STUDY SET ‘PREKNOWLEDGE, INCL.

E[F(X)]’
(REFRESHER PROBABILITY THEORY)

February 2023

A thorough understanding of probability theory is required to analyze inventory systems. The

main purpose of the exercises in this section is to practice your knowledge of probability theory
in diverse contexts (not necessarily limited to the analysis of inventory systems).

Exercise 1

Web-shop dom.com, which sells books and DVDs, offers a home delivery service. Customer
orders can consist of multiple items, but, from experience, it can be concluded that no orders
for more than 8 items are being placed. After an order is paid, the items are gathered and
combined into one single package. Ms. Miller, general manager of dom.com, wants to get more
control over the delivery process. For this reason, she wants to gain more insight into the cost
factors, and she ask Mr. Jones, manager of the shipping department, to provide her with the
average packaging costs per order.

(a) Mr. Jones starts by sending an e-mail with the following data to Ms. Miller.

Number of items Packaging costs

per order/shipment of a shipment
1 1.50
2 1.50
3 2.50
4 2.50
5 2.50
6 4.00
7 4.00
8 4.00

He adds: “Based on this table, the average packaging costs of an order can be
computed as (1.5 + 1.5 + 2.5 + 2.5 + 2.5 + 4 + 4 + 4)/8 ≈ 2.81.” Just a couple of
minutes later, Mr. Jones receives a call from Ms. Sanchez, secretary of Ms. Miller. She
informs him that Ms. Miller is not satisfied with the way Mr. Jones computed the average
packaging costs. Why is that?

(b) In order to meet Ms. Miller’s requirements, Mr. Jones asks for additional data from the
sales department. He receives an email with the following information.

Number of items Number of orders

1 201
2 117
3 73
4 47
5 14
6 2
7 0
8 1
 Let 𝑓𝑓(𝑖𝑖) be the number of orders with 𝑖𝑖 items. Provide a mathematical
expression for the probability 𝑝𝑝(𝑖𝑖) that a randomly selected order has 𝑖𝑖 items.
Furthermore, let 𝑋𝑋 be the number of items in an arbitrary order, which has probability
mass function 𝑝𝑝. Give a mathematical expression for the average number of items per
order, utilizing the probability mass function 𝑝𝑝. Evaluate this expression (compute the
result).

(c) Mr. Jones concludes that the expected number of items per order is roughly 2. After
looking up the packaging costs for a shipment of 2 items, he sends a new email to Ms.
Miller stating that the average packaging costs of an order is 1.50. Shortly after sending
the email, Ms. Miller enters Mr. Jones’ office to express her grievance. Why?

(d) Let 𝐶𝐶(𝑖𝑖) be the packaging cost for an order with 𝑖𝑖 items. Provide a mathematical
expression for the expected packaging cost per order and compute the result.

(e) Describe in mathematical terms the difference between the answer that Mr. Jones gave
in question (c) and the answer you obtained in question (d). Promise you will never
make the same mistake as Mr. Jones.

Exercise 2

If the demand during any given day follows a particular distribution with a mean of 100 and a
standard deviation of 50 -independent of anything else-, what is the mean and standard
deviation of demand during four days, respectively?

a) (400, 100)
b) (400, 200)
c) (400, 10000)
d) (200, 200)

Exercise 3
Which of the following is false for two independent random variables X and Y? (E and V are
the expectation and variance operators, respectively.)

a) E[X-Y] = E[X] - E[Y]

b) V[X-Y] = V[X] - V[Y]
c) E[X2] ≥ (E[X])2
d) E[X2] ≥ V[X]

Exercise 4

The demand of a particular product during the sales season is expected to be between 100
and 200 (all possible outcomes being equally likely). You can assume the demand to be a
continuous random variable. Figuring out that the expected demand is 150, you have
ordered 150 units at the start of the sales season. What is the expected number of units that
will be left over at the end of the sales season?

a) 0
b) 7.5
c) 12.5
d) 25

Exercise 5
The demand of a particular product during the sales season is expected to be between 0 and
200 (all possible outcomes being equally likely). You can assume the demand to be a
continuous random variable. Figuring out that the expected demand is 100, you have ordered
100 units at the start of the sales season. What is the expected number of shortages at the
end of the sales season?

a) 0
b) 10
c) 25
d) 50

Exercise 6
A company that produces soaps and detergents uses coconut oil in the soap-making process.
At the production plant, the coconut oil is kept in a storage tank with a size of 1000 liters. The
amount of coconut oil that is used in the production process varies from day to day. Based on
historical data, the daily usage in liters is uniformly distributed on the interval [500,1000], with
the usage on two different days being independent.

To ensure the availability of coconut oil for the production process, at the end of each day the
tank is refilled to the maximum level of 1000 liters. The coconut oil is transported from a central
warehouse to the production site by trucks that have a maximum capacity of 200 liters.

