2
Note: It will be seen that cells A: W and B: W have been increased by 2;

cells A : X, A : Y,A :Z, B :X,B:Y, B:Z, C:W and D:W are unchanged, and all
other cells have been reduced by 2.
Step 5. Repeat steps 3 and step 4 until the number of lines covering the
zero equals the number of assignments without any further repetition,
thus:
Table 6
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Lesson Eight
329
A
B
C
D
12
25
0
0
3
0
0
0
0
30
16
0
0
9
14
2
Line
Line
Line
Line
1
2
3
4
Step 6 when the number of lines equals the number of assignments to be

made using the following rules:
a) Assign to any zero which is unique to both a column and a
row.
b) Assign to any zero which is unique to a column or a row.
c) Ignoring assignments already made repeat rule (b) until all
assignments are made.
Carrying out this procedure for our example results in the following:
a) (Zero unique to both a column and a row). None in this
example.
b) (Zero unique column or row). Assign B to X and A to Z.
The position is now as follows.
Table 7
W
A
Row
satisfied
B
Row
satisfied
C
0
D
0
Satisfied
Column
Satisfied
Column
Column Satisfied 16
Column Satisfied 0
Column Satisfied
Column Satisfied
c) Repeating rule (b) results in assigning D to Y and C to W.

Notes:
a) Should the final assignment not be to a zero, then more lines than
necessary were used in step 3.
b) If a block of 4 or more zeros is left for the final assignment, then a
choice of assignment exits with the same mileage.
Step 7 Calculate the total mileage of the final assignment.
A to Z Mileage
14
B to X
15
C to W
15
D toY
36
80 Miles
The assignment technique for maximising
A maximising assignment problem typically involves making assignments
so as to maximise contribution. To maximise only one step 1 from above
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Operation Research
differs-the columns are reduced by the largest number in each column.
From then on the same rules apply that are used for minimising.
Maximising example
Example 2
The previous example No.1 will be used with the changed
assumptions that the figures relate to contribution and not mileage
and that it is required to maximise contribution .The solution would
be reached as follows.(In each case the step number corresponds to
the solution given for Example No 1.)
Original data
Table 8
A
B
C
D
W
25
38
15
26
X
18
15
17
28
Y
23
53
41
36
Z
14
23
30
29
Contributions
to be gained
Step 1:
Reduce each column by the largest figure in that column
and ignore the resulting signs.
Table 9
A
B
C
D
W
X
13 10
0
13
23
11
12
0
Y
30
0
12
17
Z
16
7
0
1
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Lesson Eight
331
Step 2. Reduce each row by smallest figures in that row.
Table 10
A
B
C
D
W
3
0
23
12
X
0
13
11
0
Y
20
0
12
17
Z
6
7
0
1
Step 3.Cover zeros by minimum possible number of lines.

Table 11
A
B
C
D
W
3
0
23
12
X
0
13
11
0
Y
20
0
12
17
Z
6
7
0
1
Step 4. If a number of lines equals the number of assignments to be

made go to step 6.If less, (as in this example), carry out the uncovered
element procedure previously described. This results in the following
table:
Table 12
A
B
C
D
W
0
0
20
9
X
0
16
11
0
Y
17
0
9
14
Z
6
10
0
1
Table 13
A
B
C
D
W
0
0
20
9
X
0
16
11
0
Y
17
0
9
14
Z
6
10
0
1
Step 6. Make assignment in accordance with the rules previously

described which result in the following assignment:
C to Z
D to X
A to W
B to Y
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Operation Research
Step 7.Calculate contribution to gained from the assignments.
C to Z
D to X
A to W
B to Y
30
28
25
53
136
Notes:
a) It will be apparent that maximising assignment problems can be
solved in virtually the same manner as minimising problems.
b) The solution methods given are suitable for any size of matrix. If a
problem is as small as the illustration used in this chapter, it can
probably be solved merely by inspection.
Unequal sources and destinations
5. To solve assignments problems in the manner described the matrix
must be square, i.e. the supply must equal the requirements. Where the
supply and requirements are not equal, an artificial source or
destinations
must
be
created
to
square
the
matrix.
The
cost/mileage/contributions etc for the fictitious column or row be zero
throughout.
Solution method
Having made the sources equal the destinations, the solutions method
will be as normal, treating the fictitious elements as though they were
real. The solution method will automatically assign a source or
destination to the fictitious row or column and the resulting assignment
will incur zero cost or gain zero contribution.
Points to note
a) The assignment technique can be used for repairing type of
problems, e.g. taxis to customers, jobs to personnel.
b) Most practical problems of size illustrated could be solved
fairly readily using nothing more than commonsense. However,
the technique illustrated can be used to solve much larger
problems.
Exercises with answers
1. A foreman has four fitters and has been asked to deal with five jobs.
The times for each job are estimated as follows:
Fitters
Alf
Job 1
Job 2
Job 3
6
22
12
Bill
Charlie
12
18
16
20
15
18
Dave
12
20
15
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Lesson Eight
333
Job 4
Job 5
16
18
8
14
12
10
20
17
Allocate the men to the jobs so as to minimise the total time taken and
identify the job which will not be dealt with.
2.
A company has four salesmen who have to visit four clients. The
profits records from previous visits are shown in the table and it is
required to maximise profits by the best assignments.
A
6
22
12
16
12
18
16
8
20
15
18
12
12
20
15
20
C
20
D
12
Customer 1
Answers to exercises
1. Dummy fitter inserted to square matrix
A
B
1
6
12
2
22
18
3
12
16
4
16
8
5
18
14
DUMMY
0
20
0
15
0
15
0
17
0
15
18
12
10
Reduce columns by the smallest element and cover by lines

0
10
16
6
10
12
10
8
0
6
0
5
8
2
0
0
8
3
8
5
0
0
0
0
4 lines so not optimum, smallest element 3

Therefore reduce uncovered elements by 3 and increase elements
crossed by 2 lines by 3
0
13
3
10
12
4
7
5
0
6
10
2
5
2
0
0
5
0
8
5
3
0
0
3
3
5 Lines so optimum.
Assignments
B to 4
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Operation Research
C to 5
A to 1
Dummy to 2
8.3
Network Analysis
This is a system of interrelationship between jobs and tasks for planning
and control of resources of a project by identifying critical part of the
project.
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Lesson Eight
335
Terminology
Activity. Task or job of work, which takes time and resource e.g building
a bridge. Its represented by an arrow which indicates where the
task begins and ends
Event (node). This is a point in time and it indicates the start or finish of
an activity e.g in building a bridge, rails installed. Its represented
by a circle.
Dummy activity. An activity that doesnt consume time or resources, its
merely to show logical dependencies between activities so as
abide by rules of drawing a network, its represented by dotted
arrow
Network. This is a combination of activities and events (including dummy
activities)
Rules for Drawing a Network

a) A network should only have one start point and one finish point
(start event and finish event )
b) All activities must have at least one preceding event (tail event)
and at least one succeeding event (head event), but an activity
may not share the same tail event and head event.
c) An activity can only start after its tail event has been reached
d) An event is only complete after all activities leading to it are
complete.
e) Activities are identified by alphabetical or numeric codes i.e.
A,B,C; 1,2,3 or identification by head or tail events 1-2, 2-4, 3-4,14
f) Loops (a series of activities leading back to the same event) and
danglers (activities which do not link to the overall project) are not
allowed
Loop
Dangling activity
Dummy Events
This is an event that does not consume time or resources, its represented
by dotted arrow. Dummies are applied when two or more events occur
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Operation Research
concurrently and they share the same head and tail events e.g. when a
car goes to a garage tires are changed and break pads as well, instead of
representing this as;
Car Arrives (CA)
A- Tires Changed
Car ready (CR)
B- Break pads Changed

These events are represented as;
B
CA
CR
A
Example of a network.
Activities
1-2
- where 1 is the preceding event where as 2 is the succeeding
event of the activity
1-3
2-4
2-5
3-5
4-5
4-6
5-6
6-7
4
2
6
1
3
8.4
Network Analysis-Time Analysis
Assessing the time
a) After drawing the outline of the network time durations of the
activities are then inserted.
a) Time estimates. The analysis of the projects time can be
achieved by using :
i.
Single time estimates for each activity. These
estimates would be based on the judgment of the
336
Lesson Eight
337
ii.
individual responsible or by technical calculations

using data from similar projects
Multiple time estimates for each activity. the most
usual multiple time estimates are three estimates
for each activity , i.e. optimistic (O), Most Likely
(ML), and Pessimistic (P). These three estimates are
combined to give an expected time and the accepted
formula is:
Expected time =
O P 4ML
6
For example assume that the three estimates for an

activity are
Optimistic
11 days
Most likely
15 days
Pessimistic
18 days
Expected time =
11 18 4 15
6
= 14.8 days
b) Use of time estimates. as three time estimates are converted
to a single time estimate there is no fundamental difference
between the two methods as regards the basic time analysis
of a network. However, on completion of the basic time
analysis, projects with multiple time estimates can be
further analyzed to give an estimate of the probability of
completing the project by a scheduled date.
c) Time units. Time estimates may be given in any unit, i.e.
minutes , hours, days depending on the project. All times
estimates within a project must be in the same units
otherwise confusion is bound to occur.
Basic time analysis critical path
b) The critical path of a network gives the shortest time in which
the whole project can be completed. It is the chain of activities
with the longest duration times. There may be more than one
critical path which may run through a dummy.
Earliest start times (EST) Forward pass, Once the activities have
been timed we can assess the total project time by calculating
the ESTs for each activity. The EST is the earliest possible time
at which a succeeding activity can start.
Assume the following network has been drawn and the activity
times estimated in days.
2
B
D
4
2
0
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Operation Research
A
1
C
3
E
1
F
2
The ESTs can be inserted as follows.
EST
2
3
D
4
2
0
0
A
1
C
3
1
1
3
4
E
1
F
2
4
7
5
9
The method used to insert the ESTs is also known as the forward
pass, this is obtained by;
EST = The greater of [EST (tail event) + Activity
duration]
a) Start from the start event giving it 0 values,
b) For the rest of the events EST is obtained by summing the EST of
the tail event and the activity duration
c) Where two or more routes converge into an activity, calculate
individual EST per route and the select the longest route (time)
d) The EST of the finish event is the shortest time the whole project
can be completed.
Latest Start Times (LST) Backward pass. this is the latest possible
time with which a preceding activity can finish without increasing
the project duration. After this operation the critical path will be
clearly defined.
From our example this is done as follows;
2
3 3
B
2
0
0 0
A
1
1
1 1
C
3
3
4 6
LST
D
4
E
1
4
7 7
F
2
5
9
LST = Lowest of [LST (head event) activity duration]
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Lesson Eight
339
a) Starting at the finish event, insert the LST (i.e. 9 for our
example) ,and work backwards through the network.
b) deduct each activity duration from the previously calculated LST
(i.e. head LST).
c) Where the tails of activities join an event, the lowest number is
taken as the LST for that event
Critical Path. . This is the chain of activities in a network with the
longest duration Assessment of the resultant network shows
that one path through the network (A, B, D, F) has EST's and
LST's which are identical this is the critical path.
The critical path can be indicated on the network either by a
different colour or by two small transverse lines across the
arrows along the path thus in our example we have;
2
3 3
D
4
2
0
0 0
A
1
1
1 1
C
3
E
1
3
4 6
4
7 7
F
2
5
9
Activities along the critical path are vital activities which must
be completed by their EST's/LST's otherwise the project will be
delayed.
Non critical activities (in the example above, C and E) have
spare time or float available. C and/ or E could take up to an
additional 2 days in total without delaying the project duration.
If it is required to reduce the overall project duration then the
time of one or more of the activities on the critical path must be
reduced perhaps by using more labour, or better equipment to
reducing job times.
FLOAT
Float or spare time can only be associated with activities which are noncritical. By definition, activities on the critical path cannot have float.
There are three types of float, Total Float, Free Float and
Independent Float. To illustrate these types of float we use the
following example.
5
10 20
B
10
6
40 50
Section of the network
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Operation Research
a) Total float. Amount of time by which a path of activities could be

delayed without affecting the overall project duration. The path in
this example consists of one activity only i.e. B
Total Float = Latest Finish time (LFT) - Earliest Start time(EST)
time Activity Duration
Total Float = 50 - 10 - 10
= 30 days
b) Free float Amount of time an activity can be delayed without
affecting the commencement of a subsequent activity at its earliest
start time, but may affect float of a previous activity.
Free Float = Earliest Finish Time(EFT) - EST - Activity
Duration
Free Float = 40-10-10
= 20 days
c) Independent float. Amount of time an activity can be delayed when
all preceding activities are completed as late as possible and all
succeeding activities commenced as early a possible. Independent
float therefore does not affect the float of either preceding or
subsequent activities.
Independent float = EFT- Latest Start time (EST) - Activity
Duration
Independent float = 40 - 20 - 10
= 10 days
Note:
for examination purposes, float always refers to total float
The total float can be calculated separately for each activity but it is
often useful to find the total float over chains of non-critical activities
between critical events
Example.
The following represents activities of a network.
Activity
A
B
Preceding Activity
A
Duration Days
4
7
340
Lesson Eight
341
C
D
E
F
G
H
I
J
K
L
A
A
B
C
E
B,F
G,H
C
D
I,J,K
5
6
2
3
5
11
7
4
3
4
Required:
a) Draw the network diagram and find the critical path
b) Calculate the floats of the network in question
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Operation Research
Solution. (a)
E
2
G
5
13
23
H
11
12
B 7
F
A
4
C
5
J
4
30
L
4
34
10
First we draw the network structure ensuring it fits the data above
We then label all activities from 1 to 12 and indicate activity
duration
Conduct a forward pass operation (to obtain the diagram above)
Operate backward pass to establish the critical path, thus we
have
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Lesson Eight
343
E
2
G
5
13
18
11 15
12
12
B
7
0 0
A
4
23 23
F
3
C
5
J
4
9
K
D
6
10 27
Therefore we get the critical path to be, A-C-F-H-I-L
30
30
L
4
34 34
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Operation Research
b)
The floats of the network,
Activity EST
*A
B
*C
D
E
*F
G
*H
*I
J
K
*L
0
4
4
4
11
9
13
12
23
9
10
30
LST
EFT
0
4
4
4
15
9
21
12
23
9
22
30
4
11
9
10
13
15
23
23
30
30
30
34
Activit
y
Durati
on
LFT
D
4
15
9
22
21
15
23
23
30
30
30
34
Total Float
LFT -ESTD
4
7
5
6
2
3
5
11
7
4
3
4
Free
Float
Independ
ent Float
EFT-EST-D EFT-LST-D
4
12
8
5
17
17
-
5
17
17
-
17
5
-
The total float on the non-critical chains are;

