Business Statistics, 5

th
ed.
by Ken Black



Chapter 4

Probability
Discrete Distributions
PowerPoint presentations prepared by Lloyd Jaisingh,
Morehead State University
Learning Objectives
Comprehend the different ways of assigning
probability.
Understand and apply marginal, union,
joint, and conditional probabilities.
Select the appropriate law of probability to
use in solving problems.
Solve problems using the laws of
probability including the laws of addition,
multiplication and conditional probability
Revise probabilities using Bayes rule.
Methods of Assigning Probabilities
Classical method of assigning probability
(rules and laws)
Relative frequency of occurrence
(cumulated historical data)
Subjective Probability (personal intuition or
reasoning)
Classical Probability
Number of outcomes leading
to the event divided by the
total number of outcomes
possible
Each outcome is equally likely
Determined a priori -- before
performing the experiment
Applicable to games of chance
Objective -- everyone correctly
using the method assigns an
identical probability
E in outcomes of number
outcomes of number total
:
) (
e
=
=
=
n
n
N
Where
N
E P
e
Relative Frequency Probability
Based on historical
data
Computed after
performing the
experiment
Number of times an
event occurred divided
by the number of trials
Objective -- everyone
correctly using the
method assigns an
identical probability
E producing
outcomes of number
trials of number total
:
) (
e
=
=
=
n
n
N
Where
N
E P
e
Subjective Probability
Comes from a persons intuition or
reasoning
Subjective -- different individuals may
(correctly) assign different numeric
probabilities to the same event
Degree of belief
Useful for unique (single-trial) experiments
New product introduction
Initial public offering of common stock
Site selection decisions
Sporting events
Structure of Probability
Experiment
Event
Elementary Events
Sample Space
Unions and Intersections
Mutually Exclusive Events
Independent Events
Collectively Exhaustive Events
Complementary Events
Experiment
Experiment: a process that produces outcomes
More than one possible outcome
Only one outcome per trial
Trial: one repetition of the process
Elementary Event: cannot be decomposed or
broken down into other events
Event: an outcome of an experiment
May be an elementary event, or
May be an aggregate of elementary events
Usually represented by an uppercase letter, e.g.,
A, E
1
An Example Experiment
Experiment: randomly select, without
replacement, two families from the residents of
Tiny Town
Elementary Event: the
sample includes families
A and C
Event: each family in
the sample has children
in the household
Event: the sample
families own a total of
four automobiles
Family
Children in
Household
Number of
Automobiles
A
B
C
D
Yes
Yes
No
Yes
3
2
1
2
Tiny Town Population
Sample Space
The set of all elementary events for an
experiment
Methods for describing a sample space
roster or listing
tree diagram
set builder notation
Venn diagram
Sample Space: Roster Example
Experiment: randomly select, without
replacement, two families from the residents of
Tiny Town
Each ordered pair in the sample space is an
elementary event, for example -- (D,C)
Family
Children in
Household
Number of
Automobiles
A
B
C
D
Yes
Yes
No
Yes
3
2
1
2
Listing of Sample Space
(A,B), (A,C), (A,D),
(B,A), (B,C), (B,D),
(C,A), (C,B), (C,D),
(D,A), (D,B), (D,C)
Sample Space: Tree Diagram for
Random Sample of Two Families
A
B
C
D
B
C
D
A
C
D
A
B
D
A
B
C
Sample Space: Set Notation for
Random Sample of Two Families
S = {(x,y) | x is the family selected on the
first draw, and y is the family selected on
the second draw}
Concise description of large sample spaces
Sample Space
Useful for discussion of general principles
and concepts
Listing of Sample Space
(A,B), (A,C), (A,D),
(B,A), (B,C), (B,D),
(C,A), (C,B), (C,D),
(D,A), (D,B), (D,C)
Venn Diagram
Union of Sets
The union of two sets contains an instance
of each element of the two sets.
{ }
{ }
{ }
X
Y
X Y
=
=
=
1 4 7 9
2 3 4 5 6
1 2 3 4 5 6 7 9
, , ,
, , , ,
, , , , , , ,
{ }
{ }
{ }
C IBM DEC Apple
F Apple Grape Lime
C F IBM DEC Apple Grape Lime
=
=
=
, ,
, ,
, , , ,
Y X
X Y
Intersection of Sets
The intersection of two sets contains only
those element common to the two sets.
{ }
{ }
{ }
X
Y
X Y
=
=
=
1 4 7 9
2 3 4 5 6
4
, , ,
, , , ,
Y
X
{ }
{ }
{ }
C IBM DEC Apple
F Apple Grape Lime
C F Apple
=
=
=
, ,
, ,
X Y
Mutually Exclusive Events
Events with no
common outcomes
Occurrence of one
event precludes the
occurrence of the
other event
{ }
{ }
{ }
X
Y
X Y
=
=
=
17 9
2 3 4 5 6
, ,
, , , ,
{ }
{ }
{ }
C IBM DEC Apple
F Grape Lime
C F
=
=
=
, ,
,
Y X
P X Y ( ) = 0
Independent Events
Occurrence of one event does not affect the
occurrence or nonoccurrence of the other
event
The conditional probability of X given Y is
equal to the marginal probability of X.
The conditional probability of Y given X is
equal to the marginal probability of Y.
P X Y P X and P Y X P Y ( | ) ( ) ( | ) ( ) = =
Collectively Exhaustive Events
Contains all elementary events for an
experiment
E
1
E
2
E
3
Sample Space with three
collectively exhaustive events
Complementary Events