The manufacturer who produces and supplies the coconut oil to the central warehouse has to
make extra production costs if his daily production quantities vary strongly. Assume his daily
production quantities are equal to the daily transportation quantities to the storage tank of the
company producing soaps and detergents. To help him understand the difference in production
quantities in two consecutive days, determine

(a) the expectation of the difference in usage of coconut oil between two days. That is, if
𝑋𝑋 denotes the usage on day 1 and 𝑌𝑌 denotes the usage on day 2, then determine the
expectation of the difference, i.e. 𝐸𝐸[𝑋𝑋 − 𝑌𝑌].

(b) the variance of the difference in usage of coconut oil between two days, i.e. 𝑣𝑣𝑣𝑣𝑣𝑣[𝑋𝑋 −
𝑌𝑌].

The costs of a truck transporting coconut oil to the production site can be decomposed into a
fixed cost and a variable cost (e.g., due to gasoline usages that increases with the load). The
fixed cost is 150 euro per truck and the variable cost for a truck to transport 𝑙𝑙 liters of coconut
oil is 3√2𝑙𝑙 euro.

(c) What is the expected transportation cost per day?

The manufacturer considers 𝐸𝐸[𝑍𝑍] with Z= |𝑋𝑋1 − 𝑋𝑋2 |, the absolute value of the difference in
usage of coconut oil between two days, as an indicator for the variability of the production
quantity.

(d) Determine 𝐸𝐸[𝑍𝑍].

Exercise 7

Carl runs a shop that sells several household appliances, among which vacuum cleaners. The
shop is open five days per week, from Monday until Friday. In his assortment, there is one type
of vacuum cleaner, 1CV-Clean, that is quite popular. Based on his experience, Carl thinks that
currently the demand for this type is stationary over time and that the demand in disjoint periods
is independent. He believes that the demand in a week can be modeled by a normal distribution
with mean 15 and variance 25. Under the current ordering strategy, there is always enough
inventory to satisfy the demand.

A large part of the shop’s success can be attributed to the sales assistant, who is specialized
in getting customers to buy things they don’t need. The sales assistant doesn’t get a standard
wage; at the end of each day, he gets paid bonuses based on the number of items he sells of
each of the product categories. As for the 1CV-Clean vacuum cleaners, if 𝑋𝑋 vacuum cleaners
are sold on a day, the shop assistant receives

0, 𝑖𝑖𝑖𝑖 𝑋𝑋 < 𝜇𝜇,

𝑏𝑏(𝑋𝑋) = �
2(𝑋𝑋 − 𝜇𝜇), 𝑖𝑖𝑖𝑖 𝑋𝑋 ≥ 𝜇𝜇,

where 𝑏𝑏(𝑋𝑋) is in euro and 𝜇𝜇 denotes the mean number of 1CV-Clean vacuum cleaners sold
on a day.

(a) Give the expectation of this daily bonus. You may assume that the demand process is
stationary throughout the week (i.e., the demand distribution is the same for each
weekday) and that the demand at different days is independent. You may use the
following results about the normal distribution:
• If 𝑓𝑓(. ) is the probability density function of a normally distributed random variable
with mean 𝜇𝜇 and standard deviation 𝜎𝜎, then
𝑏𝑏
𝑎𝑎 − 𝜇𝜇 𝑏𝑏 − 𝜇𝜇 𝑏𝑏 − 𝜇𝜇 𝑎𝑎 − 𝜇𝜇
� 𝑥𝑥𝑥𝑥(𝑥𝑥)𝑑𝑑𝑑𝑑 = 𝜎𝜎𝜎𝜎 � � − 𝜎𝜎𝜎𝜎 � � + 𝜇𝜇Φ � � − 𝜇𝜇Φ � �
𝑎𝑎 𝜎𝜎 𝜎𝜎 𝜎𝜎 𝜎𝜎
for all 𝑎𝑎 and 𝑏𝑏. Here, 𝜑𝜑(. ) and Φ(. ) are the probability density function and the
cumulative distribution function of the standard normal distribution, respectively.
• The sum of 𝑛𝑛 independent normally distributed random variables with mean 𝜇𝜇 and
variance 𝜎𝜎 2 is normally distributed with mean 𝑛𝑛𝜇𝜇 and variance 𝑛𝑛𝑛𝑛 2 .

Recently, a newer, more energy-efficient vacuum cleaner has been developed. It will take
some time until this new type of vacuum cleaner will be released to the market, but as soon as
the new type becomes available, the demand for the 1CV-Clean vacuum cleaner will vanish.
No 1CV-Clean vacuum cleaners will be sold anymore. Carl’s belief about the time until the
release of the new type 𝑇𝑇 can be represented by a probability distribution:

0.2 𝑖𝑖𝑖𝑖 𝑡𝑡 = 1 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ

0.5 𝑖𝑖𝑖𝑖 𝑡𝑡 = 2 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
𝑃𝑃(𝑇𝑇 = 𝑡𝑡) = �
0.3 𝑖𝑖𝑖𝑖 𝑡𝑡 = 3 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
0 𝑜𝑜𝑜𝑜ℎ𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒

For example, Carl thinks that with probability 0.5 the new type is released 2 months from now.