Noncritical
chain
B,E,G
B,Dummy
D,K
J
Time required
(sum of
duration)
14
7
9
4
Time available
Total Float over
st
(LFT of last activity-EST of 1
chain
activity)
19
5
8
1
26
17
21
17
Slack
This is the difference between the EST and LST for each event. Strictly it
does not apply to activities but on occasions the terms are confused in
examination questions and unless the context makes it abundantly clear
that event slack is required, it is likely that some form of activity float is
required. Events on the critical path have zero slack.
8.5
Cost Scheduling
This is done by calculating the cost of various project durations, cost
analysis seeks to find the cheapest way of reducing the overall cost
duration of a project by increasing labour hours, equipment e.t.c.
Terminologies
Normal cost. The costs associated with a normal time estimate for an
activity. Often the normal time estimate is set at the point
where resources (labour, equipment, etc.) are used in the most
efficient manner.
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Lesson Eight
345
Crash cost. The costs associated with the minimum possible time for an
activity. Crash costs, because of extra wages, overtime
premiums, extra facility costs are always higher than normal
costs.
Crash time. The minimum possible time that an activity is planned to
take. . The minimum time is invariably brought about by the
application of extra resources, e.g. more labour or machinery.
Cost slope. This is the average cost of shortening an activity by one time
unit (day, week, month as appropriate). The cost slope is
generally assumed to be linear and is calculated as follows:
Cost slope = Crash cost Normal cost
Normal time Crash cost
Example
A project has the following activities and costs
Activity
Precedi
ng
Activity
A
A
B,C
A
B
C
D
E
Duratio
n
days
4
8
5
9
5
Crash
time
Cost
(Shs).
Crash
cost
Cost
slope
3
5
3
7
3
360
300
170
220
200
420
510
270
300
360
60
70
50
40
80
1
4
D
9
C
4
0
0
3
14 14
B
4
2
9
Project duration and costs

(a)
Normal duration = 14 days

Critical path = A,C,E
Project cost (cost of all activities at normal time) = Shs. 1,250.
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Operation Research
(b)
Reduce by 1 day the activity on the critical path with the lowest
cost slope. Thus we reduce C at extra cost of Shs. 50.
Now
Project duration = 13 days
Project cost = Shs. 1,300
Note: that all activities are now critical.
(c)
Further reducing the critical path by 1 day will require that more
than one activity is affected because there exist several critical
paths.
Reduce by 1
day
A and B
D and E
B, C and D
Extra cost
Activities
critical
All
All
All
60 + 70 = 130
40 + 80 = 120
70 + 50 + 40 =
160
60 + 80 = 140
E and E
A, D, B, E
From this we realize that reducing D and E is the cheapest.

However closer examination of the fourth alternative reveals that
C is now non-critical and has 1 day float. Since we earlier reduced
C for Shs. 50, if we reduce A and E and increase C by a day which
will save Shs. 50.
Then the net cost for 12 day duration = 1,300 + (140 50) =
1,390.
The network becomes
1
3
D
3
3
(crash)
1
2
1
2
5
C
E
4
0
0
(d)
B
0
2
7
Next we reduce D & E

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Lesson Eight
347
Project duration = 11 days
Project cost = 1,510
Critical activities = All
(e)
Final reduction possible is by reducing B, C & D for Shs. 160 the

network then becomes.
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Operation Research
1
3
A
D
3
3
(crash)
7
(Crash
)
1
0
C
0
0
B
0
3
(crash)
1
0
Duration = 10 days
Cost = Shs. 1,670
Critical activities = All.
Note: only critical activities affect project duration.
: Always look for a possibility of increasing the duration of a
previously
crashed activity.
SCHEDULING RESOURCES AND GANTT CHART
Apart from time, cost network analysis also help in controlling and
planning of resources.
Example
A project has the following activity durations and resource requirements.
Activit
y
A
B
C
D
E
F
Preceding
activity
C
B
D
Duration
(days)
6
3
2
2
1
1
Resource requirement
(man power)
3
2
2
1
2
1
Required
i)
What is the networks critical path
ii)
Draw a gantt chart diagram indicating activity times, using their
estimate.
iii)
Show resource requirement on a day to day basis assuming all
events commence at their estimates.
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Lesson Eight
349
iv)
Assuming that only six employees are available, how will the
activities be planned for?
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Operation Research
Solution
i)
Activities
A
B
C
D
E
F
ii)
Duration
6
3
2
2
1
1
EST
0
0
0
2
3
4
LST
0
0
0
3
5
5
Man power
3
2
2
1
2
1
A gantt chart or a bar chart. This is a diagram indicating a

resource scaled
network.
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Lesson Eight
351
iii)
Resource requirements on a day to day basis.
iv)
When on 6 manpower resources are available then we adjust

the activities to accommodate this and still end at the given
critical time duration i.e.
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Operation Research
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Lesson Eight
353
Node Networks
This network also known as a procedure diagram is represented with the
same information as a network diagram.
Its characteristics are;
i)
Activities are shown in boxes instead of arrows
ii)
Events are not represented.
iii)
The arrows linking boxes indicate the sequence precedence
of activities.
iv)
Dummies arent necessary.
E.g.
Would appear as
A full activity node network is represented as;
This is represented as;
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Operation Research
Note:
i)
EST and LST are calculated by the same process we learnt earlier.
ii)
EFT and LFT are calculated by adding the activity time duration to
EST and LST respectively.
iii)
Critical path is similarly identified by identifying equal EST and
LST throughout the path.
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Lesson Eight
355
QUESTION ONE
a) M & K Contractor pays his subcontractors a fixed fee plus mileage or
travelling expenses for work per formed. On a given day, the
contractor is faced with three electrical jobs associated with various
projects (A, B and C).
M & K contractor has four electrical
subcontractors (Wesside, Federal, National and Universal) who are
located at various places throughout the area. Given below are the
distances in kilometres) between the subcontractors and the projects.
Wesside
Subcontractors Federal
Naitonal
Universal
A
km
50
28
35
25
Projects
B
km
36
30
32
25
C
km
16
18
20
14
Required:
i) Represent the above problem in a network.
ii) Determine how subcontractors should be assigned in order to
minimise the total costs.
b) Explain the assumptions of the quantitative techniques you have used
to
solve
part
(a)
above.
(Q6 Dec. 1999)
QUESTION TWO
Regal Investments has just received instructions from a client to invest in
two shares; one an airline sha re, the other an insurance share. The total
maximum appreciation in share value over the next year is to be
maximized subject to the following restrictions:
the total investment shall not exceed Sh.100,000
at most Sh.40,000 is to be invested in the insurance shares
quarterly dividends must total at least Sh.2,600
The airline share is currently selling for Sh.40 per share and its quarterly
dividend is Sh.1per share. The insurance share is currently selling for
Sh.50 per share and the quarterly dividend is Sh.1.50 per share. Regals
analysts predict that over the next year, the value of the airline share will
increase by Sh.2 per share and the value of the insurance share will
increase by Sh.3 per share.
A computer software provided the following part solution output:
Objective Function Value = 5,400
Variable
Number
Reduced cost
Airline shares
1,500
0.000
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Operation Research
Insurance shares
800
Constraint
Slack/Surplus
Total investment
0.000
Investment in insurance
0.000
Dividends
100.000
0.000
Dual prices
0.050
0.010
0.000
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Lesson Eight
357
Objective Coefficient Ranges
Variable
Lower limit
Airline share
2.500
Insurance share
0.000
Current value
3.000
2.000
Upper limit
No upper limit
2.400
Right-hand Side Ranges

Constraint
Lower limit Current value
Upper limit
Total investment
96,000.00
100,000
No upper limit
Investment in insurance20,000.00
40,000
100,000.00
Dividends
No lower limit
2,600
2,700.00
Required:
a)
b)
c)
d)
Formulate the above problem.

Explain what reduced cost and dual prices columns above mean.
How should the clients money be invested to satisfy the restrictions?
Suppose Regals estimate of the airline shares appreciation is an
error, within what limits must the actual appreciation lie for the
answer in (c) above to remain optimal?
(Q 6 Dec
2001)
QUESTION THREE
a) A baker makes two products; large loaves and small round loaves. He
can sell up to 280 of the large loaves and up to 400 small round
loaves per day. Each large loaf occupies 0.01m3 of shelf space, each
small loaf occupies 0.008m3 of space, and there is 4m 3 of shelf space
available. There are 8 hours available each night for baking, and he
can produce large loaves at the rate of 40 per hour, and small loaves
at the rate of 80 per hour. The profit on each large loaf is Sh.5.00 and
Sh.3.00 profit on the small round loaf.
Required:
In order to maximize profits, how many large and small round loaves
should he produce?
b) Summarize the procedure for solving the kind of quantitative
technique you have used to solve part (a) above.
(Q 6 June 2001)
QUESTION FOUR
a) A small company will be introducing a new line of lightweight bicycle
frames to be made from special aluminium alloy and steel alloy. The
frames will be produced in two models, deluxe and professional. The
anticipated unit profits are currently Sh.1,000 for a deluxe frame and
Sh.1,500 for a professional frame. The number of kilogrammes of
each alloy needed per frame is summarized in the table below. A
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Operation Research
supplier delivers 100 kilogrammes of the aluminium alloy and 80
kilogrammes of the steel alloy weekly.
Deluxe
Professional
Aluminium alloy
2
4
Steel alloy
3
2
Required:
i) Determine the optimal weekly production schedule.
ii) Within what limits must the unit profits lie for each of the frames
for this solution to remain optimal?
b) Explain the limitations of the technique you have used to solve part (a) above.
(Q 6 Dec 2000)
QUESTION FIVE
a) Define the following terms as used in linear programming:
i) Feasible solution
ii) Transportation problem
iii) Assignment problem
b) The TamuTamu products company ltd is considering an expansion
into five new sales districts. The company has been able to hire four
new experienced salespersons. Upon analysing the new salespersons
past experience in combination with a personality test which was
given to them, the company assigned a rating to each of the
salespersons for each of the districts .These ratings are as follows:
c)
Salespersons
A
B
C
D
Districts
1
2
92
90
84
88
90
90
78
94
3
94
96
93
89
4
91
82
86
84
5
83
81
93
88
The company knows that with four salespersons, only four of the five
potential districts can be covered.
Required:
i) The four districts that the salespersons should be assigned to in
order to maximize the total of the ratings
ii) Maximum total rating.
(Q 6 June
2002)
QUESTION SIX
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Lesson Eight
359
a) Explain the value of sensitivity analysis in linear programming
problems and show how dual values are useful in identifying the
price worth paying to relax constraints.
b) J.A Computers is a small manufacturer of personal computers. It
concentrates on production of three models- a Desktop 386, a
Desktop 286, and a Laptop 486, each containing one CPU Chip. Due
to its limited assembly facilities JA Computers are unable to produce
more than 500 desktop models or more than 250 Laptop models per
month. It has one hundred and twenty 80386 chips (these are used in
Desktop-386) and four hundred 80286 chips (used in desktop 286
and Laptop 486) for the month. The Desktop 386 model requires five
hours of production time, the Desktop 286 model requires four hours
of production time, and the Laptop 486 requires three hours of
production time. J.A Computers have 2000 hours of production time
available for the coming month. The company estimates that the
profit on Desktop 386 is Sh. 5,000. for a desktop 286 the profit is
Sh.3,400 and Sh.3,000 profit for a laptop 486.
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Operation Research
Required:
Formulate this problem as a profit maximization problem and
mention the basic assumptions that are inherent in such models.
c) An extract of the output from a computer package for this problem is
given below:
Output solution
X1=120, X2=200, X3=200
Dual values
Constraints 3
150
Constraints 4
90
Constraints 5
20
Sensitivity analysis of objective function coefficients:
Variabl
e
X1
X2
X3
Lower
limit
100
150
127.5
Origina
l value
250
170
150
Upper
limit
No limit
200
170
Original
value
500
250
120
400
2000
Upper
limit
No limit
No limit
130
412.5
2180
Sensitivity analysis on R.H.S ranges.

Constra
ints
1
2
3
4
5
Lower
limit
320
200
80
350
1950
X1=Monthly production level for Desktop 386.

X2 =Monthly production level for Desktop 286.
X3=Monthly production level for Laptop 486.
Required:
i) Interpret the output clearly, including optimum product mix,
monthly profit, unused resources and dual values
ii) Explain the purpose of upper limits and lower limits for the
variables X1,X2,X3 and constraints 1 to 5.
iii) Calculate the increase in profit if the company is able to produce
a further 10 CPU 80386 chips.
(Q7 July 2000 Pilot paper)
QUESTION SEVEN
Preface Retailers is a high-technology retailer and mail order business.
In order to improve its process the company decides to install a new
microcomputer system to manage its entire operation (i.e. payroll,
accounts, inventory).
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Lesson Eight
361
Terminals for each of its many stores will be networked for fast,
dependable service. The specific activities that Preface will need to
accomplish before the system is up and running are listed below. The
table also includes the necessary increased staffing to undertake the
project.
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Operation Research
Activity
Preceding
Activities
A. Build insulated enclosure

B. Decide on computer
system
C. Electrical wiring of room
D. Order and collect
computer
E. Install air conditioning
F. Install computer
G. Staff testing
H. Install software
I. Staff training
A
B
A
D, E
B
C, F
G, H
Duratio
n
(Days)
4
1
3
2
4
2
5
2
3
Increas
ed
Staff
1
3
2
1
2
2
1
1
1
Required:
a) Draw a network diagram for the project and determine the critical
path and its duration.
b) Assuming that all activities start as soon as possible, draw a
progress chart for the project, showing the times at which
each activity takes place and the manpower requirements.
c) The union has decided that any staff employed on the project must
be paid for the duration of the project whether they work or
not, at a rate of 500 per day.
Assuming that the same staff is employed on the different
activities, determine the work schedule that will minimise
labour costs through not necessarily the project time. What is
the cost associated with this schedule?
Comment on the validity of the assumption.
QUESTION EIGHT
A particular project comprises 12 activities which have the following
durations and precedences:
Activity
A
B
C
D
E
F
G
H
I
J
Duration
(days)
3
5
7
2
9
6
5
6
3
4
Immediately preceding
activities
A
L
L
B, C
E
B, C
A
I
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Lesson Eight
363
K
L
4
4
D, F
-
Required:
a)
i.
Represent the project by means of a network diagram
ii.
Show the earliest and latest times of each activity
iii.
Determine the critical path and minimum completion time of
the project
b)
Calculate the total floats for each activity and explain how
they can be of use when allocating resources.
c)
Due to a strike the labour force on five activities G, H, I, K

cannot be utilized. However the non-utilised labour, which is used
for activities A and B, can also be used on these five activities
without affecting activity durations.
Activity
Labour force used
G
A
H
B
I
A
J
B
K
B
So that, for example, activities A, G, I cannot overlap in time.

