QUANTITATIVE METHODS

FOR MANAGEMENT
Session 8
RECAP
• Introduction – definition, types of statistics, levels of measurement
• Collection / compilation/ classification / tabulation
• Presentation – graphical and diagrammatic
• Measures of central tendencies
• Measures of dispersion
• Measures of skewness
• Exploratory data analysis
• Association between variables – covariance and correlation
• Regression analysis – simple, measures of variations ( SSE, SSR, SST,
coefficient of determination and coefficient of correlation)
• Basic probability – terms, definition, simple, joint, addition,
multiplication theorem, Baye’s theorem. Random variables, Expected
value and variance.
• Theoretical distributions – binomial, Poisson
Normal distribution
Chapter 6
207-233
Learning Objectives
In this chapter, you learn:
• Normal distribution and its properties
• Standard normal variate
• To compute probabilities from the normal distribution
• Inverse normal probability
Continuous Probability Distributions

• A continuous random variable is a variable that can

assume any value on a continuum (can assume an
uncountable number of values)
• thickness of an item
• time required to complete a task
• temperature of a solution
• height, in inches

• These can potentially take on any value depending

only on the ability to precisely and accurately
measure
 The Normal Distribution
• ‘Bell
Shaped’
• Symmetrical f(X)
• Mean, Median and Mode
are Equal
Location is determined by the σ
mean, μ X
μ
Spread is determined by the
standard deviation, σ
Mean
= Median
= Mode
The random variable has an infinite
theoretical range:
+  to  
Properties of Normal distribution
• It is symmetrical, thus the mean, median and mode are equal
• It is bell shaped, thus the empirical rule applies
• The interquartile range equals 1.33 standard deviations
• The rage is approximately equal to 6 standard deviations.
The Normal Distribution
Density Function
 The formula for the normal probability density function is

2
1  (X μ) 
1   
2  
f(X)  e
2π
Where e = the mathematical constant approximated by 2.71828
π = the mathematical constant approximated by 3.14159
μ = the population mean
σ = the population standard deviation
X = any value of the continuous variable
 Many Normal Distributions

By varying the parameters μ and σ, we obtain different normal

distributions
 The Normal Distribution Shape

f(X) Changing μ shifts the distribution

left or right.

Changing σ increases or decreases

the spread.
σ

μ X
 The Standardized Normal

• Any normal distribution (with any mean and standard

deviation combination) can be transformed into the
standardized normal distribution (Z)

• Need to transform X units into Z units

• The standardized normal distribution (Z) has a mean

of 0 and a standard deviation of 1
 Translation to the Standardized
Normal Distribution

• Translate from X to the standardized normal (the

“Z” distribution) by subtracting the mean of X and
dividing by its standard deviation:

X μ
Z
σ
The Z distribution always has mean = 0 and standard
deviation = 1
 The Standardized Normal
Probability Density Function
• The formula for the standardized normal probability
density function is

1 (1/2)Z 2
f(Z)  e
2π

Where e = the mathematical constant approximated by 2.71828

π = the mathematical constant approximated by 3.14159
Z = any value of the standardized normal distribution
 The Standardized
Normal Distribution

• Also known as the “Z” distribution

• Mean is 0
• Standard Deviation is 1
f(Z)

Z
0

Values above the mean have positive Z-values, values below the mean have negative Z-values
 Problem
The mean length of time spent on a training program
is 500 hrs and this normally distributed random
variable has a SD of 100 hrs
What is the probability that a participant will take
• More than 500 hrs (0.50)
• Between 500 & 600 hrs (.3413)
• Between 550 & 650 hrs (.2417)
• Between 420 & 570 hrs (.5461)
2) A project yields an average cash – flow of Rs. 500 lakhs with a standard
deviation of Rs. 60 lakhs. Calculate the following probabilities.
(i) Cash flow will be more than Rs. 560 lakhs
(ii) Cash flow will be less than Rs. 420 lakhs
(iii) Cash flow will be between Rs. 460 and Rs. 540 lakhs
(iv) Cash flow will be more than Rs. 680 lakhs
Solution:
Let x Cash flow in Rs.
  Rs. 500 lakhs
σ = Rs. 60 lakhs

(i) Cash flow will be more than Rs. 560 lakhs

-3 -2 -1 0 1 2 3


P (X ≥ 560) = P(Z≥ )

560  500
P (X ≥ 560) = P(Z≥ )
60
= P (Z  1)

= ( Area from 0 to ∞ ) - ( Area from 0 to 1 )

= 0.5 – 0.3413

= 0.1587
(ii) Cash flow will be less than Rs. 420 lakhs

-3 -2 -1 0 -1 -2 -3


P (X ≤ 420) = P(Z≤ )

420  500
P (X ≤ 420) = P(Z≤ )
60
= P (Z  1.33)

= ( Area from 0 to -∞ ) - ( Area from -1.33 to 0 )

= 0.5 – 0.4082

= 0.0918
 (iii) Cash flow will be between Rs. 460 and Rs. 540 lakhs

-3 -2 -1 0 1 2 3

460  500 540  500

P (460≤ X ≤ 540) = P(  )
60 60
P (460≤ X ≤ 540) = P(-0.67≤ Z≤ 0.66)

