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Probability

Ms. Bergen is a loan officer at Coast Bank and Trust. From her years of experience, she estimates that the probability is .025 that an applicant will not be able to repay his or her installment loan. Last month she made 40 loans.

a. What is the probability that 3 loans will be defaulted?
b. What is the probability that at least 3 loans will be defaulted?

Ans; 0.0613
0.0803

Solution Preview

Using Poisson distribution ...

mu = np = 0.025 * 40 = 1

(a) x = 3

P(x) = e^-mu * mu^x / x!

P(3) = e^-1 * 1^3 / 3! = 0.0613

(b) P(At least 3 will be defaulted) = P(x >= 3) = 1 - P(x < 3) = 1 - [P(0) + ...

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