Schedule these five activities outlining the effect, if any, on the
project duration time.
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Operation Research
COMPREHENSIVE ASSIGNMENT FOUR
QUESTION ONE
a) Define the following terms used in game theory:
i) Dominance.
marks)
ii) Saddle point.
marks)
iii) Mixed strategy.
marks)
iv) Value of the game
marks)
(2
(2
(2
(2
b) Consider the two person zero sum game between players A and B
given the following pay-off table:
Player
Strategies
Player B Strategies
1
2
A 1
-1
Required:
i) Using the maximin and minimax values, is it possible to determine the
value of the game?
Give reasons.
(3
marks)
ii) Use graphical methods to determine optimal mixed strategy for
player A and determine
the value of the game.
(9
marks)
(Total:
20
marks)
QUESTION TWO
Central and Eastern Industries is planning to introduce a new mobile
phone service. To do so, the following activities are necessary:
Preceding
Expected
Standard
Activity
Activity
Time
Deviation
(weeks)
(weeks)
A
6
1.0
B
3
0.5
C
A
5
1.0
D
A
4
1.0
E
A
3
0.5
F
C
3
0.5
G
D
5
1.0
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Lesson Eight
365
H
I
J
B.D.E
H
F.G.I
5
2
3
1.0
0.5
1.0
The costs of the project are estimated to be Sh.10 million. If the projects
is completed within 24 weeks the expected net revenue will be about
Sh.100 million but if the deadline of 24 weeks is not met, the service will
fail to penetrate the market and a net revenue of Sh.2 million is
expected.
Required:
a) Determine how long the project would take.
(8 marks)
b) If the start of activities B, E and G are respectively delayed b 3,2 and
2 weeks,
how would this affect the total project time?
(6 marks)
c) Determine a 95% confidence interval for the expected time of the
project
and explain your answer. Ignore the delays referred to in (b) above.
(3 marks)
d) Determine the expected profit on this project. Again ignore the
delays referred
in (b) above
(3
marks)
(Total:
20
marks)
QUESTION THREE
a) Explain the value of sensitivity analysis in linear programming
problems and show how dual values are useful in identifying the price
worth paying to relax constrains. (4marks)
b) J.A Computers is a small manufacturer of personal computers. It
concentrates production on three models, a Desktop 286,and a laptop
486,each containing one CPU Chip. Due to its limited assembly
facilities J.A Computers are unable to produce more than 500 desktop
model or more than 250 Laptop models per month. It has one
hundred and twenty 80386 chips (these are used in Desktop 386)
and four hundred 80286 chips(used in desktop 286 model requires
four hours of production time, and the laptop 486 requires three
hours of production time.
J.A Computers have 2000hours of
production time available for the coming month. The company
estimates that the profit on a desktop 386 is Sh.5000, for a desktop
286 the profit is Sh.3400 and Sh.3000 profit for a Laptop 486.
Required:
Formulate this problem as a profit maximization problem and mention
the basic
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Operation Research
assumptions that are inherent in such models.
(7 marks)
a) An extract of the output from a computer package for this problem is
given below:
Output solution
X1 = 120, X2 = 200, X3 = 200
Dual values Constraints 3
150
Constraints 4
90
Constraints 5
20
Sensitivity analysis of objective function coefficients

Variable
Lower limit
Original value
X1
100
250
X2
150
170
X3
127.5
150
Sensitivity analysis
Constraints
1
2
3
4
5
X1
X2
X3
=
=
=
on R. H. S ranges
Lower limit
320
200
80
350
1950
Upper limit
No limit
200
170
Original value
500
250
120
400
2000
Upper limit
No limit
No limit
130
412.5
2180
Monthly level for Desktop 386.

Monthly production level for Desktop 286
monthly production level for Laptop 486
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Lesson Eight
367
Required:
i) Interpret the output clearly, including optimum product mix, monthly
profit,
unused resources and dual values.
(3
marks)
ii) Explain the purpose of upper limits for the variables X 1, X2 ,X3 and
constraints 1 to 5.
(3
marks)
iii) Calculate the increase in profit if the company is able to produce a
further
10 CPU 80836 chips.
(3
marks)
(Total:
20
marks)
QUESTION FOUR
a) Give two applications of simulation in business.
marks)
(2
b) Collins Simiyu recently acquired a piece of land in Kitale. A property

development company has offered him Sh.300,000 for the piece of
land. He has to make a decision on whether to cultivate the piece of
land or to sell it to the property development company. if he decides
to cultivate the land, there is a probability of getting a high, medium
or low harvest. The expected net income for each of the above states
of harvest is shown below:
State
harvest
High
Medium
Low
of Net
income
(Sh.)
500,000
100,000
(200,000)
From past experience, there is a 10 per cent probability that the harvest
will be low, a 30 pr cent probability that the harvest will be medium and
a 60 per cent probability that the harvest will be high. Collins Simiyu
can engage an agricultural expert to carry out a survey on the
productivity of the land, which will cost him Sh.30,000. The agricultural
expert gives the following information as to the reliability of such surveys
(prior probabilities).
Results
survey
of State of harvest
Accurate
Not accurate
High
0.35
0.25
0.60
Medium
0.10
0.10
0.20
Low
0.05
0.15
0.20
Total
0.5
0.5
1.0
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Operation Research
Required:
i) Construct a decision tree for the above problem.
(6 marks)
ii) The expected monetary value for each decision
(10 marks)
iii) The decision that you would recommend
marks)
(2
(Total:
marks)
20
QUESTION FIVE
a) Explain the difference between
problems.
(4 marks)
assignment and transportation
b) State the assumptions made in solving a transportation problem.

(4 marks)
c) Umoja Engineering Works Ltd. Has a network of branches all over
Kenya.
The branches are used to service, repair and install
equipment for their clients. Currently, the Nairobi branch has four
clients who require installation of equipment. Each client requires
the services of one engineer.
There are four engineers who are not engaged at the moment and can be
assigned any one of the tasks. However, these engineers have to travel
from different locations and the Nairobi branch has to meet their travel
and subsistence allowances. The allowances vary from one engineer to
another and according to the client the engineer has been assigned to
work for.
The table below shows the costs (in thousands of shillings) associated
with each engineer.
Engineer
A
B
C
D
1
37.0
57.0
22.0
39.0
2
27.0
22.0
25.0
42.0
Client
3
34.0
79.0
61.0
54.0
4
21.0
34.0
45.0
43.0
Required:
i) The assignments to be made in order to minimize the total cost of the
engineers.
(10 marks)
ii) The minimum cost of using engineers.
(12 marks)
(Total:
20
marks)
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Lesson Eight
369
QUESTION SIX
a) Define the following terms as used in the network analysis:
i) Crash time
marks)
ii) Optimistic time
marks)
iii) Forward pass
marks)
iv) Dummy activity
marks)
v) Slack
marks)
(2
(2
(2
(2
(2
b) James Mutiso is a computer engineer in an information technology

firm. The firm has decided to install a new system to be used by the
firms help desk. James Mutiso has identified some activities required
to complete the installation.
The table below provides a summary of the activities durations and
the required number of technicians:
Activity
1-2
1-3
2-4
2-5
3-4
3-6
4-5
5-6
6-7
Duration
(Weeks)
3
1
3
2
2
4
2
2
2
Required
number
technicians
2
4
4
2
4
4
2
2
2
of
Required:
i) Draw a gantt chart for the project.
(6
marks)
ii) Mr. Mutiso would like to reschedule activities so that not more than 6
technicians
are required each week.
Determine if this is possible and how it can be achieved by
rescheduling
the activities.
(4
marks)
(Total:
20
marks)
QUESTION SEVEN
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Operation Research
Regal investments has just received instructions from a client to invest
in two shares; one an airline share, the other an insurance share. The
total maximum appreciation is share value over the next year is to be
maximized subject to the following restrictions:
The total investment shall not exceed Sh.100,000
At most Sh.40,000 is to be invested in the insurance shares
Quarterly dividends must total at least Sh.2,600
The airline share is currently selling for Sh.40 per share and its quarterly
dividend is Sh.1 per share. The insurance share is currently selling for
Sh.50 per share and the quarterly dividend is Sh.1.50 per share. Regals
analysts predict that over the next year, the value o f the airline share
will increase by Sh.2 per share and the value of the insurance share will
increase by Sh.3 per share.
A computer software provided the following part solution output:
Objective Function Value = 5,400
Variable
Number
Airline shares
Insurance shares
1,500
800
Reduced
cost
0.000
0.000
Constraint
Total investment
Dividends
Slack/Surplu
s
0.000
0.000
100,000
Dual
prices
0.050
0.010
0.000
Objective
Ranges
Variable
Lower limit
coefficient
Airline share
2.5000
Current
value
3.000
Insurance share
0.000
2.000
Right-hand Side Ranges

Constraint
Lower limit
Total investment
96,000.00
Current
value
100,000
Dividends
20,000.00
No lower limit
40,000
2,600
Required:
i) Formulate the above problem.
marks)
Upper limit
No
limit
2.400
upper
Upper limit
No
upper
limit
100,000.00
2,700.00
(7
370
Lesson Eight
371
ii) Explain what reduced cost and dual prices columns above mean.
(5 marks)
iii) How should the clients money be invested to satisfy the restrictions?
(4 marks)
iv) Suppose Regals estimate of the airline shares appreciation is in error,
within
what limits must the actual appreciation lie for the answer in (c)
above to
remain optimal?
(4
marks)
(Total:
20
marks)
QUESTION EIGHT
The linear programming model and output model below represent a
problem whose solution will tell a road side kiosk owner how many of the
four different types of household goods to stock in order to maximize
profits. It is assumed that every item stocked will be sold. The variables
measure the packets of Unga, Spaghetti, Rice and Sugar to stock
respectively. The constraints measure storage space in units, special
display racks, demand and a marketing restriction, respectively.
Maximize Z = 4X1+ 6X2+ 5X3+ 3.5X4
Subject to :
2X1 + 3X2+ 3X3+ X1 120
1.5X1 + 2X2
54
2X2 + X3 + X4
X2 + X3
12
Where X1
X2
X3
X4
Optimal
solution
Variable
X1
X2
X3
X4
Constraint
1
2
3
=
=
=
=
packets
packets
packets
packets
120 (1)
(2)
72 (3)
(4)
of
of
of
of
Unga
Spaghetti
Rice
Sugar
Value
12.00
0.00
12.00
60.00
Reduced cost
0.50
-
Stack/surp
lus
-
Dual/shadow
price
2.00
1.50
372
Operation Research
4
-2.50
Objective Coefficient Ranges

Variable
Lower limit
X1
X2
X3
X4
1.50
No limit
4.50
3.00
Right Hand Side Ranges

Constrain Lower limit
t
1
96
2
18
3
24
4
0
Current
value
-
Upper
limit
5.00
6.50
7.50
No limit
Current value
Upper limit
168
No limit
96
24
Required:
a) Determine the retailers optimal profit level.
(2 marks)
b) Determine and interpret the missing values under:
i)
Reduced cost column.

(2
marks)
ii)
Slack/surplus column, indicate whether the value is a slack or a
surplus.
(2
marks)
iii)
Dual/shadow price column.
(2
marks)
iv)
Current value column under objective coefficient ranges.
(2 marks)
v)
Current value column under right hand side ranges.
(2 marks)
c) Interpret the value 0.50 under the reduced cost column and values;
2.00, 1.50
and -2.50 under the dual/shadow price column
(2
marks)
d) Determine whether the current, optimal solution would change if the
current profit of packets of Unga is increased by Sh.2.00.
(2 marks)
e) Determine by how much the amount of space would increase before
there
is a change in the dual/shadow price.
(2 marks)
f) The above problem could have been solved manually. Explain how the
optimal solution can be determined using the manual approach.
(2 marks)
372
Lesson Eight
373
(Total:
marks)
20
374
Lesson Nine
LESSON NINE
9. Revision Aid
SOLUTIONS
LESSON ONE
QUESTION ONE
1. 3, 12
2. 12, 0
3. 10, 4
8,
4.
QUESTION TWO
a) x 0, y 4; b) x 3, y 3; c) x 10.5, y 36
QUESTION THREE
60

1. The vector for final demand = 60
60
The input/output coefficient matrix (also called the matrix for
technical coefficients). Call it A
80
320
80
320
80
320
100
400
200
400
100
400
100
300
60
300
100
300
4
2
4
1
1
1
5
3
let X be the total output vector.

