Course : STAT6081 Statistics

Year : 2014

Session 4

INTRODUCTION TO PROBABILITY
 Topics
1. Introduction : Data and Statistics
2. Descriptive Statistics
3. Introduction to Probability
4. Discrete Probability Distributions
5. Continuous Probability Distributions
6. Sampling and Sampling Distributions
7. Interval Estimation
8. Hypothesis Tests
9. Analysis of Variance
10. Simple Linear Regression

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 References
Anderson, David R., Sweeney, Dennis J., Williams, Thomas A. (2011).
Statistics for Business and Economics. 11. Cengage Learning. USA.
ISBN: 978-0538481649.

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Evaluating and Grading

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 Learning Outcome

LO 1: Explain the statistical data

LO 2: Interpret the results of statistical measurements
LO 3: Apply statistical method to the real problem
LO 4: Analyze the results from statistical method solution

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(2) Interpret the results of statistical measurements

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1. Sample Space and Events

2. Probability of an Event and Conditional Probability

3. Bayes Theorem

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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 0 indicates an event is very unlikely to occur.

A probability near 1 indicates an event is almost certain to

occur.

A probability of 0.5 indicates the occurrence of the event is just

as likely as it is unlikely.

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Probability as a Numerical Measure
of the Likelihood of Occurrence

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 An experiment is any process that generates well-defined
outcomes.

The sample space for an experiment is the set of all

experimental outcomes.

A sample point is an element of the sample space, any one

particular experimental outcome.

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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.

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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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Example: Bradley Investments

A Counting Rule for Multiple-Step Experiments

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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 Counting Rule for Combinations

Number of combinations of N objects taken n at a time

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
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.

Number of permutations of N objects taken n at a time

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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 the assignors judgment.

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 Classical Method

If an experiment has n possible outcomes, this method

would assign a probability of 1/n to each outcome.

Example :

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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Example: Lucas Tool Rental
Relative Frequency Method

Lucas would like to assign probabilities to the number of floor

polishers it rents per day. Office records show the following
frequencies of daily rentals for the last 40 days.

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Example: Lucas Tool Rental
Relative Frequency Method

The probability assignments are given by dividing the number-

of-days frequencies by the total frequency (total number of
days).

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 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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Example: Bradley Investments

Events and Their Probabilities

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)

= .2 + .08 + .16 + .26

= .70

Event C = Collins Mining Profitable

P(C) = .48 (found using the same logic)

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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 al
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.

The Venn diagram below illustrates the concept of a complement.

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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 is denoted by A B
The union of A and B is illustrated below.

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Example: Bradley Investments
Union of Two Events
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M C = Markley Oil Profitable
or Collins Mining Profitable
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 is denoted by A

The intersection of A and B is the area of overlap in the

illustration below.

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Example: Bradley Investments
Intersection of Two Events

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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Example: Bradley Investments
Addition Law

Markley Oil 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. That is, two events are mutually
exclusive if, when one event occurs, the other cannot occur.

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Mutually Exclusive Events

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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:

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Example: Bradley Investments
Conditional Probability

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Multiplication Law

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Example: Bradley Investments
Multiplication Law

Markley Oil and Collins Mining Profitable

We know: P(M) = .70, P(C|M) = .51

Thus: P(M C) = P(M)P(M|C)

= (.70)(.51)

= .36

This result is the same as that obtained earlier using the definition
of the probability of an event.

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 Independent Events

Events A and B are independent if P(A|B) = P(A).

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Example: Bradley Investments

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Example: L. S. Clothiers
New Information
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?
Conditional Probabilities
Past history with the planning board and the town council
indicates the following:
P(B|A1) = .2 P(B|A2) = .9
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Example: L. S. Clothiers

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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.

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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 Exercises
1. In a Business Week/Harris Poll, 1035 adults were asked about their
attitudes toward business (Business Week, September 11, 2000). One
question asked :How would you rate large U.S. Companies on making
good products and competing in a global environment? The responses
were :excellent-18%, pretty good-50%, only fair-26%, poor-5%, and dont
know/no answer-1%.
a. What is the probability that a respondent rated U.S. companies pretty
good or excellent?
b. How many respondents rated U.S. companies poor?
c. How many respondents did not know or did not answer?

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2. The following crosstabulation shows household income by
educational level of the head of household (Statistical Abstract of the
United States, 2002)

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a. Develop a joint probability table!
b. What is the probability of a head of household not being a high
school graduate?
c. What is the probability of a head of household having a bachelors
degree or more education?
d. What is the probability of a household headed by someone with a
bachelors degree earning $100.000 or more?
e. What is the probability of a household having income below
$25.000?
f. What is the probability of a household headed by someone with a
bachelors degree earning less than $25.000?
g. Is household income independent of educational level?

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 Anderson, David R., Sweeney, Dennis J., Williams, Thomas A. (2011).
Statistics for Business and Economics. 11. Cengage Learning. USA. ISBN:
978-0538481649.

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