Chapter 4

Introduction to Probability
 Experiments, Counting Rules,
and Assigning Probabilities
 Events and Their Probability
 Some Basic Relationships
of Probability
 Conditional Probability
 Bayes’ Theorem

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 Uncertainties

Managers often base their decisions on an analysis

of uncertainties such as the following:

What are the chances that sales will decrease

if we increase prices?

What is the likelihood a new assembly method

method will increase productivity?

What are the odds that a new investment will

be profitable?

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 Probability

Probability is a numerical measure of the likelihood

that an event will occur.

Probability values are always assigned on a scale

from 0 to 1.

A probability near zero indicates an event is quite

unlikely to occur.

A probability near one indicates an event is almost

certain to occur.

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 Probability as a Numerical Measure
of the Likelihood of Occurrence

Increasing Likelihood of Occurrence

0 .5 1
Probability:

The event The occurrence The event

is very of the event is is almost
unlikely just as likely as certain
to occur. it is unlikely. to occur.

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 Statistical Experiments

In statistics, the notion of an experiment differs

somewhat from that of an experiment in the
physical sciences.

In statistical experiments, probability determines

outcomes.

Even though the experiment is repeated in exactly

the same way, an entirely different outcome may
occur.

For this reason, statistical experiments are some-

times called random experiments.
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 An Experiment and Its Sample Space

An experiment is any process that generates well-

defined outcomes.

The sample space for an experiment is the set of

all experimental outcomes.

An experimental outcome is also called a sample

point.

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 An Experiment and Its Sample Space

Experiment Experiment Outcomes

Toss a coin Head, tail
Inspection a part Defective, non-defective
Conduct a sales call Purchase, no purchase
Roll a die 1, 2, 3, 4, 5, 6
Play a football game Win, lose, tie

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 An Experiment and Its Sample Space

 Example: Bradley Investments

Bradley has invested in two stocks, Markley Oil
and Collins Mining. Bradley has determined that the
possible outcomes of these investments three months
from now are as follows.
Investment Gain or Loss
in 3 Months (in $000)
Markley Oil Collins Mining
10 8
5 -2
0
-20

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 A Counting Rule for
Multiple-Step Experiments
 If an experiment consists of a sequence of k steps
in which there are n1 possible results for the first step,
n2 possible results for the second step, and so on,
then the total number of experimental outcomes is
given by (n1)(n2) . . . (nk).
 A helpful graphical representation of a multiple-step
experiment is a tree diagram.

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 A Counting Rule for
Multiple-Step Experiments
 Example: Bradley Investments
Bradley Investments can be viewed as a two-step
experiment. It involves two stocks, each with a set of
experimental outcomes.

Markley Oil: n1 = 4
Collins Mining: n2 = 2
Total Number of
Experimental Outcomes: n1n2 = (4)(2) = 8

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 Tree Diagram

 Example: Bradley Investments

Markley Oil Collins Mining Experimental
(Stage 1) (Stage 2) Outcomes
Gain 8 (10, 8) Gain $18,000
(10, -2) Gain $8,000
Gain 10 Lose 2
Gain 8 (5, 8) Gain $13,000

Lose 2 (5, -2) Gain $3,000

Gain 5
Gain 8
(0, 8) Gain $8,000
Even
(0, -2) Lose $2,000
Lose 20 Lose 2
Gain 8 (-20, 8) Lose $12,000
Lose 2 (-20, -2) Lose $22,000
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 Counting Rule for Combinations

 Number of Combinations of N Objects

Taken n at a Time
A second useful counting rule enables us to count
the number of experimental outcomes when n objects
are to be selected from a set of N objects.

 N N!
CnN   
 n  n !(N - n )!

where: N! = N(N - 1)(N - 2) . . . (2)(1)

n! = n(n - 1)(n - 2) . . . (2)(1)
0! = 1

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 Counting Rule for Permutations

 Number of Permutations of N Objects

Taken n at a Time
A third useful counting rule enables us to count
the number of experimental outcomes when n
objects are to be selected from a set of N objects,
where the order of selection is important.

 N N!
PnN  n !  
 n  (N - n )!

where: N! = N(N - 1)(N - 2) . . . (2)(1)

n! = n(n - 1)(n - 2) . . . (2)(1)
0! = 1
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 Assigning Probabilities

 Basic Requirements for Assigning Probabilities

1. The probability assigned to each experimental

outcome must be between 0 and 1, inclusively.