Thus;
X = AX + Y
X = (I A )-1Y
1 0 0
I A 0 1 0
0 0 1
1
1
1
4
4
4
1
1
1
1
4
1 3
14
5
14 13
1
1
2
5
1 4 2 3
Revision Aid
375
Inverse (I - A)-1=
240
23
17
60
13
60
3
16
1
4
5
12
1
4
68 60 52
1
52 100 56
23
45 60 75
13
60
7
30
5
16
10,800
68 60 52 60
1
1
52 100 56 60
17, 480
Therefore X =
23
23
45 60 75 60
10,800
469.57
= 542.60
469.57
QUESTION FOUR
i)
Express each percentage as a decimal and the matrix equation

becomes,
0.4 0.6
0.5 0.25

ii)
t1
t2
b1
b
2
Put t1= 400 and t2= 700 and the matrix equation becomes.
b
0.4 0.6 400
1
0.5 0.25 700
b2
That is
b1 = (0.4 400) (0.6 700)

= 580 kilos
b2 = (0.5 400) (0.25 700)
= 375 kilos
iii)
To establish the value of t1 and t2 which correspond to b1 and b2 it

is necessary to form the inverse of the matrix.
which is
0.4 0.6
0.5 0.25
1.25 3.0
2.5 2.0
the equation to determine t1 and t2 now becomes,
376
Lesson Nine
t1
1.25 3.0
t 2.5 2.0
600
450
Thus;
t1 = - 1.25600 + 3.0 450
= 600 kilos
and
t2= - 2.5600 - 2 .0 450
= 600 kilos
QUESTION FIVE
i)
A3 =
A2 =
ii)
F(A)
10
-2
-3
-3
-3
15
20
-2
14
26
-3
-3
15
39
-51
A3 3A2 2A + 41
14
26
10
-2
-3
-2
+4
39
-51
-3
15
-3
14
26
30
39
-51
-9
45
-6
-16
28
42
-86
iii)
-3
1_
A-1 = -12
-2
=
-3
1
4
1
4
1
6
-1
6
Revision Aid
377
QUESTION SIX
i)
12
10
15
15
20
18
16
24
22
348
=
536
660
Cost of Standard set

Cost of Deluxe set =
Cost of super set =
=
348 pence
536 pence =
660 pence =
15
3,000
=
3.48
5.36
6.60
ii)
10
15
16
20
24
100
10
4,300
80
1,480
50
or (100 80
15
50)1520
16
620
24
Squares 3,000, triangles 4,300 hexagons 1,480, octagons 620

iii)
12
8
(3,000 4,300 1,480 620)
18
20
= 110,680 in pence
= 1,106.80
QUESTION SEVEN
a)
NP =
Cost
Cost
Cost
Cost
of
of
of
of
10
60
12
0
50
20
storage maintenance
2
3
2
storing in warehouse Y
storing in warehouse W
maintaining warehouse Y
maintaining warehouse W
0.5
1.5
0.5
156
160
= 156p
=160p
= 48p
= 40p
48
40
=
=
=
1.56
=
1.60
0.48
0.40
378
Lesson Nine
b)
A
storage
10
10
50
20
3
2
1.5
0.5
maintenance
Day I
cost in
W
40
A
10
10
60
0.5
20
3
2
1.5
0.5
0.5
=
120
150
45
30
pence
storage
maintenance
Day II
191
60.5
cost
165
52.5
pence
in
40
15
For total cost add Day I and Day II values

c)
10
150
45
C
191
60.5
165
52.5
+3 X
120
30
Cost in pence
Revision Aid
379
LESSON TWO
QUESTION ONE
a) 6
b)
c)
2
x3
1
1 2x
1
y
2x x
y
d)
QUESTION TWO
dc
2Q 30
dQ
Therefore Q = 15 at minimum
d 2c
2 Note: which is positive indicating a minimum value
dQ 2
QUESTION THREE
n() = 250
P + 12 + 59 = 147 giving P = 76
Q + 59 + 37 = 102 giving Q = 6
i)
ii)
Those who did not vote

= 250 (76 + 12 + 14 + 59 + 6 + 37)
= 250 204 = 46
x = 76 + 12 + 14 = 102
380
Lesson Nine
x = 12 + 59 + 6 = 77
z = 37 + 14 + 6 = 57
iii)
x won the election.

QUESTION FOUR
i)
To find maximum or minimum value we use differential calculus as

follows:
R 14 81x
x3
12
dR
3x 2
81
dx
12
d 2R
6x
x
0
2
dx
12 2
t 81
i.e.
x2
0 hus
4
81 x = 0
x =18 or 18
Which gives x = 18 or = -18
Check for a maximum or a minimum

x
d2R
=
2
2
dx
d2R
=
dx2
when x = 18,
-9
which is negative
Therefore at x = 18, the value of R is maximum

Similarly at x = -18, the value of R is minimum.
Therefore, the number of units that maximize the revenue = 18 units
ii)
The maximum revenue is given by

18 3
R = 14 + 81 18
12
= Ksh.986
iii)
The price per unit to maximize the revenue is

986
18
= 45.78
i.e.
Ksh.54.78
QUESTION FIVE
Revision Aid
381
i)
Profit is maximized when

Marginal Revenue
Note: Profit
=
=
Revenue Cost
RC
grad of
=
Grad of R grad of C
(marginal Revenue marginal Cost)
=
Grad of =
Marginal cost
0 for maximum and minimum.
PRODUCTION DEPARTMENT
Marginal Revenue
Cost per unit

Therefore
20,000
Giving Q
=
ii)
=
6 + 6 0.8
Shs.10.8 per unit
20,000
Q
+ 6.0002 =
=
Revenue per unit

=
+ 6 + 0.0002 (marginal cost)
10.8
20,000
4.7998
4,166.84
4,167 units
SALES DEPARTMENT
Profit =
Revenue =
2,000p)
Revenue Cost
Sales price x Quantity
=
Cost
=
=
=
=
p(40,000
40,000p 2,000p
2 X q + 6,000 + 6q + 80% of 6q
2q + 6p + 4.8q + 6,000
12.8q + 6,000
12.8 (40,000 2,000p) + 6,000
Profit =
2,000p)]
(40,000p 2,000p2) [6,000 + 12.8(40,000
40,000p 2,000p2 6,000 512,000 + 25,600p
-2,000p2 + 65,600p 518,000
-4,000p + 65,600
d
dp
382
Lesson Nine
d 2
dp 2
65,600
Selling price
iii)
-4,000p + 65,600
400
When
d
dp
= 0
16.4
Shs.16.4
Quantity 4,167 (as in i)

Selling price Shs 16.4 (as in ii)
Firms Profit
Revenue
Total Revenue Total Cost

=
4,167 16.4
=
Shs.68,338.8
Cost of production
Production Department
Sales Department
Total
Profit
iv)
20,000 + 6.0002 4,167

6,000 + 2 4,167
26,000 + 25,002.833 + 8,334
59,336.83
Shs.59,336.85
68,338.8 59,336.85
Shs.9,002
Quantity and sales price that maximizes the shops profit.

Revenue
(40,000 2,000p)p [Q = 40,000 2,000p]
Cost
(40,000 2,000p) (6 + 0.0002 + 2) + 20,000 + 6,000
Profit
26,000]
(40,000p 2,000p2) [(40,000 2,000p) (8.0002) +
40,000p 2,000p2 320,008 + 16,000.4p - 26,000
-2,000p2 + 56,000.4p 340,008
For maximum profit

d
dp
d
dp
=0
and
d 2
dp 2
is ve
-4,000p + 56,000.4
Revision Aid
383
Therefore
d 2
dp 2
-4,000p + 56,000.4 = 0
-4,000
for maximum profit
Quantity
giving p = 1.0001 = Shs.14
which is ve
=
-2,000 (14) + 56,000.4 14 340,008
-392,000 + 784,005.6 340,008
47,998
=
=
40,000 2,000 14
12,000 units.
QUESTION SIX
a) Quadratic functions in decision making.
Due to economies of scale, the cost of production is usuall dependent
upon volume of sales.
Total revenue = sale price per unit quantity sold (say x)
Sales price is usually a function of x; f(x).
Hence total revenue = f(x) x
; which may be a
quadratic function
Using calculus techniques (i.e. maxima and minima) we can
calculate the optimum value of x, which might give maximum
profits or minimum costs.
b) Demand function p = 400 q
Average
quantity
total
=
Hence total
cost
of
(price p in shillings and q in Kg)

prodcing
the
100
100 5q q 2
q
1000
100 5q q 2 q 1000 100q 5q 2 q 3 cost

q
Revenue = Price Quantity = p q = (400 q) q = 400q q2

Profit = (400q q2) (1000 + 100q 5q2 + q3)
= 300q + 4q2 q3 1000
i.
1000
Fixed cost
(100 is fixed cost)

q
Quantity produced and sold
= average fixed cost/unit
as quantity sold gradually increases, average fixed
cost per unit decreases
ii.
for maximum profit
384
Lesson Nine
300q 4q 2 q 3 1000
d
d
300 8q 3q 2 (puting
=0 )
dq
dq
8 60.53
we get q
11.422 Kg (note that the negative part of q is invalid)
6
d 2
8 6q
dq 2
for q 11.422 ;
d 2
is negative, it gives the mximumvalue of
dq 2
maximum profit 300(11.42) 4(11.42) 2 (11.42)3 1000

Sh.1458.31
iii.
px 13 2 x y 0 (Product x demand function)

py 13 x 2 y 0 (Product y demand function)
px 13 2 x y and py 13 x 2 y
total revenue for x (13 2 x y ) x 13 x 2 x 2 xy
total revenue for y (13 x 2 y ) y 13 y xy 2 y 2
total revenue for x and y combined (13 x 2 x 2 xy ) 13 y xy 2 y 2
13x 13 y 2 x 2 2 y 2 2 xy
total cost x y
Profit Total revenue - total cost
(13 x 13 y 2 x 2 2 y 2 2 xy ) ( x y )
12 x 12 y 2 x 2 2 y 2 2 xy
Revision Aid
385
px 13 2 x y 0 (Product
Using partial differentiation and standard calculus techniques for maxima and minima
12 4 x 2 y ,
12 2 x 4 y
x
y
2
4 x (-ve),
x 2
2
4 (-ve)
y 2
2
2
xy
Rules :
For maximum or minimum values
0 ,
0
x
y
2 2
2
For maximum value
2
y 2
xy
x
In this case, 12 2 x 4 y 0 ; 12 4 x 2 y 0
which gives; x 2units, y 2units
other conditions are also certified.
Price Px 13 4 2 7
Price Py 13 2 4 7
QUESTION SEVEN
i.
The required matrix equation is

5 8 x
640
4 12
y
820
Note that 640, 000 has been written as 640 (in thousands)
5
multiplying both sides with an inverse matrix of
4
12
1
8
1 12 8 5 8 x
60 32 4 5 4 12
60 32 4 5
y
1 28 0 x 1 1120
28 0 28 y 28 1540
x 40
y 55

thus x 40, y 55
ii.
1. Marginal productivity
8
we get;
12
640
820
386
Lesson Nine
60
10 (this is the rate of change)
x2
total productivity P is given by the function
60
10 dx
2
x
60
10 x C where C is a constant
x
For the values; x 5 and P 62
60
we have; 62
10(5) C
5
thus C 24
60
Hence P
10 x 24
x
when x 10
60
P
10(10) 24 118 furnaces
10
P
2. Marginal productivity is the increase in output of electric furnaces

per week if the capitalization is increased by Sh.1 million.
Revision Aid
387
LESSON THREE
QUESTION ONE
a) Discrete data have distinct values with no intermediate points, whereas
continuous data can have any values over a range either a whole number
or any fraction.
b) Dispersion is the variation or scatter of a set of values.
Standard deviation is represented by;
x x
n 1
x x
Where s: is for a sample and : is for a population
c) This is the coefficient of dispersion of a distribution that is used in

comparing dispersion between distributions. It is given by;
coefficient of variation
100%
x
.
d) See Text
QUESTION TWO
a)
Payment in daysMid-point
59
10 14
5 19
20 24
25 29
30 -34
35 39
40 44
Arithmetic Mean
x
7
12
17
22
27
32
37
42
Number of
customers
f
4
10
17
20
22
16
8
3
100
fx 2, 405 24.05days
f 100
f
28
120
289
440
594
512
296
123
2,405
fx2
196
1,440
4,913
9,680
16,038
16,384
10,952
5,292
64,895
388
Lesson Nine
b)
fx
f
Standard deviation
64,895 2, 405
100
100
fx
f
8.4
c) Histogram to show payment record of 100 customers
Number of
Customers
25
22
20
20
17
15
16
10
10
8
4
3
4.5
9.5
14.5
19.5
24.5
29.5
34.
39.5
44.5
Days taken to
settle debt
d) Out of 100, 16 i.e. in the class 30 to 34 days and 8 lie in the class 35 to
39 days. Therefore, the best estimate that an unpaid invoice chosen at
random will be between 30 and 39 days old is
2,478
64
0.24
QUESTION THREE
a) The smallest value in the distribution is 105, the largest in the
distribution is 142. The range to be spanned is 142 105, i.e. 37. The
following grouping is a suggestion.
The classes should be of equal
Group
105 but less than 110
110
115
115
120
120
125
width.
Tally
II
IIII
IIII
IIII III
Frequency
2
5
4
8
Revision Aid
389
125
130
135
140
130
135
140
145
IIII
IIII
IIII
II
IIII
10
5
4
2
40
b) To construct the ogive, it is first necessary to calculate the cumulative

frequency.
Group
FrequencyCumulative
Frequency
2
2
5
7
4
11
8
19
10
29
5
34
4
38
2
40

110
115
115
120
120
125
125
130
130
135
135
140
140
145
GRAPH MISSING
SummaryMedian value
First quartile
Third quartile
=
=
=
125 p
119 p
131 p
The semi-interquartile range is given by the formula

value first quartile value)
Thus the semi-interquartile range
=
=
(third quartile
=
(131 119)
12
6p
c)
Group
110
115
115
120
120
125
125
130
130
135
Mid-point
107.5
112.5
117.5
122.5
127.5
132.5
f
2
5
4
8
10
5
fx
215.0
562.5
470.0
980.0
1,275.0
662.5
390
Lesson Nine
135
140
140
145
137.5
142.5
4
2
40
550.0
285.0
5,000
Calculate the mean value first using the