(b) What is the expectation of the remaining demand for the 1CV-Clean vacuum cleaner?
What is the standard deviation of the remaining demand? You may assume that there
are 4 weeks in a month.

Exercise 8

A company faces demand from two customers, both of which determine their demand
randomly. More specifically, in each period, independent of each other, each customer tosses
a fair coin to decide whether he/she orders one item or orders nothing. If the outcome is heads,
the customer orders an item; otherwise, the customer orders nothing. Derive the probability
mass function of total demand during two periods.
Exercise 9

Consider a setting in which the weekly demand (Monday-Saturday) follows a continuous

uniform demand distribution on the interval [0,10], with the demand in disjoint weeks being
independent. Determine the probability density function for the total demand in two weeks
using the convolution method.

Exercise 10

A refrigerator retailer has the following promotion for a particular refrigerator model: “Square
your discount, square your pleasure: The % discount on the sales price of this model is the
squared maximum temparature/100.” (i.e. if it is maximum 10 degrees, then the discount =
(102/100)% = 1%.) The weather forecast states that the maximum temperature tomorrow will
be 30 degrees with probability 0.5, 32 degrees with probability 0.1, and 35 degrees with
probability 0.4. If the sales price of the refrigerator is €1000 prior to discount, what is the
expected sales price for tomorrow?

a) 912.64
b) 895.76
c) 856.32
d) 812.18

Exercise 11

Followers Co., an Eindhoven based home appliances retailer follows the following pricing
strategy for their popular kitchen robot model: They check the retail price at the closest
competitor of Followers, Leaders Co., at the beginning of the week and set their price to be
10% less than that of Leaders, unless the price at Leaders is lower than Followers’ reservation
price of €250, in which case the price is set as €250. Customer demand is sensitive to the price
and is observed to be well represented by 100-0.2PF+0.1PL units per week, where PF denotes
the price at Followers and PL denotes the price at Leaders 1. The competition analyst at
Followers estimates next week’s price at Leaders to be somewhere between €270 and €300
(equally likely), unless Leaders does a promotion campaign and sets their price to be €220,
which has a likelihood of 20%. What is next week’s expected demand at Followers for this
kitchen robot model (when the final answer is rounded off to the nearest integer)?

a) 80
b) 78
c) 76
d) 74

Exercise 12
Remow is an engine manufacturer for Formula 5 races. They sell these engines to some of
the teams racing in the 2023 season. Sad Bull Racing is one of the teams buying engines
from Remow. The simulations that Sad Bull engineers have conducted show that they will
need between 9 and 18 engines during the season (all possible outcomes from 9 to 18 –
inclusive- being equally likely). Note that the demand is a discrete random variable, so DO
NOT assume a continuous distribution.

1
Note that demand can be any real number (and is thus not restricted to integers only). It is of interest
to investigate the situation wherein demand has integer values only as well.
 1. Remow is planning to manufacture 14 engines for Sad Bull Racing. It is stated in
their contract with Sad Bull that if they are unable to deliver an engine (in time),
they have to pay a fine of €120,000m2 with m representing the number of engines
that are not delivered from stock. What is the expected fine that Remow will have
to pay?
2. A student from the TU/Eindhoven is hired by Remow to help decide on the
number of engines that Remow should produce for Sad Bull. The student gives
the advice to build 13 engines, i.e. less than the expected demand, and argues
that Remow will get rid of all the engines by the end of the racing season this
way. Is the student right? If Remow follows this advice, what is the expected
number of engines that will be left over at the end of the racing season?

Exercise 13 (Expectation of a function of two random variables)

We have two random variables X and Y with the following distributions:

1/10 0 ≤ x ≤ 10
f ( x) = 
0 elsewhere

1/ 5 0≤ y≤5
g ( y) = 
0 elsewhere

Determine the expectation of the function h( X , Y=

) X +Y

Exercise 14 (Expectation of a function of two random variables)

We have two random variables X and Y with the following distributions:

2 x 0 ≤ x ≤1
f ( x) = 
0 elsewhere

1/10 0 ≤ y ≤ 10
g ( y) = 
0 elsewhere

Determine the expectation of the function h( X , Y =

) X ⋅Y

Exercise 15 (Expectation of a function of two random variables)

We have two random variables X and Y with the following distributions:

1/ 3 x =1

P( X= x=
) 1/ 3 x=2
1/ 3 x=3


1/ 2 y=0
P(Y= y=
) 
1/ 2 y =1

Determine the expectation of the function h( X , Y=

) X +Y