0 < P(Ei) < 1 for all i

where:
Ei is the ith experimental outcome
and P(Ei) is its probability

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 Assigning Probabilities

 Basic Requirements for Assigning Probabilities

2. The sum of the probabilities for all experimental

outcomes must equal 1.

P(E1) + P(E2) + . . . + P(En) = 1

where:
n is the number of experimental outcomes

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 Assigning Probabilities

Classical Method
Assigning probabilities based on the assumption
of equally likely outcomes

Relative Frequency Method

Assigning probabilities based on experimentation
or historical data

Subjective Method
Assigning probabilities based on judgment

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 Classical Method

 Example: Rolling a Die

If an experiment has n possible outcomes, the
classical method would assign a probability of 1/n
to each outcome.
Experiment: Rolling a die
Sample Space: S = {1, 2, 3, 4, 5, 6}
Probabilities: Each sample point has a
1/6 chance of occurring

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 Relative Frequency Method

 Example: Lucas Tool Rental

Lucas Tool Rental would like to assign probabilities
to the number of car polishers it rents each day.
Office records show the following frequencies of daily
rentals for the last 40 days.
Number of Number
Polishers Rented of Days
0 4
1 6
2 18
3 10
4 2
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 Relative Frequency Method

 Example: Lucas Tool Rental

Each probability assignment is given by dividing
the frequency (number of days) by the total frequency
(total number of days).

Number of Number
Polishers Rented of Days Probability
0 4 .10
1 6 .15
2 18 .45 4/40
3 10 .25
4 2 .05
40 1.00
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 Subjective Method

 When economic conditions and a company’s

circumstances change rapidly it might be
inappropriate to assign probabilities based solely on
historical data.
 We can use any data available as well as our
experience and intuition, but ultimately a probability
value should express our degree of belief that the
experimental outcome will occur.
 The best probability estimates often are obtained by
combining the estimates from the classical or relative
frequency approach with the subjective estimate.

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 Subjective Method

 Example: Bradley Investments

An analyst made the following probability estimates.

Exper. Outcome Net Gain or Loss Probability

(10, 8) $18,000 Gain .20
(10, -2) $8,000 Gain .08
(5, 8) $13,000 Gain .16
(5, -2) $3,000 Gain .26
(0, 8) $8,000 Gain .10
(0, -2) $2,000 Loss .12
(-20, 8) $12,000 Loss .02
(-20, -2) $22,000 Loss .06

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 Events and Their Probabilities

An event is a collection of sample points.

The probability of any event is equal to the sum of

the probabilities of the sample points in the event.

If we can identify all the sample points of an

experiment and assign a probability to each, we
can compute the probability of an event.

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 Events and Their Probabilities

 Example: Bradley Investments

Event M = Markley Oil Profitable

M = {(10, 8), (10, -2), (5, 8), (5, -2)}
P(M) = P(10, 8) + P(10, -2) + P(5, 8) + P(5, -2)
= .20 + .08 + .16 + .26
= .70

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 Events and Their Probabilities

 Example: Bradley Investments

Event C = Collins Mining Profitable

C = {(10, 8), (5, 8), (0, 8), (-20, 8)}
P(C) = P(10, 8) + P(5, 8) + P(0, 8) + P(-20, 8)
= .20 + .16 + .10 + .02
= .48

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 Some Basic Relationships of Probability

There are some basic probability relationships that

can be used to compute the probability of an event
without knowledge of all the sample point probabilities.

Complement of an Event

Union of Two Events

Intersection of Two Events

Mutually Exclusive Events

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 Complement of an Event

The complement of event A is defined to be the event

consisting of all sample points that are not in A.

The complement of A is denoted by Ac.

Sample
Event A Ac Space S

Venn
Diagram

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 Union of Two Events

The union of events A and B is the event containing

all sample points that are in A or B or both.

The union of events A and B is denoted by A B

Sample
Event A Event B Space S

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 Union of Two Events

 Example: Bradley Investments

Event M = Markley Oil Profitable

Event C = Collins Mining Profitable
M C = Markley Oil Profitable
or Collins Mining Profitable (or both)
M C = {(10, 8), (10, -2), (5, 8), (5, -2), (0, 8), (-20, 8)}
P(M C) = P(10, 8) + P(10, -2) + P(5, 8) + P(5, -2)
+ P(0, 8) + P(-20, 8)
= .20 + .08 + .16 + .26 + .10 + .02
= .82

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 Intersection of Two Events

The intersection of events A and B is the set of all

sample points that are in both A and B.