Formula
***
fx
f
Thus
***
5,000 40
**
125p
Continuing now with *** = 125 we can calculate the standard deviation
Group
105 but less than
110
115
120
125
130
135
140
110
115
120
125
130
135
140
145
x
107.5
112.5
117.5
122.5
127.5
132.5
137.5
1425
(x x)
-17.5
-12
.-7.55
-2.5
2.5
7.5
12.5
17.5
f
2
5
4
8
10
5
4
2
40
f (x-x)2
612.50
781.25
225.00
50.000
62.50
281.25
625.00
612.50
3,250.00
The standard deviation is given by the formula

Formula missing
d)
i)
This distribution is very nearly normal and so consequently the mean at

125 and the median at just over 125 are close to one another.
ii)
The semi-interquartile range and the standard deviation both measure

dispersion. The semi-interquartile range, in this case 6p, gives the
dispersion around the median. The standard deviation measures the
dispersion around the mean, in this case 9p, for the whole distribution
QUESTION FOUR
Use the same method as in question 77 to find mean and standard
deviation or use the formulae
Mean
fx
f
formula
Revision Aid
391
Supermarket A
Mean
Standard Dev
599
12
=
=
49.92
30.49
30.5
Supermarket B
Mean
=
=
Standard Dev
613
12
51.08
51.1
=
34.25
Coefficient of Variation Supermarket A

=
=
30.5
100
49.92
61.1%
Coefficient of Variation Supermarket B

=
34.25 100
51.1
67.02
QUESTION FIVE
The objective of this question is to test the candidates knowledge of:
Use of base and current weighting index numbers and contrast their
construction.
a) To establish the base weighted indices, the weights are the quantities
used in 1981. the following tabulation leads to the solution.
For 1981
Competent
A
B
C
D
Weight
Price ()
3
4
1
7
3.63
2.11
10.03
4.01
Price X weight
()
10.89
8.44
10.03
28.07
57.4
392
Lesson Nine
For 1982
Competent
Weight
Price ()
3
4
1
7
4.00
3.10
10.36
5.23
Weight
Price ()
3
4
1
7
4.49
3.26
12.05
5.21
A
B
C
D
For 1983
Competent
A
B
C
D
Price X weight
()
12.00
12.40
10.36
36.61
71.37
Price X weight
()
13.47
13.04
12.05
36.47
75.03
The base weighted price indices are therefore for

1981,
1982,
100
71.37
100
57.43
75.03
1983
100
57.43
124.27
130.65
b) The current weighted indices use the weights of the components in

1982 to establish the 1982 index, then the weights of the components
in 1983 for the 1983 index. The following tabulation leads to the
solution.
The 1981 index as before 100
For 1982
Compon
ent
Weight
1981
Price ()
A
B
C
D
2
5
1
6
3.63
2.11
10.03
4.01
1981
Price X
Weight
()
7.26
10.55
10.03
24.06
51.90
1982
Price ()
4.00
3.10
10.36
5.23
The 1982 current weighted price index is therefore
1982
Price X
Weight
()
8.00
15.50
10.36
31.38
65.24
Revision Aid
393
65.24
100 that is 125.70
51.90
Compon
ent
Weight
1981
Price ()
A
B
C
D
2
6
1
5
3.63
2.11
10.03
4.01
1981
Price X
Weight
()
7.26
12.66
10.03
20.05
50.00
1982
Price ()
4.49
3.26
12.05
5.21
1982
Price X
Weight
()
8.98
19.56
12.05
26.05
66.64
The 1983 current weighted price index is therefore

6.64
100 that is 133.28
50.00
c) Laspeyres price indices use weights at the base period, whereas

Paasche price indices use weights from the current period.
The weights at the base period will always be available whereas the
current weights may not always be available. In application like
Retail or Consumer Price Index establishing the current weights will
be much more difficult and expensive than establishing the current
prices. These arguments give a preference for the Laspeyres type of
index number.
It can be argued that the use of current weights reflects the present
situation more accurately, giving a preference for the Paasche type of
index number. However, in computing the series of index numbers, it
is clearly demonstrated in part (a) that the denominator need only be
calculated once in the series for base weighted indices, whereas a
recomputation is needed for current weighted indices. This leads to a
favouring of the Laspeyres type index.
QUESTION SIX
a)
i)
The Laspeyres Price index is often summarized by the formula

PNQO 100
POQO
That is the weighting factor in the calculation is the quantity at the
base period.
For 1983
Compon
ent
Quantit
y
Price
Quantity
Price
Quantity1
(1982)
1982
1983
982
394
Lesson Nine
X Price1982
A
B
C
D
E
10
6
5
9
50
3.12
11.49
1.40
2.15
0.32
31.20
68.94
7.00
19.35
16.00
142.49
X
Price1982
3.17
11.58
1.35
2.14
0.32
31.70
69.48
6.75
19.26
16.00
143.19
Thus the Laspeyres Price Index for 1983

=
143.19 100
142.49
100.49
For 1984
Compone
nt
Quantity
Price
1982
10
6
5
9
50
1984
3.2
11.67
1.31
2.63
0.32
A
B
C
D
E
Quantity
1982
X Price 1984
32.00
70.20
6.55
23.67
16.00
148.24
Thus the Laspeyres Price Index for 1984

=
=
ii)
148.24
100
142.49
104.04
The Paasche Price Index is often summarized by the formula

PNQN 100
POQN
That is the weighting factor in the calculation is the quantity at the
current year.
For 1983
Compone
nt
Quantit
y
Price
(1982)
Quantity
Price
1982
1983
X Price1982
Quantity19
82
X Price1982
Revision Aid
395
A
B
C
D
E
12
7
8
9
53
3.12
11.49
1.40
2.15
0.32
37.44
80.43
11.20
19.35
16.96
165.38
3.17
11.58
1.35
2.14
0.32
38.04
81.06
10.80
19.26
16.96
166.12
Thus the Paasche Price Index for 1983

=
166.12 100
165.38
=
100.45
For 1984
Compone
nt
Quantit
y
A
B
C
D
E
14
5
9
10
57
Price
Quantity
(1982)
1982
82
X Price1982
X Price1982
3.12
11.49
1.40
2.15
0.32
43.68
57.45
12.60
21.50
18.24
153.47
Price
1983
3.20
11.67
1.31
2.63
0.32
Quantity19
44.80
58.35
11.79
26.30
18.24
159.48
Thus the Paasche Price Index for 1984

=
=
iii)
159.48
100
153.47
103.92
The following is a comparison between the index numbers.

Year
1983
1984
Laspeyre
s
100.49
104.03
Paasch
e
100.45
103.92
There is little to choose between the two measures in 1983 as the

weightings, that is, the quantity for 1982 and 1983 are close. The
situation is different in 1984 where the weightings have increased in
three cases by a significant amount over the 1982 figures resulting in
a large increase in the Laspeyres index than the Paasche index.
b) An index of industrial production would probably by calculated on a
month by month basis by central government, indicating in
percentage terms by how much production in the industrial sector has
396
Lesson Nine
either grown or declined over the previous month or year. The full
index would be made up from components which apply to particular
sectors and so it is possible for an employer to measure increase or
decrease in production in that sector and increase in production may
thus be rewarded and a decrease would be looked upon with less
favour.
An index of retail prices would also probably be calculated on a month
by month basis by central government, and is an indication in
percentage terms of the increase or decrease in retail prices. This
measure is often used to quantify inflation. A trade union may
therefore argue its case for an increase in pay to be greater than or
equal to the rate of inflation to keep up with the cost of living and not
decrease the living standard s of its members. An index of wages may
also be published by central government, and may be available for
different industrial sectors.
QUESTION SEVEN
Note: The production for 1980 and 1990 is given in 1,000 boxes. As
long as units are kept the same throughout the problem, the rates will
not change.
Produc
e
Cabbag
es
Tomato
es
Onions
Spinach
Production
1,000 boxes
1980(
%)
48,600
1990(
%)
62,000
22,000
Price per
box
Po(Shs)Pn
1980
1990
Pn
Po
100
150
1.5
37,440
220
310
1.4091
47,040
61,430
180
200
1.1111
43,110
55,720
130
170
1.3077
5.3279
a) Mean Relative Index of prices
Po Qo
po q o
4,860,00
0
4,840,00
0
8467,200
7,290,00
0
6,820,00
0
9,408,00
0
7,328,70
0
30,846,7
00
5,604,30
0
23,71,50
0
5.3279
133.20
Hence there is a 33.2% increase in average price of the four

horticultural products from 1980 to 1990.
b) Laspeyres Price Index
30,846,700
100
23,771,500
% increase 29.76%
129.76
Revision Aid
397
c) Paasches Price Index
pnqn 100
pOqn
And
d) Marshall Hedge-worth index =
Pn(qn + qn) 100
PO (qn + q n )
Cabbages
Tomatoes
Onions
Spinach
pnqn
9,300,000
poqn
6,200
pn + qn
110,600
11,606,40
0
12,286,00
0
9,472,400
8,236,800
59,400
11,057,40
0
7,43,600
108,470
42,664,80
0
32,737,80
0
e) Paasches index =
pn (qn + pn)
16,590,00
0
18,426,40
0
21,694,00
0
16,801,10
0
73,511,50
0
98,830
42,664,800
100
32,737,800
pn(pn + qn)
11,060,00
0
13,076,80
0
19,524,60
0
12,847,90
0
56,509,30
0
130.32
% increase 30.32%
f) Marshall Hedge-worth Index =
% increase
g) Fishers Price Index
130.4
=
=
73,511,500
100
56,509,300
130.09
30%
(129.76 130.32)1/2
This gives a percentage increase
=
= 30%
398
Lesson Nine
LESSON FOUR
QUESTION THREE
r2x1 = 0.78
This is the coefficient of determination of miles traveled to cost and
means that 78% of total cost is attributable to mileage
r2x1 = 0.16 i.e. 1% of cost is accounted for by the type of journey
R = 0.88 is the overall coefficient of determination and indicates that the
multiple regression equation accounts for 88% of the total variation in
costs.
The coefficient in the equation are:
a = 86
b1 = 0.37
b2 = 0.08
= fixed costs
= amount per mile
= influence of the type of journey
QUESTION SIX
A.
a)
Year
1990/9
1
Qtr
Sum in
qtrs
Sum of
two qtrs
Trend
Actua
l
minus
trend
Actu
al/
trend
5.125
13.875
-3.375
15.625
5.125
13.75
-3.625
-15
4.875
14.75
-5.625
1.097
1.261
0.937
0.709
49
2
3
4
1
2
37
58
67
50
38
211
212
213
214
215
423
425
427
429
52.875
53.125
53.375
53.625
3
4
1
2
3
4
1
2
3
59
68
51
40
60
70
50
42
61
216
218
219
221
220
222
223
431
434
437
440
441
442
445
53.875
54.25
54.625
55
55.125
55.25
55.625
1.095
1.253
-.934
0.727
1.088
1.267
0.899
Revision Aid
399
b) Either
Year
1990/91
1991/1992
1992/93
1993/94
Total
Average
Seasonal
variation
Q1
-3.375
-3.625
-5.625
-12.625
-4.208
Additive model
Quarter
Q2
Q3
5.125
-15.625 5.125
-15 4.875
______ _____
-30.625 15.125
-15.313 5.042
-4
-15 5
Q4
13.875
13.75
14.75
______
42.375
14.125
14
=
-0.354
=0
Or
Multiplicative model
Quarter
Q1
Q2
Q3
1.097
0.937
0.709
1.095
0.934
0.727
1.088
0.899
2.770
0.718
3.280
0.923
0.718
1.093
1.0015 1.0015
1.0015
Year
1990/91
1991/1992
1992/93
1993/94
Total
Average
Adjustment
factor*
Seasonal
0.924
0.719
variation
* adjustment factor = 4/(3.994) =
1.0015
1.095
Q4
1.261
1.253
1.267
3.781
1.260
1.0015
= 3.994
1.262
= 4.000
c) An explanation of the forecasting method:

i)
Plot a graph of the trend.
ii)
By eye, establish an appropriate forecast of the trend for the last
qurter of 1993/94 and the first three quarters of 1994/5. (Note:
linear regression or the high/low method may be appropriate
methods to establish the forecast.)
iii)
Adjust the forecast trend for these quarters for the seasonal
variations:
Additive model
Estimated data value = forecast trend value + appropriate seasonal
variation value.
Multiplicative method
Multiply each point by the appropriate seasonal factor.
400
Lesson Nine
B.
a) A = y bx
b=
x x y y
2
x x
Revision Aid
401
A
x - x
2
8
6
8
10
4
4
2
6
10
60
6
6
6
6
6
6
6
6
6
6
-4
2
0
2
4
-2
-2
-4
0
4
B
y - y
60
132
100
120
150
84
90
68
104
140
1,048
104.8
104.8
104.8
104.8
104.8
104.8
104.8
104.8
104.8
104.8
-44.8
27.2
-4.8
15.2
45.2
-20.8
-14.8
-36.8
-0.8
35.2
60
AxB
179.2
54.4
0
30.4
180.8
41.6
29.6
147.2
0
140.8
804.0
(x x)2
16
4
0
4
16
4
4
0
16
16
80
1,048
104.8
10
10
Therefore b =
804
80
= 10.05
a = 104.8 (10.05 6) 44.5

where
y = total cost (x 10)

x = age in years
b) Maintenance costs using formula from (a):

Age of
vehicles
(years)
1
2
3
4
5
6
7
8
9
10
Cost
( = 10)
54.55
64.60
74.65
84.70
94.75
104.80
114.85
124.90
134.95
145.00
c) 12-year-old vehicle would have an estimated maintenance cost of:

