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45-733 PROBABILITY AND STATISTICS I


Answer to Problem 3


Let A1 = Devalue the Currency, A2 = Not Devalue the Currency,
B = News Report
A Diagram of this is:

P(A1) = .3
P(A2) = .7
P(B | A1) = .7 = P("News Report of Devaluation before Actual Devaluation")
P(B | A2) = .25 = P("News Report of Devaluation before No Actual Devaluation")
Hence:

P(A1|B) = [P(A1)P(B|A1)]/ [åj=1,2 P(Aj)P(B|Aj)] = 

                         .3*.7       
         P(A1 | B) = -------------- = .5455
                     .3*.7 + .7*.25