The intersection of events A and B is denoted by A 

Sample
Event A Event B Space S

Intersection of A and B
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 Intersection of Two Events

 Example: Bradley Investments

Event M = Markley Oil Profitable

Event C = Collins Mining Profitable
M C = Markley Oil Profitable
and Collins Mining Profitable
M C = {(10, 8), (5, 8)}
P(M C) = P(10, 8) + P(5, 8)
= .20 + .16
= .36

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 Addition Law

The addition law provides a way to compute the

probability of event A, or B, or both A and B occurring.

The law is written as:

P(A B) = P(A) + P(B) - P(A  B

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 Addition Law

 Example: Bradley Investments

Event M = Markley Oil Profitable

Event C = Collins Mining Profitable
M C = Markley Oil Profitable
or Collins Mining Profitable
We know: P(M) = .70, P(C) = .48, P(M C) = .36
Thus: P(M  C) = P(M) + P(C) - P(M  C)
= .70 + .48 - .36
= .82
(This result is the same as that obtained earlier
using the definition of the probability of an event.)
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 Mutually Exclusive Events

Two events are said to be mutually exclusive if the

events have no sample points in common.

Two events are mutually exclusive if, when one event

occurs, the other cannot occur.

Sample
Event A Event B Space S

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 Mutually Exclusive Events

If events A and B are mutually exclusive, P(A  B = 0.

The addition law for mutually exclusive events is:

P(A B) = P(A) + P(B)

There is no need to
include “- P(A  B”

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 Conditional Probability

The probability of an event given that another event

has occurred is called a conditional probability.

The conditional probability of A given B is denoted

by P(A|B).

A conditional probability is computed as follows :

P( A  B)
P( A|B) 
P( B)

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 Conditional Probability

 Example: Bradley Investments

Event M = Markley Oil Profitable

Event C = Collins Mining Profitable
P(C | M ) = Collins Mining Profitable
given Markley Oil Profitable
We know: P(M C) = .36, P(M) = .70
P(C  M ) .36
Thus: P(C | M )    .5143
P( M ) .70

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 Multiplication Law

The multiplication law provides a way to compute the

probability of the intersection of two events.

The law is written as:

P(A B) = P(B)P(A|B)

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 Multiplication Law

 Example: Bradley Investments

Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M C = Markley Oil Profitable
and Collins Mining Profitable
We know: P(M) = .70, P(C|M) = .5143
Thus: P(M  C) = P(M)P(M|C)
= (.70)(.5143)
= .36
(This result is the same as that obtained earlier
using the definition of the probability of an event.)
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 Joint Probability Table

Collins Mining
Markley Oil Profitable (C) Not Profitable (Cc) Total

Profitable (M) .36 .34 .70

Not Profitable (Mc) .12 .18 .30

Total .48 .52 1.00

Joint Probabilities
(appear in the body
Marginal Probabilities
of the table)
(appear in the margins
of the table)

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 Independent Events

If the probability of event A is not changed by the

existence of event B, we would say that events A
and B are independent.

Two events A and B are independent if:

P(A|B) = P(A) or P(B|A) = P(B)

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 Multiplication Law
for Independent Events
The multiplication law also can be used as a test to see
if two events are independent.

The law is written as:

P(A B) = P(A)P(B)

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 Multiplication Law
for Independent Events
 Example: Bradley Investments

Event M = Markley Oil Profitable

Event C = Collins Mining Profitable
Are events M and C independent?
Does P(M  C) = P(M)P(C) ?
We know: P(M  C) = .36, P(M) = .70, P(C) = .48
But: P(M)P(C) = (.70)(.48) = .34, not .36
Hence: M and C are not independent.

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 Mutual Exclusiveness and Independence

Do not confuse the notion of mutually exclusive

events with that of independent events.

Two events with nonzero probabilities cannot be

both mutually exclusive and independent.

If one mutually exclusive event is known to occur,

the other cannot occur.; thus, the probability of the
other event occurring is reduced to zero (and they
are therefore dependent).

Two events that are not mutually exclusive, might

or might not be independent.
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 Bayes’ Theorem

 Often we begin probability analysis with initial or

prior probabilities.
 Then, from a sample, special report, or a product
test we obtain some additional information.
 Given this information, we calculate revised or
posterior probabilities.
 Bayes’ theorem provides the means for revising the
prior probabilities.
Application
Prior New Posterior
of Bayes’
Probabilities Information Probabilities
Theorem

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 Bayes’ Theorem

 Example: L. S. Clothiers
A proposed shopping center will provide strong
competition for downtown businesses like L. S.
Clothiers. If the shopping center is built, the owner
of L. S. Clothiers feels it would be best to relocate to
the shopping center.
The shopping center cannot be built unless a
zoning change is approved by the town council.
The planning board must first make a
recommendation, for or against the zoning change,
to the council.