44.5 + (10.05 12) = 165.1 ( x 10), or x 10), or 1,651.00
This forecast is an extrapolation beyond the data and consequently is
less sound.
402
Lesson Nine
QUESTION SEVEN
a) Two possible reasons for the large variation in output each month
are:
Seasonal variation
Production problems in some months
b) Graph showing relationship between output and costs.
400
350
300
250
200
150
0
5
10
15
20
25
30
The graph shows there is a strong positive relationship between output

and costs. This means that output may be used to predict costs.
x
16
20
23
25
25
19
16
12
19
25
28
12
240
b=
a=
y
170
240
260
200
280
230
200
160
240
290
350
200
2,920
xy
2,720
4,800
5,980
7,500
7,000
4,370
3,200
1,920
4,560
7,250
9,800
2,400
61,500
12 61,500
- 240 2,920
=
2
12 5.110
- 240
2,920
12
10
x2
256
400
529
625
625
361
256
144
361
625
784
144
5,110
37,200
3,720
240
= 43.333
12
y2
28,900
57,600
67,600
90,000
78,400
52,900
40,000
25,600
57,600
84,100
122,500
40,000
745,200
=
10
Revision Aid
403
y = 43.333 = 10x
This means that when output is zero, costs are zero 43.333, and that for
every one unit increase in output, costs will rise by 10. This assumes
linearity.
QUESTION EIGHT
i.
The tabulation of the trend pattern is as follows and has been

computed using the formula
Trend = Sales Seasonal deviation
Year
Quarter
Sales
1983
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
000
360
530
354
304
430
750
395
340
500
660
509
374
590
710
521
440
1984
1985
1986
1987
ii.
Seasonal
deviation
000
Trend
-42
-128
-37
276
-93
-145
12
153
-15
-165
43
153
396
432
467
474
488
485
488
507
524
539
547
557
000
The seasonal variations are established from the following table

Year
1983
1984
1985
1986
Total
Average
Adjusted
average
Quarter
3
-128
-145
-165
-438
-146
-147
-37
12
43
18
6
5
276
153
153
582
194
193
4
-42
-93
-15
-150
-50
-51
Adjustment to each average 4/4 that is 1

To the nearest integer the seasonal variations are
Total 4
Total 0
404
Lesson Nine
Quarter
iii.
1
2
193
-51
-147
The time series graph is to be found on the figure shown on the

next page
iv.
The calculation is also to be found on the figure shown on the next

page
v.
Forecast sales 1987 quarter II =

590 + 5 ( 000)
= 595 ( 000)
QUESTION NINE
The object of this question was to test the candidates knowledge of the
time series and the ability to present data on a labeled diagram
Year
1980
1981
Quart
er
Costs
IV
1560
I
1730
II
1554
III
1504
IV
1630
1982
I
1950
II
1595
III
1540
IV
1700
1983
I
1860
II
1709
III
1574
IV
1790
1984
I
1910
II
1721
III
1640
a) The calculations for
Four
quarter
total
6348
6418
6638
6679
6715
6785
6695
6809
6843
6933
6983
6995
7061
Four quarter
total in pairs
Trend
Deviation
12766
13056
13317
13394
13500
13480
13504
13652
13776
13916
13978
14056
1595.77
1632.00
1664.63
1674.25
1687.50
1685.00
1688.00
1706.50
1722.00
1739.50
1747.25
1757.00
-41.75
-128.00
-34.63
275.75
-92.50
-145.00
12.00
153.50
-13.00
-165.50
42.75
153.00
the trend figures and the deviations are
summarized in the above table

The seasonal effect is removed from the data by first totaling four
quarter figures, then totaling the four quarter figures in pairs and
Revision Aid
405
finally dividing by eight and centering the trend figure at the middle
point
Deviation is the difference between the costs and the corresponding
trend figure
b) The histogram is shown in figure 1
c) The seasonal deviation is another calculation produced from a table
Year
I
1983
1984
275.75
1985
153.50
1986
153.00
Total
582.25
Average
194.08
Adjusted
192.70
average
Seasonal
193.00
deviation
The adjustment is obtained by
Deviations
I
-41.75
-92.50
-13.00
Seasonal
Quarter
III
-128.00
-145.00
-165.50
-147.25
-49.08
-50.46
-438.50
-146.17
-147.55
20.12
6.71
5.33
-50.00
-148.00
IV
-34.63
12.00
42.75
Total = 5.54
Total = 0.02
reducing each figure by 1.38 (that is 5.54
4)
d) From the figure 1 the forecast trend value of Quarter IV of 1984 is
1790. the seasonal deviation is 5, hence the forecast heating costs
for quarter IV for 1984 are 1795
It can be seen that the trend is a little variable and the seasonal
deviations are not very regular, possibly due to the weather.
Another possible reason for the irregular fluctuation in the heating
cost trend line is an uneven increase in the price of the heating
medium (for example, oil or gas or electricity.)
406
Lesson Nine
LESSON FIVE
QUESTION ONE
a) The Poisson distribution is appropriate because there is a small
probability of an event occurring there are discrete values and the
average of these events (i.e. m = np) is below
10 (50 0.1 = 5)
b) The Poisson formula is
P( x)
xe
!
In this exmple m = np = 50(.2) =1

P ( x 2) = P(x=0) +P ( x=1 ) + p (x=2 )
e e 2e
0! 1!
2!
27181 27181 12 27181
1
1
2 1
0.3679 0.3679 0.1840 0.92
c) Similarly , the following can be drawn up
P
0
0.02
0.05
0.10
0.15
Pa
1.000
0.920
0.544
0.125
0.020
These values are shown on the graph below. The graph is used to
determine two areas of interest
QUESTION TWO
(a)
(i)
Probability = 0.7 0.3 0.7 = 0.147
(ii)
Probability =3C2 (0.72) (0.3) = 0.441;
(iii)
The answer to (ii) is 3 the answer to (i)
Revision Aid
407
This is because either A or B could be detected, A and C, or B and C.
Each of these situations is equally probable, with the probability given in
part (i).
(b) (i) The probability that the defect is undetected by the
inspection procedure is 0.3.
The probability that it is undetected by the secondary check
is 0.4.
The probability that it is undetected by both is 0.3 0.4 =
0.12
(ii)
Call the two faults A and B.

We can have the possibilities:
A is found by inspection procedure, B not found by either procedure.

B is found by inspection procedure, A not found by either procedure.
A is found by secondary check, A and B not found by inspection
procedure.
B is found by secondary check, A and B not found by inspection
procedure.
Adding together the probabilities corresponding these four possibilities,
the required probability is
(0.70.30.4)
+
(0.30.70.4)
(0.30.30.40.6)
(0.30.30.60.4)
=0.0840 + 0.0840 + 0.0216 + 0.0216 + 0.1680 + 0.0432

=0.2112
(iii)
Probability that a fault is detected by the inspection

procedure is 0.7. Probability that a fault is detected by
secondary check is 0.3 0.6 =0.18
Therefore the proportion of faults detected by the inspection procedure

and secondary check, respectively, is
0.7
0.18
and
0.7 0.18
0.7 0.18
that is
70
18
and
88
88
QUESTION THREE
Let F represent a unit which has been found to be faulty.
408
Lesson Nine
Let P(S1) = probability that a unit chosen at random comes from S 1
P(S1) = 0.40
P(S2) = 0.35
P(S3) =
0.25
1.00
The percentages of faulty unit are as follows:
P( F S1 ) 0.02
P( F S2 ) 0.03
P( F S3 ) 0.04
The required probability may be expressed as;
P(S1 F)
the unknown probability is P(F) to be slotted into the formula
Note that
P(S1 F)
P(S1 ) P( F S1 )
P(F)
P(S2 F)
P(S2 ) P( F S2 )
P(F)
P(S3 F)
P(S3 ) P( F S3 )
P(F)
the faulty part can only have come from S1 or S2 or S3 and so
P(S1 F)+P(S2 F)+P(S3 F)=1.0

since P(F) is a denominator and the sum equals unity then the expression
P(S1 ) P( F S1 )+P(S2 ) P( F S2 )+P(S3 ) P( F S3 )

must be equal to P(F)
thus
P(F)= (0.4 0.02)+(0.35 0.03)+(0.25 0.04)
0.0080 0.0105 0.0100
= 0.0285
Substitution into P(S1 F)
Gives
P(S1 ) P( F S1 )
P(F)
P(S1 F)
0.4 0.02
0.0285
= 0.2807
Revision Aid
409
QUESTION FOUR
QUESTION FIVE
P=0.6 q=1-p=1-.06=0.4
pq
n
0.6 0.4
200
0.035
0.65 0.60
1.43
0.035
Which gives 0.4236 (42.36%)
This means there is a (0.5-0.4236) 0.0764(7.64%) chance of 65% or more

passing the first attempt. This is graphically shown below.
Probability
density
42.36%
7.64%
0.60
0.65
i.e. the mean
X
proportions
QUESTION SIX
a) The left-hand tail of the distribution below 900 hours represents the
number of lamps that will fail before 900 hours. Accordingly, if the
probability of the distribution above 900 hours is found and deducted
from 0.5, the required number can be found thus:
1000 900
1.33
75
The probability of which is 0.4082
410
Lesson Nine
Lamps failing before 900 hours =5000(0.5- 0.4082)=459

b)
1000 950
0.67
75
Lamps failing between 1000 and 950 hours = 5000

(0.2486)=1243
c)
1000 925
1
75
Proportion failing between before 925 hours = 0.5 0.3413 =

15.87%
d) A probability of 0.3(0.5-02) is found in the tables with a Z
score of 0.84
Thus 0.84=
z=
1000-916
84
=1 s.d.=
=100
s.d.
0.84
Revision Aid
411
LESSON SIX
QUESTION ONE
The sample mean is 150 grams so that the estimate of the population
mean is 150 grams.
150 grams
i.e. x 150 grams
Where means best estimate
of .
When n= 625
Standard error of the mean
s
30
=
=1.2grams
n 625
When n =1225
sx =
30
=0.857 grams
1225
QUESTION TWO
Correction
factor =
N-n
800 80
0.9493
N-1
800 1
Approximation to correction factor= 1-
n
80
1
0.9486
N
800
It will be seen that to three significant figures, accurate enough for all
practical purposes, the two formulae give the same result, i.e. 0.949.
Standard deviation error of the means
x =
n
1
N
n
6
0.949
80
0.637 grams
Note: The standard error without correction is
6
0.671 grams
80
412
Lesson Nine
Thus the precision of the sample estimate, measured by the standard
error, is determined not only by the absolute size of the sample but also
to some extend by the proportion of the population sampled.
Revision Aid
413
QUESTION THREE
The Central Limit Theorem states that the means of samples (and the
medians and standard deviations) tend to be normally distributed almost
regardless of the shape of the original population.
QUESTION FOUR
QUESTION FIVE
QUESTION SIX
H0 : 2 = 1
H1 : 2 1 (one-tail test)
P1 =
200
0.2
1000
p2 =
240
=0.22
1091
Pooled sample proportion
p=
200+240
0.21
1000+1091
and q=1-p=1-0.21=0.79
S P1 P2
0.21
0.79 0.21
0.79
0.0178
1000
1091
z=
0.20-0.22
=1.12
0.0178
The critical value of one-tailed test t the 5% level is 1.64 so that as

the calculated value is lower than this value we conclude there is
insufficient evidence to reject the null hypothesis.
QUESTION SEVEN
H 0 :1 - 2 =0
H1:1 - 2 =0
It will be seen that this is a two-tailed test.
The common standard deviation is calculated first.
sp=
(n1 -1)s12 (n 2 1)s 22

n1 +n 2 2
414
Lesson Nine
(12 1)632 (9 1)762

12 9 2
68.77
s x1 =
SP
68.77
19.85
n1
12
s x2 =
sp
68.77
22.92
n2
9
s(x1 -x 2 )= s 2x1 +s 2x2 =30.32

and, finally the t score can be calculated
t=
x1 -x 2
1060 970
2.97
s(x1 -x 2 )
30.32
The 5%nalue with (n1+n2-2)= (12+9-2) = 19 degrees of freedom is 2.093.

Since the calculated value is greater than this, the null hypothesis can be
rejected at the 5% level, i.e. we conclude that there is a significant
difference between the mean monthly incomes.
QUESTION EIGHT
We are testing whether the observed number of defects fits a binomial
distribution, thus;
H0: the observed number of defects conforms to a binomial distribution of
the form
(p+q) 5 where p=0.18
H1 :that the observations do not conform.
The observed frequencies are already given so its only necessary to
calculate the frequencies expected from a binomial distribution to the
power 5 i.e. (p+q)5, where p=0.18 and q=1-0.18= 0.82.
The probabilities of the various values of p and q can be found from
binomial probability tables if available. Alternatively they can be
calculated from the binomial expansion. I.e.
P5 +5 (p4 q)+ 10(p3 q2)+ 10(p2 q3)+ 5(p q4)+q5
This shows the probabilities for 5, 4, 3, 2, 1 and 0 defectives and when p
= 0.18 (the probability of a bulb being defective) and q=0.82 (the
probability of not being defective) the probabilities range from 0.0002
(i.e. 0.185) for five defectives to 0.3711 (0.82 5) for no defectives. When
the probabilities are known they are multiplied by 100 boxes to find the
expected frequencies which are used in the normal X2 procedures.
The table below summarises the calculations:
Revision Aid
415
Defectives
0
1
2
3
4
5
No. of boxes
Observed
40
37
17
5
1
0
Binomial
Probabiliti
es
0.3711
0.4069
0.1786
0.0392
0.0040
0.0002
Expected
Frequenc
y
37.11
40.69
17.86
3.92
0.4
0.02
(O - E)
(O - E)
2
8.35
13.62
0.74
2.76
E
0.22
0.33
0.04
0.64
1.23
Note: Because of the very small values of the expected frequencies for 3,
4 and 5 defectives they have been combined onto one but it makes little
difference to the results if they are not combined.
The calculated X2 value is compared with an X2 value for the appropriate
degrees of freedom. Because the last three classes have been combined
there are four classes remaining, i.e. for 1, 2 and the combined class for
3-5 rejects thus
V =n 2 = 4 - 2=2.
The X2 value for two degrees of freedom at the 5% level is 5.991 and, as
the calculated value of 1.23 is well below this, we accept the null
hypothesis and conclude that the observed values fit a binomial
distribution to the power 5 when p = 0.18.
Note: If the last three classes had not been combined, the calculated X2
score would have been 1.8 and there would have been 4 degrees of
freedom. At 4 degrees of freedom the score is 9.488, so the conclusion
would be the same, i.e. we accept the Null Hypothesis.
QUESTION NINE
QUESTION TEN
1.
a)
S.e. =
pq
n
0.1 0.9
80
0.033
Where p =proportion late

Actual p =
6
80
= 0.075
0.1 0.075
0.75 standard errors
0.033
416
Lesson Nine
This is less than the standard errors at the 5% level 1.96 so we
conclude there is no significant improvement in deliveries.
b) 0.75 standard errors from the mean would cover 0.2734 i.e.
54.68%, say 55% of the population, so the MDs claim could be
accepted at any level of confidence
2.
Calculated mean of sample = 4.68 gms

Calculated sample s.d. = 1.968
best estimate of population s.d.=
n
10
1.986
2.093
n-1
9
std. error of mean=
2.093
0.66
10
There are 10-1 =9 d.f and it is a one-tailed test. The 5%value for a
one-tailed test is 1.833.
The sample mean should be within 1.833*0.66 gms = 1.21 gms.
The actual difference is 4.68-3.8 gms= 0.88 gms so the figures do
not support the Purchasing Managers assertion.
QUESTION ELEVEN
Revision Aid
417
LESSON SEVEN
QUESTION ONE
QUESTION TWO
QUESTION THREE
QUESTION FOUR
Let the value of the small store be = 1
And let the value of the large store be = 2
If both survive, A loses nothing, if only larger store survives, A loses 1
and if smaller store survives, A will lose 2.
DEFENDER
Defend the smaller

store
I
Defend the larger
store
II
I
Attack the smaller

store
I
Both survive
0
The smaller store
destroyed
II -1Row
Minimum
I
-2
-2
II
-1
-1
Column
Maximum
There is no saddle point.

