[Math] Computing expected cost for exponential random variable

exponential distributionprobabilitystatistics

I am reading Probability and Statistics for Engineering and the Sciences.

Exercise 63, Chapter 4 says:

A consumer is trying to decide between two long-distance calling plans. The first one charges a flat rate of 10¢ per minute, whereas the second charges a flat rate of 99¢ for calls up to 20 minutes in duration and then 10¢ for each additional minute exceeding 20 (assume that calls lasting a noninteger number of minutes are charged proportionately to a whole-minute’s charge). Suppose the consumer’s distribution of call duration is exponential with parameter $\lambda$.

  • Which plan is better if expected call duration is 10 minutes? 15 minutes?

Assuming the first question, when the duration is 10 minutes, I computed the cost of the first plan as:

$h_1(x) = 10 * E[x] = 10 * 10 = 100$

However, how do I compute the cost for the second plan ($h_2(x)$) ?

I tried with:

$h_2(x) = 99 * F(x \leq 20) + 10 * (1 – F(x \leq 20)) \approx 87$

But the correct result is $112.53$.

Best Answer

In the second plan, you pay $99$ cents for sure for a call, plus a charge for calls that last more than $20$ minutes. Let us compute the expected value of this additional charge.

The additional charge occurs with probability $e^{-20/10}$.

Given that a call lasted more than $20$ minutes, the expected additional time is $10$, by the memorylessness property of the exponential distribution. Thus the expected additional charge is $(10)(e^{-20/10})(10)$.

So the expected cost of a call on the second plan, when mean length is $10$, is $99+(10)(e^{-20/10})(10)$ cents.

The calculation when the mean is $15$ is done in the same way.

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