Business Statistics, 4e: by Ken Black

Business Statistics, 4e, by Ken Black. 2003 John Wiley & Sons.
4-1
Business Statistics, 4e
by Ken Black

Chapter 4
Probability

A LOTTERY IS A
TAX ON PEOPLE
WHO DON'T
UNDERSTAND
STATISTICS!!

Discrete Distributions
4-2
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.
Probability
It is the basis of inferential statistics
Inferential statistics involves taking a
sample from a pop to guess about pop
- market: what % would like soy flour
- insurance : prob certain age-group getting
into accident
- operation: a machine breakage in an
interval
-HR: large company honoring govts equal
employment regulations
4-3
4-4
Methods of Assigning Probabilities

Applications: chances of having break downs,
defective items, customer visits in an hour of a
day, life insurance claims, accidents, employees
attrition, life of a mechanical part; companys
hiring practices meeting govt. criteria; managing
risk; regulators examining whether criteria is met.
Classical method of assigning probability (rules
and laws)
Relative frequency of occurrence (cumulated
historical data)
Subjective Probability (personal intuition or
reasoning)
4-5
Classical Probability
Method of assigning
probability based on laws:
involves a random experiment,
outcomes, events. Probability
can be determined even before
the experiment.
Number of outcomes leading
to the event divided by the
total number of outcomes
possible
Each outcome is equally likely
Applicable to games of chance
Objective -- everyone correctly
using the method assigns an
identical probability
Numerator cant exceed
denominator

P E
N
Where
N
e
n
( )
:
=
=
=
total number of outcomes
number of outcomes in E
e
n
4-6
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
P E
N
Where
N
e
n
( )
:
=
=
=
total number of trials
number of outcomes
producing E
e n
4-7
Subjective Probability
Comes from a persons intuition or reasoning
Subjective -- different individuals may assign
different numeric probabilities to the same event
(farmer, oil price, success of a rural marketing
campaign)
Degree of belief (probability that a CEO will be
kidnapped by an unhappy employee/ terrorist,
chances of strike by trade, manager of a casino
business will not pay tax, repo will reduce,er
will increase )
Useful for unique (single-trial) experiments
New product introduction
Initial public offering of common stock
Beauty contest

4-8
Structure of Probability
Experiment: family planning 3kids, random check
on quality of a product, interviewing 30
customers for their satisfaction with a gadget,
sampling every 100 th package of food for
humidity or contamination, (tossing coin 2x, a die)
Event: an outcome or collective outcomes (even#)
- at least 10 liking the product
Elementary Events: event impossible to break
down into other events
Sample Space: list of all possible outcomes (eg
planning for 3 kids]
Unions and Intersections
E1: family having at least 2 girls; E2: family
having no girls. What are U and I?
- E3: family having at most 2 girls. I ?
Mutually Exclusive Events: if occurrences of
one precludes occurrence of another
-E4: family having less than 2 girls
- E1 intersection E4 ?
-P[it will rain tomorrow/month is July] =P[it
will rain tomorrow] ????

4-9
Independent Events: if occurrences or non-
occurrences of one event doesnt influence
occurrences or non-occurrences of another
event.
-E5: 1
st
child is a girl; E6: 2
nd
child a girl
-P[E6/E5]=? P[E6]=?
- does sale of Lux influence sale of other soap?
- P[X/Y]=P[X]; similarly P[Y/X]=P[Y]
Prob of X when Y is known is same as when Y
is unknown means Y doesnt affect probability
of X.

4-10
Collectively Exhaustive Events
-contains all possible elementary events
Complementary Event is
- A complement of event A is pronounced not
A: P(A)=1-P(A)
- E1=family having at least 2 girls; its
complement?

4-11
Counting the Number of Possibilities
Permutation: counting no of possibilities in
a sample space while computing probability
(where order is important)
- eg. Order A,B,C,D & find possible sequences
Answer: 4!
- Put x items in order: x*(x-1).2*1=x!
- A consumer is asked to rank in order of
preference, the taste of 5 brands of beer. If each
order is equally likely, what is the probability
of selecting any particular order?
- Formula: If there are N items to arrange: N!

4-12
Counting the Number
If picking n items from N items:
Formula:
N
P
n
= N!/(N-n)!

What if we are not concerned about the
order?

Then we are interested in number of possible
combinations, denoted
N
C
n
= N!/[n! (N-n)!]
- Ex: Combinations from A,B,C,D?

