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Statistics for Business

and Economics
Anderson
Williams

Sweeney

Slides by

John Loucks
St. Edwards University
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Probability Distribution

1. Random Variables
2. Discrete Probability Distribution
2.1 Binomial Probability Distribution
2.2 Poisson Probability Distribution
3. Continuous Probability Distribution
3.1 Normal Probability Distribution
3.2 Exponential Probability Distribution

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1. Random Variables
A
A random
random variable
variable is
is aa numerical
numerical description
description of
of the
the
outcome
outcome of
of an
an experiment.
experiment.
A
A discrete
discrete random
random variable
variable may
may assume
assume either
either aa
finite
finite number
number of
of values
values or
or an
an infinite
infinite sequence
sequence of
of
values.
values.
A
A continuous
continuous random
random variable
variable may
may assume
assume any
any
numerical
numerical value
value in
in an
an interval
interval or
or collection
collection of
of
intervals.
intervals.

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Discrete Random Variable


with a Finite Number of Values

Example: JSL Appliances

Let
Let xx =
= number
number of
of TVs
TVs sold
sold at
at the
the store
store in
in one
one day,
day,
where
where xx can
can take
take on
on 55 values
values (0,
(0, 1,
1, 2,
2, 3,
3, 4)
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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Discrete Random Variable


with an Infinite Sequence of Values

Example: JSL Appliances

Let
Let xx =
= number
number of
of customers
customers arriving
arriving in
in one
one day,
day,
where
where xx can
can take
take on
on the
the values
values 0,
0, 1,
1, 2,
2, .. .. ..
We can count the customers arriving, but there is
no finite upper limit on the number that might arrive.

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Random Variables
Question
Family
size

Random Variable x

x = Number of dependents Discrete


reported on tax return

Distance fromx = Distance in miles from


home to store
home to the store site
Own dog
or cat

Type

Continuous

Discrete
x = 1 if own no pet;
= 2 if own dog(s) only;
= 3 if own cat(s) only;
= 4 if own dog(s) and cat(s)

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2. Discrete Distribution Functions

2.1 Binomial Probability Distribution


2.2 Poisson Probability Distribution
Binomial Probabilities

0.4500

0.25
0.20
0.15
0.10
0.05
0.00

0.4000
0.3500
0.3000
0.2500
0.2000
0.1500
0.1000
0.0500
0.0000
0

Poisson Probabilities

1 2 of
3 Arrivals
4 5 6 in7 308 Minutes
9 10
0Number

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2.1 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.
stationarit
y
4. The trials are independent.
assumptio
n
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Binomial Probability Distribution

Binomial Probability Function

n!
f (x)
px (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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Binomial Probability - Example


There are five flights daily from KLIA via Air
Asia into the Kuching Airport. Suppose the
probability that any flight arrives late is .20.
What is the probability that none of the flights
are late today?

n!
f (x)
px (1 p)(n x)
x!(n x)!

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Binomial Probability

p(x)

p(x)
0.327
0
7
0.409
1
6
0.204
2
8
0.051
3
2
0.006
4
4
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or duplicated, 0.000
or posted to a publicly accessible website, in whole or in part.
0.4500
0.4000
0.3500
0.3000
0.2500
0.2000
0.1500
0.1000
0.0500
0.0000

Slide
11

Part of Binomial Distribution Table

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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
Thus, for any hourly employee chosen at
the
random,
hourly employees annually.
management estimates a probability of 0.1
that the
Choosing 3 hourly employees at random,
person
what will
is not be with the company next year.

the probability that 1 of them will leave the


company
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Slide
13

Binomial Probability Distribution

Example: Evans Electronics


Let:

Using the
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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Binomial Probability Distribution

Using a tree diagram

Example: Evans Electronics


1st Worker

2nd Worker
Leaves (.1)

Leaves
(.1)

3rd Worker
L (.1)

x
3

Prob.
.0010

S (.9)
L (.1)

.0090

.0090

S (.9)

.0810

L (.1)

.0090

S (.9)
L (.1)

.0810

.0810

S (.9)

.7290

Stays (.9)

Leaves (.1)
Stays
(.9)
Stays (.9)

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Binomial Probability Distribution

Expected Value
E(x) = = np

Variance
Var(x) = 2 = np(1 p)

Standard Deviation

np(1 p)

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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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2.2 Poisson Probability Distribution


A
A Poisson
Poisson distributed
distributed random
random variable
variable is
is often
often
useful
useful in
in estimating
estimating the
the number
number of
of occurrences
occurrences
over
over aa specified
specified interval
interval of
of time
time or
or space
space
It
It is
is aa discrete
discrete random
random variable
variable that
that may
may assume
assume
an
an infinite
infinite sequence
sequence of
of values
values (x
(x =
= 0,
0, 1,
1, 2,
2, .. .. .. ).
).