All elementary events not in the event A
are in its complementary event.
Sample
Space
A
P SampleSpace ( ) =1
P A P A ( ) ( ) ' = 1
' A
Counting the Possibilities
mn Rule
Sampling from a Population with
Replacement
Combinations: Sampling from a Population
without Replacement
mn Rule
If an operation can be done in m ways and a
second operation can be done in n ways,
then there are mn ways for the two
operations to occur in order.
A cafeteria offers 5 salads, 4 meats, 8
vegetables, 3 breads, 4 desserts, and 3
drinks. A meal consists of one serving of
each of the items. How many meals are
available?
(Ans: 548343 = 5,760 meals.)
Sampling from a Population with
Replacement
A tray contains 1,000 individual tax returns.
If 3 returns are randomly selected with
replacement from the tray, how many
possible samples are there?
(N)
n
= (1,000)
3
= 1,000,000,000
Combinations: Sampling from a
Population without Replacement
This counting method uses combinations
Selecting n items from a population of N
without replacement
Combinations: Sampling from a
Population without Replacement
For example, suppose a small law firm has
16 employees and three are to be selected
randomly to represent the company at the
annual meeting of the American Bar
Association.
How many different combinations of
lawyers could be sent to the meeting?
Answer:
N
C
n
=
16
C
3
= 16!/(3!13!) = 560.
Four Types of Probability
Marginal Probability
Union Probability
Joint Probability
Conditional Probability
Four Types of Probability
Marginal

The probability
of X occurring
Union

The probability
of X or Y
occurring
Joint

The probability
of X and Y
occurring
Conditional

The probability
of X occurring
given that Y
has occurred
Y X Y X
Y
X
P X ( )
P X Y ( )
P X Y ( )
P X Y ( | )
General Law of Addition
P X Y P X P Y P X Y ( ) ( ) ( ) ( ) = +
Y
X
General Law of Addition -- Example
P N S P N P S P N S ( ) ( ) ( ) ( ) = +
S
N
.56
.67 .70
P N
P S
P N S
P N S
( ) .
( ) .
( ) .
( ) . . .
.
=
=
=
= +
=
70
67
56
70 67 56
081
Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
P N S P N P S P N S ( ) ( ) ( ) ( )
. . .
.
= +
= +
=
70 67 56
81
Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
P N S ( ) . . .
.
= + +
=
56 14 11
81
Venn Diagram of the X or Y
but not Both Case
Y
X
The Neither/Nor Region
Y
X
P X Y P X Y ( ) ( ) = 1
The Neither/Nor Region
S
N
P N S P N S ( ) ( )
.
.
=
=
=
1
1 81
19
Special Law of Addition
If X and Y are mutually exclusive,
P X Y P X P Y ( ) ( ) ( ) = +
X
Y
Demonstration Problem 4.3
Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155
P T C P T P C ( ) ( ) ( )
.
= +
= +
=
69
155
31
155
645
Demonstration Problem 4.3
Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155
P P C P P P C ( ) ( ) ( )
.
= +
= +
=
44
155
31
155
484
Law of Multiplication
Demonstration Problem 4.5
P X Y P X P Y X P Y P X Y ( ) ( ) ( | ) ( ) ( | ) = =
P M
P S M
P M S P M P S M
( ) .
( | ) .
( ) ( ) ( | )
( . )( . ) .
= =
=
=
= =
80
140
0 5714
0 20
0 5714 0 20 0 1143
Law of Multiplication
Demonstration Problem 4.5
Total
.7857
Yes No
.4571 .3286
.1143 .1000 .2143
.5714 .4286 1.00
Married
Yes
No
Total
Supervisor
Probability Matrix
of Employees
20 . 0 ) | (
5714 . 0
140
80
) (
2143 . 0
140
30
) (
=
= =
= =
M S P
M P
S P
P M S P M P S M ( ) ( ) ( | )
( . )( . ) .
=
= = 0 5714 0 20 0 1143
P M S P M P M S
P M S P S P M S
P M P M
( ) ( ) ( )
. . .
( ) ( ) ( )
. . .
( ) ( )
. .
=
= =
=
= =
=
= =
0 5714 0 1143 0 4571
0 2143 0 1143 0 1000
1
1 0 5714 0 4286
P S P S
P M S P S P M S
( ) ( )
. .
( ) ( ) ( )
. . .
=
= =
=
= =
1
1 0 2143 0 7857
0 7857 0 4571 0 3286
Special Law of Multiplication
for Independent Events
General Law