4-13
Counting the Number
EX: a small company has 20 employees. Six of
these will be selected randomly for an interview
to assess employee satisfaction program. How
many different samples are possible?
- A personnel office has 8 candidates to fill 4
positions. 5 are men. If every combination is
equally likely, what is the prob. that all men
will be chosen?
- possible combinations:
8
C
4
= 70
combinations without women:
5
C
4
=5
Probability=5/70

4-14
4-15
Experiment (skip)
Experiment: a process that produces outcomes
More than one possible outcome
Exs: interview randomly selected 20 managers on
acquiring tech, selecting 50 radars for their
efficiency; testing side effect of a drug
Trial: repetition of the process
Elementary Event: cannot be decomposed or
broken down into other events (outcome)
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
4-16
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
4-17
Sample Space: Set Notation for
Random Sample of Two Families
S = {(x,y,z) | x,y,z are the gender of child in
1
st
,2
nd
and 3
rd
trials respectively.
Concise description of large sample spaces
4-18
Sample Space
Useful for discussion of general principles
and concepts
Listing of Sample Space
(GGG), (GBG), (GGB),
(GBB), (BGG), (BGB),
(BBG), (BBB)
Venn Diagram
4-19
Union of Sets (skip)
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
4-20
Intersection of Sets (skip)
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
, , ,
, , , ,
{ }
{ }
{ }
C IBM DEC Apple
F Apple Grape Lime
C F Apple
=
=
=
, ,
, ,
Y
X
4-21
Mutually Exclusive Events(skip)
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
Statistics at Work
4-22
A patient asked his surgeon what the odds were of him
surviving an impending operation. The doctor replied they were
50/50 but he'd be all right because the first fifty had already
died!!

4-23
Collectively Exhaustive Events
Contains all elementary events for an
experiment
E
1
E
2
E
3
Sample Space with three
collectively exhaustive events
4-24
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
4-25
Four Types of Probability
Marginal Probability
Union Probability
Joint Probability
Conditional Probability
4-26
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 ( | )
4-27
General Law of Addition
four laws of probability to solve prob problems: addition, conditional,
multiplication and Bayes rule; no one rule but some rules easier than others
P X Y P X P Y P X Y ( ) ( ) ( ) ( ) = +
Y
X
Example
In a survey of interior design workers were
asked which changes in office design would
increase productivity. 70% involved voted
for reducing noise, 67% said more storage
and filing space. If one worker is selected
randomly what is the prob that this person
would select reducing noise or more filing
space, if 56% said that both would improve
productivity?
Run your own experiment: workers
monetary benefit should improve (N) or
working hours should (S) or both? [gender/
specialization]
4-28
4-29
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
4-30
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
4-31
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
4-32
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
4-33
Venn Diagram of the X or Y
but not Both Case
Y
X
P(X or Y but not both) = P(X)+P(Y)-P(XY)-P(XY)
= P(XUY) P(XY)
4-34
The Neither/Nor Region
Y
X
P X Y P X Y ( ) ( ) = 1
4-35
The Neither/Nor Region
S
N
P N S P N S ( ) ( )
.
.
=
=
=
1
1 81
19
4-36
Special Law of Addition
If X and Y are mutually exclusive,
P X Y P X P Y ( ) ( ) ( ) = +
X
Y
Mutually Exclusive
Are mutually exclusive events independent?
A firm interested in increasing its workers
productivity surveyed by asking which one
of the following factor needs improving:
Improve safety (S) 21%
Improve cafeteria food (F) 28%
Improve communication skills(C) 8%
Improve supervision(M) 12%
Improve room conditions(R) 15%
Improve quality of equipments(E) 16%
What are P(S U F) and P(SF)?

4-37
4-38
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
( | )
( )
( )
( | ) ( )
( )
=

=

4-39
Probability Matrix
What is the P(S/N)?

.11
.19
.30
.56 .14 .70
.67

.33 1.00

Increase
Storage Space

Yes (S) No Total
Yes (N)
No
Total
Noise
Reduction
4-40
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
Application of conditional probability
Randomized response as shown below is used to
solicit honest answer to sensitive questions in
surveys.
Respondent is given two questions:
-a) is the last digit of your identity number odd?
-b) have you ever shoplifted?
Repondents are asked to flip a coin and if H
appears asked to answer a) otherwise b)
If 38% said yes to the two questions. Take
- A: respondent answered yes
- E1 respondent answer question a)
- E2: resondent answer question b)

4-41
Application conditional probability
Given: P(A)=0.38; P(E
1
)=P(E
2
)=0.5
P(A/E
1
)=0.5, we are asked to find P(A/E
2
)
Since P(A)=P(E
1
A)+P(E
2
A)
= P(A/E
1
)P(E
1
)+P(A/E
2
)P(E
2
)
0.37=0.5*0.5+P(A/E
2
)*0.5
P(A/E
2
)=0.24
4-42
Example: Raw values
4-43
Male Female
Managerial(G) 8 3 11
Professional(P) 31 13 44
Technical(T) 52 17 69
Clerical(C) 9 22 31
100 55 155
A company reveals that 155 employees worked in one of
4 positions as shown below with their gender in columns.
If an employee is selected randomly, what is the probability
that the employee is female or a professional worker?
P(F/G)? P(T/M)? P(T and M)?
Multiplication Laws
4-44
General law of multiplication has to do with joint
probability:
P(XY) = P(X)P(Y/X) = P(Y) P(X/Y)
Multiplication Rule
4-45
Use the following table to develop General Law of
Multiplication as well as conditional probability