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 Prior Probabilities

 Example: L. S. Clothiers
Let:
A1 = town council approves the zoning change
A2 = town council disapproves the change

Using subjective judgment:

P(A1) = .7, P(A2) = .3

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 New Information

 Example: L. S. Clothiers
The planning board has recommended against
the zoning change. Let B denote the event of a
negative recommendation by the planning board.
Given that B has occurred, should L. S. Clothiers
revise the probabilities that the town council will
approve or disapprove the zoning change?

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 Conditional Probabilities

 Example: L. S. Clothiers
Past history with the planning board and the town
council indicates the following:

P(B|A1) = .2 P(B|A2) = .9

Hence: P(BC|A1) = .8 P(BC|A2) = .1

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 Tree Diagram

 Example: L. S. Clothiers

Town Council Planning Board Experimental

Outcomes

P(B|A1) = .2
P(A1  B) = .14
P(A1) = .7
c
P(B |A1) = .8 P(A1  Bc) = .56

P(B|A2) = .9
P(A2  B) = .27
P(A2) = .3
c
P(B |A2) = .1 P(A2  Bc) = .03

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 Bayes’ Theorem

 To find the posterior probability that event Ai will

occur given that event B has occurred, we apply
Bayes’ theorem.

P( Ai )P( B| Ai )
P( Ai |B) 
P( A1 )P( B| A1 )  P( A2 )P( B| A2 )  ...  P( An )P( B| An )

 Bayes’ theorem is applicable when the events for

which we want to compute posterior probabilities
are mutually exclusive and their union is the entire
sample space.

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 Posterior Probabilities

 Example: L. S. Clothiers
Given the planning board’s recommendation not
to approve the zoning change, we revise the prior
probabilities as follows:

P( A1 )P( B| A1 )
P( A1 |B) 
P( A1 )P( B| A1 )  P( A2 )P( B| A2 )
(. 7 )(. 2 )

(. 7 )(. 2 )  (. 3)(. 9)
= .34

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 Posterior Probabilities

 Example: L. S. Clothiers
The planning board’s recommendation is good
news for L. S. Clothiers. The posterior probability of
the town council approving the zoning change is .34
compared to a prior probability of .70.

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 1
Prepare the following three columns:
Column 1 - The mutually exclusive events for
which posterior probabilities are desired.
Column 2 - The prior probabilities for the events.
Column 3 - The conditional probabilities of the
new information given each event.

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 1
(1) (2) (3) (4) (5)
Prior Conditional
Events Probabilities Probabilities
Ai P(Ai) P(B|Ai)
A1 .7 .2
A2 .3 .9
1.0

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 2
Prepare the fourth column:
Column 4
Compute the joint probabilities for each event and
the new information B by using the multiplication
law.
Multiply the prior probabilities in column 2 by
the corresponding conditional probabilities in
column 3. That is, P(Ai IB) = P(Ai) P(B|Ai).

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 2
(1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B)

A1 .7 .2 .14
A2 .3 .9 .27
.7 x .2
1.0

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 2 (continued)
We see that there is a .14 probability of the town
council approving the zoning change and a
negative recommendation by the planning board.
There is a .27 probability of the town council
disapproving the zoning change and a negative
recommendation by the planning board.

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Slide 57
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 3
Sum the joint probabilities in Column 4. The
sum is the probability of the new information,
P(B). The sum .14 + .27 shows an overall
probability of .41 of a negative recommendation
by the planning board.

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Slide 58
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 3
(1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B)
A1 .7 .2 .14
A2 .3 .9 .27
1.0 P(B) = .41

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 4
Prepare the fifth column:
Column 5
Compute the posterior probabilities using the
basic relationship of conditional probability.
P( Ai  B)
P( Ai | B) 
P( B)
The joint probabilities P(Ai I B) are in column 4
and the probability P(B) is the sum of column 4.

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 Bayes’ Theorem: Tabular Approach

 Example: L. S. Clothiers
• Step 4
(1) (2) (3) (4) (5)
Prior Conditional Joint Posterior
Events Probabilities Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B) P(Ai |B)

A1 .7 .2 .14 .3415
A2 .3 .9 .27 .6585
1.0 P(B) = .41 1.0000
.14/.41
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Slide 61
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Example: Incidence of a rare disease
Only 1 in 1000 adults is afflicted with a rare
disease for which a diagnostic test has been
developed. The test is such that when an
individual actually has a disease, a positive
result will occur 99% of the time, whereas an
individual without the disease will show a
positive test result only 2% of the time. If a
randomly selected individual is tested and the
result is positive, what is the probability that the
individual has the disease?