Special Law
P X Y P X P Y X P Y P X Y ( ) ( ) ( | ) ( ) ( | ) = =
If events X and Y are independent ,
and P X P X Y P Y P Y X
Consequently
P X Y P X P Y
( ) ( | ), ( ) ( | ).
,
( ) ( ) ( )
= =
=
Law of Conditional Probability
The conditional probability of X given Y is
the joint probability of X and Y divided by
the marginal probability of Y.
P X Y
P X Y
P Y
P Y X P X
P Y
( | )
( )
( )
( | ) ( )
( )
=

=

Law of Conditional Probability
N
S
.56
.70
P N
P N S
P S N
P N S
P N
( ) .
( ) .
( | )
( )
( )
.
.
.
=
=
=

=
=
70
56
56
70
80
Office Design Problem
164 .
67 .
11 .
) (
) (
) | (
=
=

=
S P
S N P
S N P
.19
.30
.14 .70
.33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
.11
.56
.67
Reduced Sample
Space for
Increase
Storage Space
= Yes
Independent Events
If X and Y are independent events, the
occurrence of Y does not affect the
probability of X occurring.
If X and Y are independent events, the
occurrence of X does not affect the
probability of Y occurring.
If X and Y are independent events ,
, and P X Y P X
P Y X P Y
( | ) ( )
( | ) ( ).
=
=
Independent Events
Demonstration Problem 4.10
Geographic Location
Northeast
D
Southeast
E
Midwest
F
West
G
Finance A .12 .05 .04 .07 .28
Manufacturing B .15 .03 .11 .06 .35
Communications C .14 .09 .06 .08 .37
.41 .17 .21 .21 1.00
P A G
P A G
P G
P A
P A G P A
( | )
( )
( )
.
.
. ( ) .
( | ) . ( ) .
=

= = =
= = =
007
021
033 028
033 028

Independent Events
Demonstration Problem 4.11
D E
A 8 12 20
B 20 30 50
C 6 9 15
34 51 85
P A D
P A
P A D P A
( | ) .
( ) .
( | ) ( ) .
= =
= =
= =
8
34
2353
20
85
2353
0 2353
Revision of Probabilities: Bayes Rule
An extension to the conditional law of
probabilities
Enables revision of original probabilities
with new information
P X Y
P Y X P X
P Y X P X P Y X P X P Y X P X
i
i i
n n
( | )
( | ) ( )
( | ) ( ) ( | ) ( ) ( | ) ( )
=
+ + 1 1 2 2
Revision of Probabilities
with Bayes' Rule: Ribbon Problem
P Alamo
P SouthJersey
P d Alamo
P d SouthJersey
P Alamo d
P d Alamo P Alamo
P d Alamo P Alamo P d SouthJersey P SouthJersey
P SouthJersey d
P d SouthJersey P SouthJersey
P d Alamo P Alamo P d SouthJersey P SouthJersey
( ) .
( ) .
( | ) .
( | ) .
( | )
( | ) ( )
( | ) ( ) ( | ) ( )
( . )( . )
( . )( . ) ( . )( . )
.
( | )
( | ) ( )
( | ) ( ) ( | ) ( )
( . )( . )
( .
=
=
=
=
=

+
=
+
=
=

+
=
0 65
0 35
0 08
0 12
0 08 0 65
0 08 0 65 0 12 0 35
0 553
0 12 0 35
0 08)( . ) ( . )( . )
.
0 65 0 12 0 35
0 447
+
=
Revision of Probabilities
with Bayes Rule: Ribbon Problem
Conditional
Probability

0.052




0.042

0.094
0.65




0.35
0.08




0.12
0.052
0.094

=0.553

0.042
0.094

=0.447
Alamo




South Jersey




Event
Prior
Probability

P Ei ( )
Joint
Probability

P E d i ( )
Revised
Probability

P E d i ( | )
P d
E
i
( |
)
Revision of Probabilities
with Bayes' Rule: Ribbon Problem
Alamo
0.65
South
Jersey
0.35
Defective
0.08
Defective
0.12
Acceptable
0.92
Acceptable
0.88
0.052
0.042
+ 0.094
Probability for a Sequence
of Independent Trials
25 percent of a banks customers are commercial
(C) and 75 percent are retail (R).
Experiment: Record the category (C or R) for
each of the next three customers arriving at the
bank.
Sequences with 1 commercial and 2 retail
customers.
C
1
R
2
R
3

