Question 11183
this is simple to do, but i will show you the WHOLE problem rather than just the specific answer...



we have 2 things...

1. will he default on loan.. YES/NO
2. is the economy good... YES/NO


There are therefore 4 possible combinations:
1. DEFAULTS and good economy
2. DEFAULTS and bad economy

3. NO DEFAULT and good economy
4. NO DEFAULT and bad economy

these 4 will have probabilities, that together add up to 1, the total probability..so this is a good check of your work.


Note: "and" in the 4 descriptions...and is multiply, mathematically.


So, the 4 are:
1. 0.04 * 0.65 = 0.026
2. 0.13 * 0.35 = 0.0455
3. 0.96 * 0.65 = 0.624
4. 0.87 * 0.35 = 0.3045


these add up to 1


so defaults whilst good economy is number 1...probability is 0.026


jon.