Hence this is a problem of mixed strategy.
Using method given
Attack the larger

store
II
The larger store
destroyed
-2
Both survive
0
418
Lesson Nine
I
0
II
-2
0-(-2)=2
II
-1
0-(-1)=1
0-(-1)=10-(-2)=2
The final strategy is given by the matrix
I
0
II
-2
1/3
II
-1
2/3
A
2/3
plays
first row 1/3 rd of the time (randomly)
1/3
A plays his second row 2/3 rd of the time.

Similarly
B plays his first column 2/3 rd of the time
B plays his second column 1/3 rd of the time.
The values of the game
=01/32/3 +(-2)(1/31/3) +(-1)2/32/3 +01/32/3
=0-2/9-4/9+0
= -6/9
= -2/3
QUESTION FIVE
X
Column
Maximum
Y
1
-2
2
2
2
1
2
2
-1
-2
1
1
Row
Minimum
-1
-2
0
There is no saddle effect.

Let the probabilities of y be p, q, r.
his
Revision Aid
419
Then the three payoffs to y corresponding to each of the three counter
moves of his opponent x must all be equal to the optimal value v of the
game.
Ys payoffs against the three moves of x are
1p+2q+(-1r)
-2p+1q+1r
2p+0q+1r
We obtain three equations by equating each of the three payoffs to v
1p+2q-1r =
-2p+1q+1r =
2p+0q+1r =
Also p+q+r = 1 (Total probability)

1p+2q+1r=
1p+2q+1r=
p+q+r =
-2p+1q+1r.. (1)
2p+0q+1r(2)
1
..(3)
Solving these equations simultaneously, we get

P=2/17,
q=8/17,
and
r=7/17
Similarly using the same reasoning as before

Let the three probabilities of x be p, q, r
We get 1p+2q+1r
Also p+q+r
= 2p+1q+0r
= -1p+1q+1r
Solving them simultaneously, we get

P=3/17,
q=5/17,
and
r= 9/17
Hence x should play his rows in the ratio

3: 5: 9
And y should play his columns in the ratio 2: 8: 7
(Note: Rows and columns should be played at random)
[(payoff * joint probability of the payoff]
8 3
7 3
2 3
2
(1)

17 17
17 17
17 17
i.e. 1
+6 other values calculated in the same way as above

which amount to 11/17
Alternatively
420
Lesson Nine
Value of the game is
1 3+(-2) 5+2 9 11
3+5+9
17
Revision Aid
421
LESSON EIGHT
QUESTION ONE
a) Degeneracy in linear programming is a case where one or more basic
variables have values of zero in the optimal solution. It is dealt with
by selecting another of the tied variables for removal resolving the
cycling problem of degeneracy.
b)
-50
-60
100
75
500
500
400
800
700
75
300
Demand
The Network diagram is as follows
Supply
i)
400
800
400
Trans-shipment
7
-40
Arcs represent cost/revenue or capacities (cost of shelving in this

case) Directed arcs show where flow is to.
Net flow=Flow into a node (-ve)+ flow out of a node (+ve)
Supply=demand. Nodes 1 and 2 are source nodes (with +ve net
flow), nodes 3 and 4 are trans-shipment nodes (with zero net
flow) and nodes 5,6,7 are sink node (with ve net flows)
ii) The linear programming model for this problem is as follows
Taking xij to be units of shelves to be routed from supplies i to
demand j
Minimize
z 500 x 13 800 x 14 700 x 23 400 x 24 100x 35 500x 36
800 x 37 300 x 45 400x 46 400 x 47
Subject to
x 13 x 14 75
node 1 (Apex)
x 23 x 24 75
node 2 (Maxima)
x 13 x 23 x 35 x 36 x 37 0
node 3 (Ujumi)
x 14 x 24 x 25 x 26 x 27 0
node 4 (Pizza)
x 35 x 45 50
node 5 (Oceanic)
x 36 x 46 60
node 6 (Homegrown)
x 37 x 47 40
node 7 (Down town)
422
Lesson Nine
xij0
QUESTION TWO
a) Let x1 and x2 be the number of shares invested in airline and
insurance shares respectively. Then the objective function will be as
follows:
Objective function (maximize)
z = 2x1 + 3x2
Share appreciation.
Subject to the following restrictions:

1. 40x1 + 50x2 100,000
sh. Total investment.
2. 50x1 40,000
sh. Investment in insurance.
3. x1 + 1.5x2 2600
sh. Dividends.
4. x1, x2 0
Non-negativity of number.
b) Reduced cost represents the amount that objective function
coefficient of a non-basic decision variable must improve (increase in
this case) to be put into the basis. In this case since reduced cost is
equal to zero for both variables, it means they are in the basis.
Dual prices on the other hand mean the amount that share
appreciation will improve in case any of the limiting constraints is
increased by one unit. This occurs for constraints that the slack is
exactly zero. In this case total investment and investment in
insurance do have positive dual prices while Dividends does have
zero dual price (can not increase share appreciation if increased by
one unit).
c) From the computer solution, the clients money should be invested as
follows, to satisfy the restrictions:
1500 shares to be invested in Airline shares, and
800 shares to be invested in insurance shares, to give an optimum
quarterly share appreciation of sh. 5400.
d) For the optimal decision to remain the airline shares appreciation
should not be lower than 2.5, but can be any higher amount. That is,
the optimum solution is insensitive to increase in the share
appreciation.
QUESTION THREE
a) Formulation of the problem
Take x1 to be the number of large loaves and x 2 to be the number of
small loaves.
Objective function
z = 5x1 + 3x2
Profit
Constraints.
Revision Aid
423
Line
loaves.
Line
loaves.
Line
Line
x1 280
Maximum number of large
x2 400
Maximum number of small
3
4
10x1 + 8x2 4000

25x1 + 12.5x2 8000
5
x1, x2 0
Space (1000-3) m3
Hours (1000-3)
Non-negativity.
424
Lesson Nine
Using graphical method.
Small Vs Large loaves

700
600
500
x2
400
300
200
100
D
E
0
F
-100
100
200
300
400
x1
3
The feasible area is that enclosed by corner points ABCDEF

Corner points are where the optimum feasible solution exists. The
upper points are to be considered for maximization problem.
At corner point A, Line 2 and x1=0 intersect
So x2= 400
Putting these value in the objective function gives the
following
z = 5x1 + 3x2=50 + 3400=1200
ProfitA
At corner point B, Line 2 and Line 3 intersect
4000 8 400
80
x2= 400 and x1=
10
Putting these value in the objective function gives the
following
z = 5x1 + 3x2=580 + 3400=1600
ProfitB
At corner point C, Line 3 and Line 4 intersect
The equations for the lines are:
Line 3 10x1 + 8x2 = 4000
(1)
Line 4 25x1 + 12.5x2 = 8000
(2)
Multiplying equation (1) by 25 and equation (2) by 10 gives
the following
500
Revision Aid
425
(10x1 + 8x2 = 4000) 25
(25x1 + 12.5x2 = 8000) 10
250x1 + 200x2 = 100,000
(3)
250x1 + 125x2 = 80,000
(4)
Deducting equation (4) from Equation (3) gives:
75x2 =20,000
x2 =266.7
4000 - 8 266.7
186.7
x1 =
10
Putting these values in the objective function gives the
following
z = 5x1 + 3x2=5 186.7 + 3 266.7=1733
ProfitC
At point D, Line 1 and Line 4 intersect.
x1 = 280
8000 280 25
80
x2 =
12.5
The profit at this point is then equal to:
z = 5x1 + 3x2=5280 + 380=1640
At point E, Line 1 and x2 = 0 intersect
x2 = 0
x1 = 280
z = 5x1 + 3x2=5280 + 30=1400
ProfitD
ProfitE
Comparing these profits, it is at point C that profit is maximized.

So the solution is that:
x1 = 186
No. of large loaves produced.
x2 = 266
No. of small loaves produced.
And the maximum profit is ProfitC=Shs. 1,733
NOTE: Two methods can be used to solve the problem. It is easily
solved using the graphical rather than the simplex method, since it is
just two variables and sensitivity analysis is not required.
b) To solve this kind of problem (linear programming problem) the
following procedure is followed:
First, the problem has to be formulated. That is, the objective
function and constraints are determined.
Objective function is that which is to be optimised.
Constraints are the limitations in resources.
-
Secondly, the method of solving is determined. In this case, of a

two-variable problem, the better method to use is graphical
method, rather than simplex method.
Thirdly, the constraints are taken as equalities and a line graph

drawn. The unwanted regions are shaded out. Resulting region
indicates the feasible region. The optimum point exists where
there are corner points, which show extreme amounts. For
426
Lesson Nine
maximization it is the outer ones to the right and up. For
minimization it is the lower side.
-
Lastly, the profit is determined at those points where there is

maximum profit, is the point to be used.
NOTE: This part simply asks for the procedure followed.

QUESTION FOUR
a)
i)
Simplex method will be appropriate.

Formulation of problem.
Objective function.
Let x1 and x2 be the number of Deluxe and Professional bicycle
frames produced respectively per week.
z = 1000x1 + 1500x2
Profit sh.
Constraints:
2x1 + 4x2 100
3x1 + 2x2 80
x1 , x 2 0
Aluminum alloy
Steel alloy
In standard form:
0 = z 1000x1 1500x2 + 0s1 + 0s2
100 = 2x1 + 4x2 + s1 + 0s2
80 = 3x1 + 2x2 + 0s1 + s2
Table
1
s1
s2
z
Table
2
x2
s2
z
x1
2
3
-1000
x2
4
2
-1500
s1
1
0
0
s2
0
1
0
Solution
100
80
0
Ratio
25
40
1/4
2
-250
1
0
0
1/4
-1/2
375
0
1
0
25
30
37,500
50
15
Table
3
x2
0
1
3/8
-1/4
17.5
x1
1
0
-1/4
1/2
15
z
0
0
312.5
125
41,250
Stop here
The optimal weekly production schedule is as follows:
Revision Aid
427
Deluxe bicycle Frame = 17.5 17
Professional bicycle Frame = 15
ii) Let 1 be the change in profit from Deluxe bicycle frame.
2 be the change in profit from Professional bicycle frame. So
C1 = 1000 + 1
and C2 = 1500 + 2
limit of profit.
From the final table:
To avoid entry of
s1
312.5 1/41 > 0
1 < 1250
s2
125 + 1/21 > 0
1 > -250
From the two conditions:
-250 < 1 < 1250 and
750 < C1 < 2250
To avoid entry of
s1
312.5 + 3/82 > 0
s2
125 1/42 > 0
2 > -833.33
-2 > -500 2 < 500
So from the two conditions:

-833.33 < 2 < 500
And C2 varies as follows
666.7 < C2 < 2000
NOTE: This problem could be solved graphically with part (i)
Easily determined. Part (ii) Limits will be determined from
equating slopes of the objective function which has coefficients
with constraints nearest to it.
For part (ii), accurate drawings will be required. Intuition will have
to be followed and there will be an assumption that fractions are
possible.
b) The technique is really involving.
Assumes fractions are possible, which is not really the case like here
where we cannot make a bicycle frame.
QUESTION FIVE
a)
i)
A feasible solution is one that satisfies the objective function and

given constraints
ii) Transportation problem is a special linear programming problem
where there a number of sources and destinations and an
optimum allocation plan is required. Total demand equal total
supply
iii) Assignment problem is a special kind of transportation problem
where the number of sources equals the number of destinations.
That means for every demand there is one supply.
b) This is a case of assignment problem.
428
Lesson Nine
Assignment problems usually require that the number of sources
equal the number of supply. Here there are 5 districts and only 4
salespersons. A dummy salesperson E is introduced with zero
ratings.
Sales persons
A
B
C
D
E
Districts
1
2
92
90
84
88
90
90
78
94
0
0
3
94
96
93
89
0
4
91
82
86
84
0
5
83
81
93
88
0
By following the Hungarian method:

Firstly:
For each row, the lowest rating is reduced from each rating in the
particular row. This results to a row reduced rating table. Then all
the zeroes are to be crossed by the least number of vertical and
horizontal lines. If the number of lines equal the number of rows (or
columns = 5 in this case) then the final assignment has been
determined. Otherwise the following steps are followed.
Revision Aid
429
A
B
C
D
E
1
9
3
4
0
0
2
7
7
4
16
0
3
11
15
7
11
0
4
8
1
0
6
0
5
0
0
7
10
0
Secondly, for each column, the lowest rating is reduced from every
rating in the particular column. In this case the table will remain the
same since the dummy salesperson has ratings of zero for every
district.
Thirdly a revision of the opportunity-rating table is done.
The smallest rating in the table not covered by the lines is taken (in
this case it is one). This is reduced from all the uncrossed ratings and
added to the ratings at the intersection of the crossings. Then all the
zeroes are to be crossed by the least number of vertical and
horizontal lines. If the number of lines equal the number of rows (or
columns = 5 in this case) then the final assignment has been
determined.
Otherwise the following steps are followed.
1
2
3
4
5
A
8
6
10
8
0
B
2
6
14
0
0
C
4
4
7
0
8
D
0
16
11
6
11
E
0
0
0
0
1
Third step is repeated as follows:
1
2
A
6
4
B
0
4
C
2
2
D
0
16
E
0
0
3
8
12
5
11
0
4
8
0
0
8
2
5
0
0
8
13
3
Still the optimal solution has not been reached. Third step is again
repeated to give the following table:
1
2
3
4
5
A
6
2
6
8
0
B
0
2
10
0
0
C
2
0
3
0
8
D
0
14
9
8
13
E
0
0
0
4
5
An optimal assignment can now be determined since the number of
lines crossing the ratings is equal to 5.
Lastly, the assignment procedure is that a row or column with only
one zero is identified and assigned. This row or column is now
eliminated. The other zeroes are then assigned until the last zero is
430
Lesson Nine
assigned. This step-by-step assignment is shown on the following
table from the first one to the fifth one.
Revision Aid
431
District
Sales person
10
13
0
1
14
0
4
5
The assignment is as follows

Salesperso
n
A
B
C
D
Total rating
District
Rating
5
4
2
1
83
82
90
78
333
The total rating is 333.