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62 Slide 62
or duplicated, or posted to a publicly accessible website, in whole or in part.
 End of Chapter 4

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 5
Discrete Probability Distributions
 Random Variables
 Discrete Probability Distributions
 Expected Value and Variance
 Binomial Probability Distribution
 Poisson Probability Distribution .40
 Hypergeometric Probability .30
Distribution
.20

.10

0 1 2 3 4

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Slide 64
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Random Variables

A random variable is a numerical description of the

outcome of an experiment.

A discrete random variable may assume either a

finite number of values or an infinite sequence of
values.

A continuous random variable may assume any

numerical value in an interval or collection of
intervals.

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Slide 65
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discrete Random Variable
with a Finite Number of Values
 Example: JSL Appliances

Let x = number of TVs sold at the store in one day,

where x can take on 5 values (0, 1, 2, 3, 4)

We can count the TVs sold, and there is a finite

upper limit on the number that might be sold (which
is the number of TVs in stock).

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Slide 66
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discrete Random Variable
with an Infinite Sequence of Values
 Example: JSL Appliances

Let x = number of customers arriving in one day,

where x can take on the values 0, 1, 2, . . .

We can count the customers arriving, but there is

no finite upper limit on the number that might arrive.

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Slide 67
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Random Variables

Question Random Variable x Type

Family x = Number of dependents Discrete
size reported on tax return
Distance from x = Distance in miles from Continuous
home to store home to the store site
Own dog x = 1 if own no pet; Discrete
or cat = 2 if own dog(s) only;
= 3 if own cat(s) only;
= 4 if own dog(s) and cat(s)

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 Discrete Probability Distributions

The probability distribution for a random variable

describes how probabilities are distributed over
the values of the random variable.

We can describe a discrete probability distribution

with a table, graph, or formula.

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Slide 69
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 Discrete Probability Distributions

The probability distribution is defined by a

probability function, denoted by f(x), which provides
the probability for each value of the random variable.

The required conditions for a discrete probability

function are:
f(x) > 0

f(x) = 1

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 Discrete Probability Distributions

 Example: JSL Appliances

• Using past data on TV sales, …
• a tabular representation of the probability
distribution for TV sales was developed.
Number 80/200
Units Sold of Days x f(x)
0 80 0 .40
1 50 1 .25
2 40 2 .20
3 10 3 .05
4 20 4 .10
200 1.00
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 Discrete Probability Distributions

 Example: JSL Appliances

Graphical
.50 representation
of probability
.40 distribution
Probability

.30
.20
.10

0 1 2 3 4
Values of Random Variable x (TV sales)

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Slide 72
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discrete Uniform Probability Distribution

The discrete uniform probability distribution is the

simplest example of a discrete probability
distribution given by a formula.

The discrete uniform probability function is

f(x) = 1/n the values of the

random variable
are equally likely
where:
n = the number of values the random
variable may assume

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Slide 73
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Expected Value

The expected value, or mean, of a random variable

is a measure of its central location.
E(x) =  = xf(x)

The expected value is a weighted average of the

values the random variable may assume. The
weights are the probabilities.

The expected value does not have to be a value the

random variable can assume.

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Slide 74
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Variance and Standard Deviation

The variance summarizes the variability in the

values of a random variable.

Var(x) =  2 = (x - )2f(x)

The variance is a weighted average of the squared

deviations of a random variable from its mean. The
weights are the probabilities.

The standard deviation, , is defined as the positive

square root of the variance.

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 Expected Value
 Example: JSL Appliances

x f(x) xf(x)
0 .40 .00
1 .25 .25
2 .20 .40
3 .05 .15
4 .10 .40
E(x) = 1.20

expected number of
TVs sold in a day
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 Variance
 Example: JSL Appliances
x x- (x - )2 f(x) (x - )2f(x)
0 -1.2 1.44 .40 .576
1 -0.2 0.04 .25 .010
2 0.8 0.64 .20 .128
3 1.8 3.24 .05 .162 TVs
4 2.8 7.84 .10 .784 squared
Variance of daily sales = 2 = 1.660
Standard deviation of daily sales = 1.2884 TVs

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Slide 77
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution
 Four Properties of a Binomial Experiment

1. The experiment consists of a sequence of n

identical trials.

