Professional Documents
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Week 1
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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
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P.1
Random Variables
Probability Distributions
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
Eq. P.4
P.3
Joint, Marginal and Conditional Probabilities
Joint, Marginal and
Conditional
Probabilities
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)?
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