Problem 4 [10 Pts]

Emily and John Doe don't know whether to buy a house now or wait a year, in which case a price increase

may put a house beyond their reach. Their best guess is that, if they wait a year, the price increase will be

approximately normal, with a mean 10% and, reflecting the uncertainty of the market, a standard deviation

of 13%.

(a)

(5 pts) If the price increase exceeds 30% they feel they will be unable to afford a house. What is the

chance of this?

(b)

(5 pts) On the other hand, if the price drops, they will have won their gamble handsomely. What is

the chance of this?