2. Two outcomes, success and failure, are possible

on each trial.

3. The probability of a success, denoted by p, does

not change from trial to trial.
stationarity
4. The trials are independent. assumption

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Slide 78
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

Our interest is in the number of successes

occurring in the n trials.

We let x denote the number of successes

occurring in the n trials.

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Slide 79
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Binomial Probability Function

n!
f (x)  p x (1 - p )( n - x )
x !(n - x )!
where:
x = the number of successes
p = the probability of a success on one trial
n = the number of trials
f(x) = the probability of x successes in n trials

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Binomial Probability Function

n!
f (x)  p x (1 - p )( n - x )
x !(n - x )!

Probability of a particular
Number of experimental
sequence of trial outcomes
outcomes providing exactly
with x successes in n trials
x successes in n trials

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Slide 81
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Example: Evans Electronics

Evans Electronics is concerned about a low
retention rate for its employees. In recent years,
management has seen a turnover of 10% of the
hourly employees annually.
Thus, for any hourly employee chosen at random,
management estimates a probability of 0.1 that the
person will not be with the company next year.
Choosing 3 hourly employees at random, what is
the probability that 1 of them will leave the company
this year?
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Slide 82
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 Binomial Probability Distribution

 Example: Evans Electronics

The probability of the first employee leaving and the
second and third employees staying, denoted (S, F, F),
is given by
p(1 – p)(1 – p)
With a .10 probability of an employee leaving on any
one trial, the probability of an employee leaving on
the first trial and not on the second and third trials is
given by
(.10)(.90)(.90) = (.10)(.90)2 = .081

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Example: Evans Electronics

Two other experimental outcomes also result in one
success and two failures. The probabilities for all
three experimental outcomes involving one success
follow.
Experimental Probability of
Outcome Experimental Outcome
(S, F, F) p(1 – p)(1 – p) = (.1)(.9)(.9) = .081
(F, S, F) (1 – p)p(1 – p) = (.9)(.1)(.9) = .081
(F, F, S) (1 – p)(1 – p)p = (.9)(.9)(.1) = .081
Total = .243

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Slide 84
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Example: Evans Electronics

Using the
Let: p = .10, n = 3, x = 1 probability
function
n!
f ( x)  p x (1 - p ) (n - x )
x !( n - x )!
3!
f (1)  (0.1)1 (0.9)2  3(.1)(.81)  .243
1!(3 - 1)!

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Slide 85
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 Binomial Probability Distribution
Using a tree diagram
 Example: Evans Electronics
1st Worker 2nd Worker 3rd Worker x Prob.
L (.1) 3 .0010
Leaves (.1)
S (.9) 2 .0090
Leaves
(.1) L (.1) 2 .0090
Stays (.9)
S (.9) 1 .0810
L (.1) 2 .0090
Leaves (.1)
Stays S (.9) 1 .0810
(.9) L (.1)
1 .0810
Stays (.9)
S (.9) 0 .7290
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Slide 86
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probabilities
and Cumulative Probabilities
Statisticians have developed tables that give
probabilities and cumulative probabilities for a
binomial random variable.

These tables can be found in some statistics

textbooks.

With modern calculators and the capability of

statistical software packages, such tables are
almost unnecessary.

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Slide 87
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Expected Value

E(x) =  = np

 Variance

Var(x) =  2 = np(1 - p)

 Standard Deviation

  np(1 - p )

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Slide 88
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Binomial Probability Distribution

 Example: Evans Electronics

• Expected Value
E(x) = np = 3(.1) = .3 employees out of 3

• Variance

Var(x) = np(1 – p) = 3(.1)(.9) = .27

• Standard Deviation
  3(.1)(.9)  .52 employees

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Slide 89
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 6
Continuous Probability Distributions
 Uniform Probability Distribution
 Normal Probability Distribution
 Normal Approximation of Binomial Probabilities
 Exponential Probability Distribution
f (x) Exponential
Uniform
f (x)
f (x)
Normal

x
x
x

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Slide 90
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 Continuous Probability Distributions

 A continuous random variable can assume any value

in an interval on the real line or in a collection of
intervals.
 It is not possible to talk about the probability of the
random variable assuming a particular value.
 Instead, we talk about the probability of the random
variable assuming a value within a given interval.

