Review of Appendicies
Week 1
1
Appendix A: Summation notation
n
Sum 1: The sum of n values is x x x
i 1
i 1 2 xn
n n
Sum 2: If a is a constant then axi a xi
ni 1 i 1
Sum 3: If a is a constant then a a a a na
i 1
n n n
Sum 4: If X and Y are two var., then ( xi yi ) xi yi
i 1 i 1 i 1
Appendix A: Summation notation
Sum 5: If X and Y are two var., then
n n n
(axi byi ) a xi b yi
i 1 i 1 i 1
Sum 6: The arithmetic mean (average) of n values of X is:
n
xi x1 x2 xn
x i 1
n n
Sum 7: A property of the average is that:
n n n n n n
( xi x ) xi x xi nx xi xi 0
i 1 i 1 i 1 i 1 i 1 i 1
Appendix A: Properties of Linear Functions
Appendix A: Properties of Linear Functions
Appendix A: Properties of Linear Functions
Appendix A: Differential Calculus
Appendix A: Differential Calculus examples
y = a + bx1 + cx2, y = a + bx1 + cx2 + dx1x2, y = a + bx12 + cx2
Appendix A: Natural Logarithm
Appendix A: Natural Logarithm. Fact 6
Appendix A: Exponential function
Appendix B: Random Variables
X is a random variable if it represents a random
draw from some population
a discrete random variable can take on only
selected values
a continuous random variable can take on any
value in a real interval
associated with each random variable is a
probability distribution
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Random Variables – Examples
the outcome of a coin toss – a discrete
random variable with P(Heads)=.5 and
P(Tails)=.5
the height of a selected student – a
continuous random variable drawn from an
approximately normal distribution
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P.1
Random Variables
Probability Distributions
In a large number of trials
X is the number in the cell, X = {1,2,3,4}
Y is the color, Y = {0 if white, 1 if blue}
X = 3, 30% of the time
Denote Probability as Prob(stuff) or P(stuff)
P(X =3) = .3
P(Y =1) = .4
P.1
Random Variables Probability Distributions
We summarize the probabilities of possible
outcomes using a probability density function
(pdf )
The pdf for a discrete random variable indicates
the probability of each possible value occurring
For a discrete random variable X the value of
the pdf f(x) is the probability that X takes the
value x, f(x) = P(X = x)
f(3) = P(X =3) = .3
It must be true that 0 ≤ f(x) ≤ 1
f(x1) + f(x2) + … + f(xn) = 1
P.1
Random Variables Probability Distributions
P.1
Random Variables Probability Distributions
The cumulative distribution function (cdf ) is an alternative
way to represent probabilities
The cdf of the random variable X, denoted F(x), gives the
probability that X is less than or equal to a specific value x:
F x P X x
Example: Using the pdf f(x), we compute the probability
that X is less than or equal to 2 as:
F 2 P X 2 P X 1 P X 2 0.1 0.2 0.3
P.2
Probability
Distributions Probability Distributions
pdf, of a continuous random variable at a specific
point is zero
So for a pdf, areas under a curve represent
probabilities that X falls in an interval, such as:
P 100 X 200 F 200 F 100 0.90291 0.72747
Eq. P.3 0.17544
Remember that F(number) indicates the cdf
P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities
Working with more than one random variable requires a joint
probability density function
– A joint probability is about the probability of two events
occurring simultaneously
• Example: the selection takes the value X = 2 and Y = 1 in
Table P.3 (Y=0 means white, Y=1 means blue)
• We can write this as:
P X 2 and Y 1 P X 2, Y 1 f x 2, y 1 0.1
P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities
Given a joint probability density function, we can
obtain the probability distributions of individual
random variables, which are also known as marginal
distributions
– The probability that Y = 1 is:
P Y 1 fY 1 0.1 0.1 0.1 0.1 0.4
P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities
The conditional probability is the probability of the
outcome X = 2 given that Y = 1 has occurred
– The conditional probability that the random variable X
takes the value x given that Y = y is written P(X = x|Y =
y)
– This conditional probability is given by the conditional
pdf f(x|y):
P X x, Y y f x, y
f x | y P X x | Y y
P Y y fY y
Eq. P.4
P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities
Statistical Independence: if the conditional probability
P.3.2
Conditional
that X = x given that Y = y is the same as the
Probability
unconditional probability that X = x
– This means, if X and Y are independent random
variables, then:
P X x | Y y P X x
Eq. P.4
Expected Value of X: E(X)
The expected value is really just a
probability weighted average of X
E(X) is the mean of the distribution of X,
denoted by mx
Let f(xi) be the probability that X=xi, then
n
m X E ( X ) xi f ( xi )
i 1
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Properties of Probability Distributions
Many economic questions are formulated in terms of
conditional expectation, or the conditional mean
– Example: ‘‘What is the mean (expected value) wage
of a person who has 16 years of education?’’
• In expected value notation, what is
E(WAGE|EDUCATION = 16)?
– For a discrete random variable the calculation of
conditional expected value uses the conditional
probability density function f(x|y) so that:
μ X |Y E X | Y y xf x | y
x
Properties of Expectations
E(a)=a, Var(a)=0
E(mX)=mX, i.e. E(E(X))=E(X)
E(aX+b)=aE(X)+b
E(X+Y)=E(X)+E(Y)
E(X-Y)=E(X)-E(Y)
E(X- mX)=0 or E(X)-E(X)=0
E((aX)2)= E(a2X2) = a2E(X2)
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Conditional Expectation
Key in this class will be to know what value of Y to
expect as a specific value of X
Say what “wage” you would expect when education is at 16
years?
E(Wage|Educ=16)
Also called the Conditional Mean
If X and Y are independent, then
E(Y|X) = E(Y), Cov(X,Y) = 0
If E(wage|education) = E(wage), then there is no relationship
between wages and education level
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