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Poisson Probability Distribution


Examples
Examples of
of aa Poisson
Poisson distributed
distributed random
random variable:
variable:
the
the number
number of
of holes
holes in
in 11 kilometer
kilometer of
of
road
road
the
the number
number of
of vehicles
vehicles arriving
arriving at
at aa toll
toll
booth
booth in
in one
one hour
hour
Bell
Bell Labs
Labs used
used the
the Poisson
Poisson distribution
distribution to
to model
model the
the
arrival
arrival of
of phone
phone calls.
calls.

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Poisson Probability Distribution

Two Properties of a Poisson Experiment

1.
1. The
The probability
probability of
of an
an occurrence
occurrence is
is the
the same
same
for
for any
any two
two intervals
intervals of
of equal
equal length.
length.

2.
2. The
The occurrence
occurrence or
or nonoccurrence
nonoccurrence in
in any
any

interval
interval is
is independent
independent of
of the
the occurrence
occurrence or
or
nonoccurrence
nonoccurrence in
in any
any other
other interval.
interval.

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Poisson Probability Distribution

Poisson Probability Function

x e
f ( x)
x!
where:
x = the number of occurrences in an interval
f(x) = the probability of x occurrences in an interval
= mean number of occurrences in an interval
e = 2.71828

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Poisson Probability Distribution

Poisson Probability Function

Since there is no stated upper limit for the number


of occurrences, the probability function f(x) is
applicable for values x = 0, 1, 2, without limit.
In practical applications, x will eventually become
large enough so that f(x) is approximately zero and
the probability of any larger values of x becomes
Poisson Probabilities
negligible.
0.25
0.20
0.15
0.10
0.05
0.00

0 1 2 3 4 5 6 7 8 9 10

Number of Arrivals in 30 Minutes


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Poisson Probability Distribution

Example: Mercy Hospital


Patients arrive at the emergency room of
Mercy
Hospital at the average rate of 6 per hour on
weekend
evenings.
What is
the probability of 4 arrivals in 30
minutes
on a weekend evening?

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Poisson Probability Distribution

Using the
probability
function

Example: Mercy Hospital

= 6/hour = 3/half-hour, x = 4
34(2.71828)3
f (4)

4!

.1680

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Part of Poisson Probability Table

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Poisson Probability Distribution

Example: Mercy Hospital


Poisson Probabilities
Probability

0.25
0.20

actually,
the
sequence
continues:
11, 12,

0.15
0.10
0.05
0.00
0

10

Number of Arrivals in 30 Minutes


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Poisson Probability Distribution


A
A property
property of
of the
the Poisson
Poisson distribution
distribution is
is that
that
the
the mean
mean and
and variance
variance are
are equal.
equal.

= 2

Example: Mercy Hospital


Variance for Number of Arrivals
During 30-Minute Periods

=2=3

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Poisson Probability Distribution

Example: Mercy Hospital


Variance for Number of Arrivals
During 30-Minute Periods

= 22 = 3

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3. Continuous Probability Distributions

3.1 Normal Probability Distribution

3.2 Exponential Probability Distribution

f (x)

f (x) Exponential

Normal

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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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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)

f (x) Exponential

Normal

x11 x22

x11

xx1122 x22

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3.1 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
Test scores

people
Rainfall
amounts

Scientific
measurements

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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
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

Mean

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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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Normal Probability Distribution

Characteristics

The mean can be any numerical value: negative,


zero, or positive.

x
-10

25

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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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Normal Probability Distribution

Characteristics (basis for the empirical rule)

of values of a normal random variable


68.26%
are within
of its mean.
+/- 1 standard deviation
95.44%
of values of a normal random variable
are within
of its mean.
+/- 2 standard deviations
99.72%
of values of a normal random variable
are within
of its mean.
+/- 3 standard deviations

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Normal Probability Distribution

Characteristics (basis for the empirical rule)


99.72%
95.44%
68.26%

3
1
2

+ 3
+ 1
+ 2

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Standard Normal Probability Distribution

Characteristics
A
A random
random variable
variable having
having aa normal
normal distribution
distribution
with
with aa mean
mean of
of 00 and
and aa standard
standard deviation
deviation of
of 11 is
is
said
said to
to have
have aa standard
standard normal
normal probability
probability
distribution.
distribution.