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Slide 91
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Continuous Probability Distributions

 The probability of the random variable assuming a

value within some given interval from x1 to x2 is
defined to be the area under the graph of the
probability density function between x1 and x2.

f (x) Exponential
Uniform
f (x)

f (x)
Normal

x
x x1 xx12 x2
x1 x2
x
x1 x2
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Slide 92
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 Uniform Probability Distribution

 A random variable is uniformly distributed

whenever the probability is proportional to the
interval’s length.
 The uniform probability density function is:

f (x) = 1/(b – a) for a < x < b

=0 elsewhere

where: a = smallest value the variable can assume

b = largest value the variable can assume

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Slide 93
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 Uniform Probability Distribution

 Expected Value of x

E(x) = (a + b)/2

 Variance of x

Var(x) = (b - a)2/12

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Slide 94
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 Uniform Probability Distribution

 Example: Slater's Buffet

Slater customers are charged for the amount of
salad they take. Sampling suggests that the amount
of salad taken is uniformly distributed between 5
ounces and 15 ounces.

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Slide 95
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Uniform Probability Distribution

 Uniform Probability Density Function

f(x) = 1/10 for 5 < x < 15

=0 elsewhere

where:
x = salad plate filling weight

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Slide 96
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 Uniform Probability Distribution

 Expected Value of x

E(x) = (a + b)/2
= (5 + 15)/2
= 10

 Variance of x

Var(x) = (b - a)2/12
= (15 – 5)2/12
= 8.33

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Slide 97
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 Uniform Probability Distribution

 Uniform Probability Distribution

for Salad Plate Filling Weight

f(x)

1/10

x
0 5 10 15
Salad Weight (oz.)

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Slide 98
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 Uniform Probability Distribution

What is the probability that a customer

will take between 12 and 15 ounces of salad?

f(x)

P(12 < x < 15) = 1/10(3) = .3

1/10

x
0 5 10 12 15
Salad Weight (oz.)

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 Area as a Measure of Probability

 The area under the graph of f(x) and probability are

identical.
 This is valid for all continuous random variables.
 The probability that x takes on a value between some
lower value x1 and some higher value x2 can be found
by computing the area under the graph of f(x) over
the interval from x1 to x2.

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Slide 100
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Normal Probability Distribution

 The normal probability distribution is the most

important distribution for describing a continuous
random variable.
 It is widely used in statistical inference.
 It has been used in a wide variety of applications
including:
• Heights of people • Test scores
• Rainfall amounts • Scientific measurements
 Abraham de Moivre, a French mathematician,
published The Doctrine of Chances in 1733.
 He derived the normal distribution.

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Slide 101
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 Normal Probability Distribution

 Normal Probability Density Function

1 - ( x -  )2 /2 2
f (x)  e
 2

where:
 = mean
 = standard deviation
 = 3.14159
e = 2.71828

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 Normal Probability Distribution

 Characteristics

The distribution is symmetric; its skewness

measure is zero.

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 Normal Probability Distribution

 Characteristics

The entire family of normal probability

distributions is defined by its mean  and its
standard deviation  .

Standard Deviation 

x
Mean 

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Slide 104
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 Normal Probability Distribution

 Characteristics

The highest point on the normal curve is at the

mean, which is also the median and mode.

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Slide 105
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 Normal Probability Distribution

 Characteristics

The mean can be any numerical value: negative,

zero, or positive.

x
-10 0 25

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Slide 106
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 Normal Probability Distribution

 Characteristics

The standard deviation determines the width of the

curve: larger values result in wider, flatter curves.

 = 15

 = 25

x
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 Normal Probability Distribution

 Characteristics

Probabilities for the normal random variable are

given by areas under the curve. The total area
under the curve is 1 (.5 to the left of the mean and
.5 to the right).

.5 .5
x

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Slide 108
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 Normal Probability Distribution

 Characteristics (basis for the empirical rule)

68.26% of values of a normal random variable

are within +/- 1 standard deviation of its mean.

95.44% of values of a normal random variable

are within +/- 2 standard deviations of its mean.

99.72% of values of a normal random variable

are within +/- 3 standard deviations of its mean.

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 Normal Probability Distribution

 Characteristics (basis for the empirical rule)

99.72%
95.44%
68.26%

x
  + 3
 – 3  – 1  + 1
 – 2  + 2
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 Standard Normal Probability Distribution

 Characteristics

A random variable having a normal distribution

with a mean of 0 and a standard deviation of 1 is
said to have a standard normal probability
distribution.

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 Standard Normal Probability Distribution

 Characteristics

The letter z is used to designate the standard

normal random variable.