Male (M) Female(F)
Managerial (G) 0.052 0.019
0.071
Professional(P) 0.2 0.084
0.284
Technical (T) 0.335 0.110
0.445
Clerical(C) 0.058 0.142
0.2
0.645 0.355
What is P(F/G)? 0.019/0.071=0.27 =P(FG)/P(G)
What is P(T/M)? 0.335/0.645=0.52=P(TM)/P(M)
P(TM) = P(T/M) P(M)
4-46
Law of Multiplication
Demonstration Problem 4.5
P X Y P X P Y X P Y P X Y ( ) ( ) ( | ) ( ) ( | ) = =
Married
Yes No
Supervisor Yes
16 14 30
No
64 46 110
80 60 140
A company has 140 employees of which 30 are
supervisors. Eighty are married, and 20% of the
married employees are supervisors.
4-47
Law of Multiplication
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
4-48
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
( ) ( | ), ( ) ( | ).
,
( ) ( ) ( )
= =
=
Teaser
Three roommates slept through their midterm statistics exam on Monday
morning. Since they had returned together by car from the same
hometown late Sunday evening, they decided on a great little falsehood.
The three met with the instructor Monday afternoon and told him that an
ill-timed flat tire had delayed their arrival until noon.The instructor,
while somewhat skeptical, agreed to give them a makeup exam on
Tuesday.
When they arrived the instructor issued them the same makeup exam and
ushered each to a different classroom. The first student sat down and
noticed immediately the instructions indicated that the exam would be
divided into Parts I and II weighted 10% and 90% respectively. Thinking
nothing of this disparity, he proceeded to answer the questions in Part I.
These he found rather easy and moved confidently to Part II on the next
page. Suddenly his eyes grew large and his face paled. Part II consisted of
one short and pointed question.......
"Which tire was it?"

4-49
4-50
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
4-51
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
( | ) ( )
( | ) ( ).
=
=
Demonstration problem 4.2
Probability matrix is given below from a
national survey of 200 executives who were
asked to identify the geographic location of
their company and their companys industry
type.
4-52
4-53
Independent Events
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

Example : Independence
115.5 mill civilians of a countrys labour force is
shown below by age and employment status.

What is P (U|Y)? Is unemployment independent of age?
Write joint distribution that will make them
independent.
13.6%,no
4-54
Age
Y (young,
under 25)
O (older, 25
and over)
E(employed)
20.4 86.8 107.2
U (unemployed) 3.2 5.1 8.3
23.6 91.9 115.5
4-55
Y O
E 0.177 0.751 0.928
U 0.028 0.044 0.072
0.205 0.795 1.00
Homework/ Exercise
#4.1 (p. 105) #4.7 (p.105) # 4.12 (p.114) #4.14(p.114),
#4.18 ,#4.19(119),#4.26 (p125),#4.29 (p126),#4.31 (p130)
Case study for group Colgate-Palmolive makes a total
effort. Every group should prepare slides. Group
representatives, randomly selected, will present the
case.
4-56
4-57
Only a Bayesian Statistician is able
to coherently explain the statement:
If there is a 50-50 chance that
something can go wrong, then 9
times out of ten it will.
Bayes Theorem
Total Probability & Bayes Theorem
4-58

Bayes theorem allows to evaluate probabilities that are
difficult to obtain
Law of total probability:
considering only two events X and Y.
Extension if X can be partitioned into n events, Law will
be:

Ex: If Y= event that a picture card is drawn from a deck. X
1

, X
2
, X
3
, X
4
are events that denote card drawn is a heart,
diamond, spade , club respectively.
P(Y) = P(YX
1
)+P(YX
2
)+P(YX
3
)+P(YX
4
) = 16/52

X) P(Y X) P(Y P(Y) + =
=
=
n
i 1
i
) X P(Y P(Y)
Total Probability & Bayes Law
4-59
Express total probability in terms of conditional probabilities

Bayes rule is a formula that uses the law of conditional probabilities
to allow revision of original probability with arrival of new
information.

=
= =
n
1 i
i i
n
1 i
i
) P(X ) X | P(Y ) X P(Y P(Y)
... ) X | Y ( P ) X ( P ) X | Y ( P ) X ( P
) X | Y ( P ) X ( P
P(Y)
Y) P(X
) Y | P(X
2 2 1 1
i i i
i
+ +
=
=
4-60
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
Example: Bayes Rule
4-61
Two companies, Alamo Ribbon and South Jersey produce a
type of ribbon. Let Alamo produce 65% and South Jersey
35% of the total market. 8% of the ribbons produced by
Alamo are defective whereas 12% of South Jerseys are
defective. A customer purchases a new ribbon. What are the
probabilities that Alamo produced the ribbon? South Jersey?
The ribbon is tested and found defective. Now what is the
probability that Alamo produced the ribbon? That south
jersey produced the ribbon?

Notice the new information that ribbon purchased is
defective changes the probability.
4-62
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
+
=
4-63
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
( |
)
4-64
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
4-65
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

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