QUESTION SIX
a) Sensitivity analysis measures how sensitive a linear programming
solution is to changes in the values of parameters. These parameters
include the coefficients of objective function, limiting resources and
non-limiting resources.
So sensitivity analysis involves changing any of these parameters and
showing how the linear programming problem is affected.
Dual values indicate the additional improvement of the solution due
to additional unit of limiting resource. In that way, the additional
improvement of solution is the price worth of paying to release a
constraint
b) Let x1, x2 and x3 be the units of desktop 386, Desktop 286 and laptop
486
Maximize profit
Z=5000x1+3400x2+3000x3
Subject to
x1+x2500
limit of desktop models
x3 250
limit of laptop model
x3 120
limit of 80386 chips
432
Lesson Nine
x2+x3400
limit of 80286 chips
5x1+4x2+3x22000
hours available
Assumptions x1, x2, x3 0
Linearity/proportionality
Divisibility
Deterministic
Additive
c)
i)
The optimum product mix is that the numbers of units to produce

are
Desktop 386-120
Desktop 286-200
Laptop 486-200
Maximum profit is
Z=5000120+3400200+3000200=Sh1,880,000
Unused resources include the following
JK computers can still produce 180 more desktop models (500120-200) and 50 laptop models (250-200)
For used up resources the prices to pay for any additional unit
are as follows
Sh150 for 80386 chip
Sh90 for 80286 chip
Sh20 for any hour
ii) The range for the variables x 1, x2 and x3 are to indicate where the
number of units can change without affecting the basic solution
The range for the constraints indicate the extent the resources
can be changed without altering the basic solution of the linear
programming problem
iii) The dual value of 80386 chip is Sh 150. That is the addition
increase in profit due to increase of one chip. So if the company
increases the number of chips by 10, the additional profit will be
10150=Sh1,500.
QUESTION SEVEN
a) Network
Missing diagram
The critical path is A, E, F, H, I.
The duration of the critical path is 15 days.
b) Assuming all the activities start as soon as possible, the following
chart shows when activities will start and finish.
Revision Aid
433
Missing diagram
Consequently the following resource allocation is required on a day to
day basis.
434
Lesson Nine
Day
Activities
1
2, 3
4
5, 6
7
8
9, 10
11, 12
13, 14, 15
A,
A,
A,
C,
C,
E
F
H
I
B
D, G
G
E, G
E
Number of increased
staff
1+3
=4
1+1+1
=3
1+1
=2
2+2+1
=5
2+2
=4
2
=2
2
=2
1
=1
1
=1
Current costs with 5 staff = 15 days 5 500 = 37500

If activity C is delayed to start on day 7 only 4 staff are required and the
project duration unchanged. The cost is
15 days 4 500 = 30000
However if the duration is increased by starting B on Day 1 and delaying
activities A, E, F, H, I by one day and C until day 12 only a maximum of 3
staff are required thus:
Revision Aid
435
MOCK EXAMINATION
QUESTION ONE
a) Explain the importance of set theory in business
(4marks)
b) By use of matrix algebra, develop the leontief inverse matrix.
(8marks)
c) Digital ltd manufactures and sells floppy disks at Nairobi industrial
area. The average revenue (AR)(in thousands of shillings )of
producing x floppy disks are given by the following functions
ATC=1/2X2 -5/2X+50+50/X
And
AR=800-2X2
Where: x is the number of floppy disks produced
Required:
i.
The profit function
(3marks)
ii.
The number of floppy disks required to maximize profit
(3marks)
iii.
The maximum profit
(2marks)
(Total:
20marks)
QUESTION TWO
a) State any five problems encountered in the construction of the
consumer price index
(5marks)
b) An investment analyst gathered the following data on the 91-day
Treasury bill rates for the years 2003and 2004
Month
Treasury bill rates (%)
2003
2004
January
3.2
5.5
February
3.0
5.2
March
2.8
4.3
April
2.5
3.6
May
2.9
3.3
June
3.4
2.7
July
3.7
2.4
August
4.0
2.0
September
3.8
2.3
October
4.2
2.8
November
4.5
3.1
December
5.1
3.7
The analyst would like to determine if on average there was a
significant change in the Treasury bill rates over the two years.
Required:
436
Lesson Nine
i.
ii.
The mean and variance of the Treasury bill rates for each year
(10marks)
Determine if there is a significant difference in the average
Treasury bill rates (use a significant level of 1%).
(5marks)
Note: S2=
n1 1 S12 n2 1 S 22
n1 n 2 2
Revision Aid
437
QUESTION THREE
a) Describe the characteristics of the following statistical distributions
i.
Binomial distribution
(3marks)
ii.
Poisson distribution
(3marks)
b) High Grade Meat Ltd produces beef sausages And sells them to
various supermarkets .In order to satisfy the industrys
requirements ,the firm may only produce 0.2percent of sausages
below a weight of 80 grammes .The sausage producing machine
operates with a standard deviation of 0.5 grammes .The weights of
the sausages are normally distributed
The firms weekly output is 300,000sausages and the sausage
ingredients cost shs5.00 per 100 grammes ,sausages with weights
in excess of 82 grammes require additional ingredients costing sh
2.50 per sausage
Required
i.
The mean weight at which the machine should be set
(4marks)
ii.
The firms weekly cost of production
(10marks)
(Total:
20marks)
QUESTION FOUR
a) A survey of undergraduate students at High Fliers University
(HFU)showed the following results regarding gender and the fields of
specialization in their studies
Gende
r
Male
Femal
e
Total
Field of specialization
Busine Scienc
Arts
ss
e
100
250
100
200
50
100
300
300
200
Total
450
350
800
Required
i.
Determine if the field of specialization in the studies is dependent
on gender (use significance level of 5%)
(10marks)
ii.
An earlier survey showed that the proportion of female students
taking science was only 10%of the total student population taking
science .Does the data above show any significant improvement in
the proportion of female students taking science (use a
significance level of 5%)
(6marks)
438
Lesson Nine
b) Charles Nzioka who is a barber has found out that he can shave on
average 4 customers per hour .The arrival rate of customers averages
3customers per hour
Required
i.
The proportion of time that Charles Nzioka is idle
(1 mark)
ii.
The probability that a customer receives immediate service
upon arrival (1mark)
iii.
Average number of customers in the queuing system
(1 mark)
iv.
Average time a customer spends in the queuing system
(1 mark)
(Total:
20marks)
QUESTION FIVE
a. Differentiate between the additive model and the multiplicative model
as
used
in
time
series
analysis
(4marks)
b. The sales data of XYZ Ltd (in millions of shillings) for the year 2001 to
2004 inclusive are given below.
Year
2001
2002
2003
2004
1
40
42
46
54
2
64
84
78
78
Quarter
3
124
150
154
184
4
58
62
96
106
Required
i.
The trend in the data using the least square method
(8marks)
ii.
The estimated sales for each quarter of the year 2004
(4marks)
iii.
The percentage variation of each quarters actual sales for the
year 2004
(4marks)
(Total:
20marks)
SECTION II
QUESTION SIX
a. Give two applications of simulation in business
(2marks)
b. Collins Simiyu recently acquired a piece of land Kitale .A property
development company has offered him 300,000 for the piece of
land .He has to make a decision on whether to cultivate the piece of
land or to sell it to the property development company If he decides
Revision Aid
439
to cultivate the land ,there is a probability of getting a high
,medium ,or low harvest .The expected net income for each of the
above states of harvest is shown below:
State of
Net income
harvest
(sh)
High
500000
Medium
100000
Low
(20000)
From past experience there is a 10percent probability that the
harvest will be low, a 30 per cent probability that the harvest will be
medium and a 60percent probability that the harvest will be high
.Colins Simiyu can engage an agricultural expert to carry out a survey
on the productivity of the land which will cost him sh30, 000. The
agricultural expert gives the following information as to the reliability
of such surveys (prior probabilities)
Results of survey
Accurate
Not accurate
High
0.35
0.25
0.60
state of harvest
Medium
Low
0.10
0.05
0.10
0.15
0.20
0.20
Total
0.5
0.5
1.0
Required
i.
Construct a decision tree for the above problem
(6marks)
ii.
The expected monetary value for each decision
(10marks)
iii.
The decision that you would recommend
(2marks)
(Total:
20marks)
QUESTION SEVEN
a. Explain the difference between assignment and transportation

problems (4marks)
b. State the assumptions made in solving a transportation
problem (4marks)
c. Umoja Engineering Works Ltd has a network of branches all
over Kenya .The branches are used to service repair and install
equipment for their clients .Currently ,the Nairobi branch has
four clients who require installation of equipment .Each client
requires the services of one engineer
There are four engineers who are not engaged at the moment
and can be assigned any one of the tasks .However, these
engineers have to travel form different locations and the
Nairobi branch has to meet their travel and subsistence
allowances. The allowances vary from one engineer to another
440
Lesson Nine
and according to the client the engineer has been assigned to
work for.
The table below shows the costs (in thousand of shillings)
associated with each engineer
Engine
er
A
B
C
D
1
37.0
57.0
22.0
39.0
Client
2
27.0
22.0
25.0
42.0
34.0
79.0
61.0
54.0
21.0
34.0
45.0
43.0
Required
i.
The assignments to be made in order to minimise the
total cost of engineers
(10marks)
ii.
The minimum cost of using the engineers
(2marks)
(Total 20marks)
QUESTION EIGHT
a. Define the following terms as used in network analysis:
i.
Crash time
(2marks)
ii.
Optimistic time
iii.
Forward pass
iv.
Dummy activity
v.
Slack
b.
(2marks)
(2marks)
(2marks)
(2marks)
James Mutiso is a computer engineer in an information technology

firm .The firm has decided to install a new computer system to be
used by the firms helpdesk .James Mutiso has identified nine
activities required to complete the installation.
The table below provides a summary of the activities durations and
the required number of technicians
Activity
Duration(weeks)
1-2
1-3
2-4
2-5
3-4
3-6
4-5
5-6
6-7
3
1
3
2
2
4
2
2
2
Required number of
technicians
2
4
4
2
4
4
2
2
2
Revision Aid
441
Required:
Draw a gantt chart for the project
(6
marks)
ii.
Mr. Mutiso would like to reschedule the activities so that not more
than 6 technicians are required each week
Determine if this is possible and how it can be achieved by
rescheduling the activities.
(4marks)
(Total
20marks)
i.

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STRATHMORE UNIVERSITY STUDY PACK

Instructions for Students

STRATHMORE UNIVERSITY STUDY PACK

Instructions for Students

1. Linear Algebra and Matrices.....................................................................................1

2. Sets Theory and Calculus........................................................................................45

3. Descriptive Statistics and Index Numbers..............................................................80

4. Measures of Relationships and Forecasting..........................................................116

6. Sampling and Estimation......................................................................................186

STRATHMORE UNIVERSITY STUDY PACK

STRATHMORE UNIVERSITY STUDY PACK

(by subtraction rule)

(by division rule)

Solution of quadratic equations

Set each of the two linear factors equal to

Find the roots of the resulting two linear

STRATHMORE UNIVERSITY STUDY PACK

15x2 + 16x 15 = 0.......................... (step 1)

(5x 3) (3x +5) = 0..........................(step 2)

Solution by Completing the Square

Add the square of the coefficient of x to both sided of the

equal sign. The

Factorize the perfect square on the left hand side.

Find the square root of both sides

Solution by Quadratic Formula

STRATHMORE UNIVERSITY STUDY PACK

Rules for solving linear inequations

STRATHMORE UNIVERSITY STUDY PACK

(by subtraction rule)

(by subtraction rule)

(by division rule)

(by substraction rule)

Linear inequation in two variables: relations

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17y = -34 ..................................................v.

To illustrate this technique, consider the system of two equations i. and ii

The solution of this system can be obtained by

STRATHMORE UNIVERSITY STUDY PACK

are (2 x 2) and (3 x 3) matrices since A has 2 rows and 2 columns and B

The following matrices are equal

Column Matrix or column vector

STRATHMORE UNIVERSITY STUDY PACK

Row matrix or row vector

The transpose of A i.e. AT is given by

STRATHMORE UNIVERSITY STUDY PACK

is a square matrix of order 2

An identity of unity matrix

3x3 unit matrix

A null or zero matrix

are both sub matrices of A

If it is assumed that A, B, C are of the same order, the following

Multiplying a matrix by a number

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Let A = 4 5 6 and B = 200

A B = 4 5 6 200 = 4 100 + 5 200 + 6 300=Shs3,200 a

Multiplication is only possible if the first matrix has the same

STRATHMORE UNIVERSITY STUDY PACK

Use matrix multiplication to find the number of component parts used on

ii. Determinant of a 3 x 3 matrix

STRATHMORE UNIVERSITY STUDY PACK

Simplify 3 x 3 determinants as in ii and then evaluate the 4 x 4

The minors are,