1

z
0

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 Standard Normal Probability Distribution

 Converting to the Standard Normal Distribution

x-
z


We can think of z as a measure of the number of

standard deviations x is from .

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Slide 113
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 Standard Normal Probability Distribution

 Example: Pep Zone

Pep Zone sells auto parts and supplies including
a popular multi-grade motor oil. When the stock of
this oil drops to 20 gallons, a replenishment order is
placed.
The store manager is concerned that sales are
being lost due to stockouts while waiting for a
replenishment order.

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Slide 114
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 Standard Normal Probability Distribution

 Example: Pep Zone

It has been determined that demand during
replenishment lead-time is normally distributed
with a mean of 15 gallons and a standard deviation
of 6 gallons.
The manager would like to know the probability
of a stockout during replenishment lead-time. In
other words, what is the probability that demand
during lead-time will exceed 20 gallons?

P(x > 20) = ?

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 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 1: Convert x to the standard normal distribution.

z = (x - )/
= (20 - 15)/6
= .83

Step 2: Find the area under the standard normal

curve to the left of z = .83.

see next slide

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Slide 116
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 Standard Normal Probability Distribution

 Cumulative Probability Table for

the Standard Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z < .83)

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 3: Compute the area under the standard normal

curve to the right of z = .83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

Probability
of a stockout P(x > 20)

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 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Area = 1 - .7967
Area = .7967
= .2033

z
0 .83

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Standard Normal Probability Distribution

If the manager of Pep Zone wants the probability
of a stockout during replenishment lead-time to be
no more than .05, what should the reorder point be?
---------------------------------------------------------------
(Hint: Given a probability, we can use the standard
normal table in an inverse fashion to find the
corresponding z value.)

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Slide 120
or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Solving for the Reorder Point

Area = .9500

Area = .0500

z
0 z.05

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 Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 1: Find the z-value that cuts off an area of .05

in the right tail of the standard normal
distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 We
.9693look up.9706
.9699
the.9756
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 complement
.9761 .9767
. . . . . . . .
of the
.
tail. area .
(1 - .05 = .95)
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 Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 2: Convert z.05 to the corresponding value of x.

x =  + z.05
= 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probability

of a stockout during leadtime at (slightly less than) .05.

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 Normal Probability Distribution

 Solving for the Reorder Point

Probability of no
Probability of a
stockout during
stockout during
replenishment
replenishment
lead-time = .95
lead-time = .05

x
15 24.87

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Solving for the Reorder Point

By raising the reorder point from 20 gallons to
25 gallons on hand, the probability of a stockout
decreases from about .20 to .05.
This is a significant decrease in the chance that
Pep Zone will be out of stock and unable to meet a
customer’s desire to make a purchase.

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Normal Approximation of Binomial Probabilities

When the number of trials, n, becomes large,

evaluating the binomial probability function by hand
or with a calculator is difficult.

The normal probability distribution provides an

easy-to-use approximation of binomial probabilities
where np > 5 and n(1 - p) > 5.

In the definition of the normal curve, set

 = np and   np (1 - p )

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Normal Approximation of Binomial Probabilities

Add and subtract a continuity correction factor

because a continuous distribution is being used to
approximate a discrete distribution.

For example, P(x = 12) for the discrete binomial

probability distribution is approximated by
P(11.5 < x < 12.5) for the continuous normal
distribution.

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Normal Approximation of Binomial Probabilities

 Example
Suppose that a company has a history of making
errors in 10% of its invoices. A sample of 100
invoices has been taken, and we want to compute
the probability that 12 invoices contain errors.
In this case, we want to find the binomial
probability of 12 successes in 100 trials. So, we set:
 = np = 100(.1) = 10
  np (1 - p ) = [100(.1)(.9)] ½ = 3

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Normal Approximation of Binomial Probabilities

 Normal Approximation to a Binomial Probability

Distribution with n = 100 and p = .1

=3
P(11.5 < x < 12.5)
(Probability
of 12 Errors)

x
 = 10 12.5
11.5
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Normal Approximation of Binomial Probabilities

 Normal Approximation to a Binomial Probability

Distribution with n = 100 and p = .1

P(x < 12.5) = .7967

x
10 12.5

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Normal Approximation of Binomial Probabilities

 Normal Approximation to a Binomial Probability

Distribution with n = 100 and p = .1

P(x < 11.5) = .6915

x
10
11.5
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Normal Approximation of Binomial Probabilities

 The Normal Approximation to the Probability

of 12 Successes in 100 Trials is .1052

P(x = 12)
= .7967 - .6915
= .1052

x
10 12.5
11.5
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