# AP Statistics Curriculum 2007 Pareto

## Contents

## General Advance-Placement (AP) Statistics Curriculum - Pareto Distribution

### Pareto Distribution

**Definition**: Pareto distribution is a skewed, heavy-tailed distribution that is sometimes used to model that distribution of incomes. The basis of the distribution is that a high proportion of a population has low income while only a few people have very high incomes.

**Probability density function**: For \(X\sim \operatorname{Pareto}(x_m,\alpha)\!\), the Pareto probability density function is given by

\[\frac{\alpha x_m^\alpha}{x^{\alpha+1}}\]

where

- \(x_m\) is the minimum possible value of X
- \(\alpha\) is a positive parameter which determines the concentration of data towards the mode
- x is a random variable (\(x>x_m\))

**Cumulative density function**: The Pareto cumulative distribution function is given by

\[1-(\frac{x_m}{x})^\alpha\]

where

- \(x_m\) is the minimum possible value of X
- \(\alpha\) is a positive parameter which determines the concentration of data towards the mode
- x is a random variable (\(x>x_m\))

**Moment generating function**: The Pareto moment-generating function is

\[M(t)=\alpha(-x_m t)^\alpha\Gamma(-\alpha,-x_m t)\!\]

where

- \(\textstyle\Gamma(-\alpha,-x_m t)=\int_{-x_m t}^\infty t^{-\alpha-1}e^{-t}dt\)

**Expectation**: The expected value of Pareto distributed random variable x is

\[E(X)=\frac{\alpha x_m}{\alpha-1}\mbox{ for }\alpha>1\!\]

**Variance**: The Pareto variance is

\[Var(X)=\frac{x_m^2 \alpha}{(\alpha-1)^2(\alpha-2)}\mbox{ for }\alpha>2\!\]

### Applications

The Pareto distribution is sometimes expressed more simply as the “80-20 rule”, which describes a range of situations. In customer support, it means that 80% of problems come from 20% of customers. In economics, it means 80% of the wealth is controlled by 20% of the population. Examples of events that may be modeled by Pareto distribution include:

- The sizes of human settlements (few cities, many villages)
- The file size distribution of Internet traffic which uses the TCP protocol (few larger files, many smaller files)
- Hard disk drive error rates
- The values of oil reserves in oil fields (few large fields, many small fields)
- The length distribution in jobs assigned supercomputers (few large ones, many small ones)
- The standardized price returns on individual stocks
- The sizes of sand particles
- The sizes of meteorites
- The number of species per genus
- The areas burned in forest fires
- The severity of large casualty losses for certain businesses, such as general liability, commercial auto, and workers compensation

### Example

Suppose that the income of a certain population has a Pareto distribution with \(\alpha=3\) and \(x_m=1000\). Compute the proportion of the population with incomes between 2000 and 4000.

We can compute this as follows:

\[P(2000\le X\le 4000)=\sum_{x=2000}^{4000}\frac{3\times 1000^3}{x^{3+1}}=0.109375\]

The figure below shows this result using SOCR distributions

- SOCR Home page: http://www.socr.ucla.edu

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