R
1
C
2
R
3

R
1
R
2
C
3
Probability for a Sequence
of Independent Trials
Probability of specific sequences containing
1 commercial and 2 retail customers,
assuming the events C and R are
independent
P C R R P C P R P R
P R C R P R P C P R
P R R C P R P R P C
( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
1 2 3
1 2 3
1 2 3
1
4
3
4
3
4
9
64
3
4
1
4
3
4
9
64
3
4
3
4
1
4
= =
|
\

|
.
|
|
\

|
.
|
|
\

|
.
| =
= =
|
\

|
.
|
|
\

|
.
|
|
\

|
.
| =
= =
|
\

|
.
|
|
\

|
.
|
|
\

|
.
| =
9
64
Probability for a Sequence
of Independent Trials
Probability of observing a sequence
containing 1 commercial and 2 retail
customers, assuming the events C and R are
independent
( ) P C R R R C R R R C
P C R R P R C R P R R C
( ) ( ) ( )
( ) ( ) ( )
1 2 3 1 2 3 1 2 3
1 2 3 1 2 3 1 2 3
9
64
9
64
9
64
27
64

= + +
= + + =
Probability for a Sequence
of Independent Trials
Probability of a specific sequence with 1 commercial and
2 retail customers, assuming the events C and R are
independent

Number of sequences containing 1 commercial and 2
retail customers



Probability of a sequence containing 1 commercial and 2
retail customers
( )
P C R R P C P R P R = = ( ) ( ) ( )
9
64
( ) ( )
n r C
n
r
n
r n r
=
|
\

|
.
| =

=
!
! !
!
! !
3
1 3 1
3
( )
3
9
64
27
64
|
\

|
.
| =
Probability for a Sequence
of Dependent Trials
Twenty percent of a batch of 40 tax returns
contain errors.
Experiment: Randomly select 4 of the 40 tax
returns and record whether each return
contains an error (E) or not (N).
Outcomes with exactly 2 erroneous tax returns
E
1
E
2
N
3
N
4

E
1
N
2
E
3
N
4

E
1
N
2
N
3
E
4

N
1
E
2
E
3
N
4

N
1
E
2
N
3
E
4

N
1
N
2
E
3
E
4
Probability for a Sequence
of Dependent Trials
Probability of specific sequences containing 2
erroneous tax returns (three of the six
sequences)
P E E N N P E P E E P N E E P N E E N
P E N E N P E P N E P E E N P N E N E
( ) ( ) ( | ) ( | ) ( | )
,
, ,
.
( ) ( ) ( | ) ( | ) ( | )
1 2 3 4 1 2 1 3 1 2 4 1 2 3
1 2 3 4 1 2 1 3 1 2 4 1 2 3
8
50
7
49
32
48
31
47
55 552
5 527 200
0 01
=
=
|
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=
=
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=
=
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8
50
32
49
7
48
31
47
55 552
5 527 200
0 01
8
50
32
49
31
48
7
47
55 552
5 527 200
0 01
1 2 3 4 1 2 1 3 1 2 4 1 2 3
,
, ,
.
( ) ( ) ( | ) ( | ) ( | )
,
, ,
.
P E N N E P E P N E P N E N P E E N N
Probability for a Sequence
of Independent Trials

Probability of observing a sequence containing
exactly 2 erroneous tax returns
P E E N N E N E N E N N E
N E E N N E N E N N E E
P E E N N P E N E N P E N N E
P N E E N P N E N E P N N E E
(( ) ( ) ( )
( ) ( ) ( ))
( ) ( ) ( )
( ) ( ) ( )
,
1 2 3 4 1 2 3 4 1 2 3 4
1 2 3 4 1 2 3 4 1 2 3 4
1 2 3 4 1 2 3 4 1 2 3 4
1 2 3 4 1 2 3 4 1 2 3 4
55 552
5


= + +
+ + +
=
, ,
,
, ,
,
, ,
,
, ,
,
, ,
,
, ,
.
527 200
55 552
5 527 200
55 552
5 527 200
55 552
5 527 200
55 552
5 527 200
55 552
5 527 200
0 06
+ + + + +
~
Probability for a Sequence
of Dependent Trials
Probability of a specific sequence with exactly 2 erroneous tax
returns


Number of sequences containing exactly 2 erroneous tax
returns



Probability of a sequence containing exactly 2 erroneous tax
returns
( ) ( )
n r
r
n
C
n
r
n
r n r
C
=
|
\

|
.
| = =

=
!
! !
!
! !
4
2 4 2
6
( )
6
55552
5527 200
006
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P E E N N ( )
,
, ,
. 1 2 3 4
8
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55 552
5 527 200
0 01 =
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