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Standard Normal Probability Distribution

Characteristics
The letter z is used to designate the standard
normal random variable.

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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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
The store manager is concerned that sales
order is
are
placed.
being lost due to stockouts while waiting for a
replenishment order.

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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
The manager would like to know the
deviation
probability
of 6 gallons.
of a stockout during replenishment lead-time.
In
other words, what is the probability that
demand
P(x > 20) = ?
during lead-time will exceed 20 gallons?

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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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Standard Normal Probability Distribution

Cumulative Probability Table for


the Standard Normal Distribution

P(z < .
83)
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Standard Normal Probability Distribution

Solving for the Stockout Probability

Step
Step 3:
3: Compute
Compute the
the area
area under
under the
the standard
standard normal
normal
curve
curve to
to the
the right
right of
of zz =
= .83.
.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 = .7967

Area = 1 - .7967
= .2033

0 .83

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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
(Hint: Given a probability, we can use the
point be?
standard
normal table in an inverse fashion to find the
------------------------------------------------------------corresponding
z value.)
--

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Standard Normal Probability Distribution

Solving for the Reorder Point

Area = .9500
Area = .0500

z.05

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Standard Normal Probability Distribution

Solving for the Reorder Point

Step
Step 1:
1: Find
Find the
the z-value
z-value that
that cuts
cuts off
off an
an area
area of
of .05
.05
in
in the
the right
right tail
tail of
of the
the standard
standard normal
normal
distribution.
distribution.

We look up
the
complement
of the tail area
(1 - .05 = .95)

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Standard Normal Probability Distribution

Solving for the Reorder Point

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

.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
stockout
during
replenishment
lead-time = .
95

Probability of
a
stockout
during
replenishment
lead-time = .
05

15

24.87

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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
customers desire to make a purchase.

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3.2 Exponential Probability Distribution

The exponential probability distribution is


useful in describing the time it takes to
complete
a task. random variables can be used
The exponential
to describe:

Time between vehicle arrivals at a toll booth


Time required to complete a questionnaire
Distance between major defects in a highway

In waiting line applications, the exponential


distribution is often used for service times.

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Exponential Probability Distribution

A property of the exponential distribution is


that the mean and standard deviation are
equal.
The exponential distribution is skewed to the
right. Its skewness measure is 2.

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Relationship between the Poisson


and Exponential Distributions
The Poisson distribution
provides an appropriate description
of the number of occurrences
per interval

The exponential distribution


provides an appropriate description
of the length of the interval
between occurrences
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Exponential Probability Distribution

Density Function

f ( x)
where:

1 x /
e
for x > 0

= expected or mean
e = 2.71828

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Exponential Probability Distribution

Cumulative Probabilities

P ( x x0 ) 1 e xo /
where:
x0 = some specific value of x
The time between arrivals of customers at a bank follows an
exponential probability with a mean of 12 minutes. What is
probability that the arrival time between the next two
customers is 12 minutes or less? 8 minutes or less? In
between 8 to 12 minutes?
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Exponential Probability Distribution

Example: Als Full-Service Pump


The time between arrivals of cars at Als
fullservice gas pump follows an exponential
probability
distribution with a mean time between arrivals
of 3
minutes. Al would like to know the probability
that
the time between two successive arrivals will
be 2
minutes or less.

2011 Cengage Learning. All Rights Reserved. May not be scanned, copied Slide
62
or duplicated, or posted to a publicly accessible website, in whole or in part.

Exponential Probability Distribution

Example: Als Full-Service Pump


f(x)

-2/3 = 1 - .5134 =
.4866
.4 P(x < 2) = 1 - 2.71828-2/3

.3
.2
.1
0

x
9 10

Time Between Successive Arrivals (mins.)


2011 Cengage Learning. All Rights Reserved. May not be scanned, copied Slide
63
or duplicated, or posted to a publicly accessible website, in whole or in part.

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