= ( Area from - 0.67 to 0 ) - ( Area from 0 to 0.67 )

= 0.2486 + 0.2486

= 0.4972
(iv) Cash flow will be more than Rs. 680 lakhs

-3 -2 -1 0 1 2 3

P (X ≥ 680) = P(Z≥ )

680  500
P (X ≥ 560) = P(Z≥ )
60
= P (Z  3)

= ( Area from 0 to ∞ ) - ( Area from 0 to 3 )

= 0.5 – 0.4987

= 0.0013
Problem
A normal variable has a mean of
10 and SD 5. What is the
probability that the normal
variable will take a value in the
interval 0.2 to 19.8?
P(0.2 < X < 19.8)
= p[((0.2 – 10)/5) < Z < ((19.8 – 10)/5)]
= p(-1.96 < Z < 1.96)
= 2 * .4750
= .9500
Finding Probabilities of
the Standard Normal
Distribution: P(0 < Z <
1.56) Standard Normal Probabilities
StandardNormalDistribution z
0.0
.00
0.0000
.01
0.0040
.02
0.0080
.03
0.0120
.04
0.0160
.05
0.0199
.06
0.0239
.07
0.0279
.08
0.0319
.09
0.0359
0.4 0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.3 0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
f(z) 0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.2 0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
0.1 1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.56 1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830

{
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
0.0 1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
-5 -4 -3 -2 -1 0 1 2 3 4 5 1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
Z 1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817

Look in row 2.1

2.2
0.4821
0.4861
0.4826
0.4864
0.4830
0.4868
0.4834
0.4871
0.4838
0.4875
0.4842
0.4878
0.4846
0.4881
0.4850
0.4884
0.4854
0.4887
0.4857
0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
labeled 1.5 and 2.4
2.5
0.4918
0.4938
0.4920
0.4940
0.4922
0.4941
0.4925
0.4943
0.4927
0.4945
0.4929
0.4946
0.4931
0.4948
0.4932
0.4949
0.4934
0.4951
0.4936
0.4952

column labeled .06 2.6

2.7
0.4953
0.4965
0.4955
0.4966
0.4956
0.4967
0.4957
0.4968
0.4959
0.4969
0.4960
0.4970
0.4961
0.4971
0.4962
0.4972
0.4963
0.4973
0.4964
0.4974

to find P(0  z 
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990

1.56) = 0.4406
Problem
The average time a person spends
in reading the Economic Times is
49 minutes. Assume SD is 16
min and that they are normally
distributed.
What is the probability that a
person will spend
a) At least 1 hour reading it – p(X ≥ 60) =
.2451
b) No more than 30 min reading the ET –
p(X ≤ 30) = .1170
c) For the 10% who spend the most
time reading ET, how much time
do they spend? 69.48 min
Problem
A person must score in the upper
2% of the population on an IQ test
to qualify for membership in
MENSA, the international high IQ
society. If IQ scores are normally
distributed with a mean of 100
and SD of 15, what score must a
person get to qualify for MENSA?
(130.75)
• Data indicates that the time to download check$mart’s
home page is normally distributed with mean 7 seconds
and standard deviation of 2 seconds.
• what is the probability that the download time will be more than
9 seconds
• what is the probability that the download time will be between 7
and 9 seconds
• what is the probability that the download time is under 7second
or over 9 seconds
• what is the probability that the download time will be between 5
and 9 seconds
• what is the probability that the download time is less than 3.5
seconds
• How much time ( in seconds) will elapse before 10% of the
download are complete.
• What are the Upper Limit and Lower limit of X , located
symmetrically around the mean, which include 95% of the
download times
 Given a Normal Probability
Find the X Value

• Steps to find the X value for a known probability:

1. Find the Z value for the known probability
2. Convert to X units using the formula:

X  μ  Zσ
 Finding the X value for a Known
Probability
Example:
• Let X represent the time it takes (in seconds) to download an
image file from the internet.
• Suppose X is normal with mean 8.0 and standard deviation
5.0
• Find X such that 20% of download times are less than X.

0.2000

? 8.0 X
? 0 Z
 Find the Z value for
20% in the Lower Tail
1. Find the Z value for the known probability
Standardized Normal Probability
Table (Portion) • 20% area in the lower tail
is consistent with
a Z value of -0.84
Z … .03 .04 .05

-0.9 … .1762 .1736 .1711

0.2000
-0.8 … .2033 .2005 .1977

-0.7 … .2327 .2296 .2266

? 8.0 X
-0.84 0 Z
 Finding the X value

2. Convert to X units using the formula:

X  μ  Zσ

 8.0  ( 0.84)5.0

 3.80

So 20% of the values from a distribution with mean 8.0 and

standard deviation 5.0 are less than 3.80
Business Statistics:
A First Course
5th Edition

Chapter 7
Chapter 7 : 234-257
Sampling and Sampling Distributions
Learning Objectives

In this chapter, you learn:

• To distinguish between different sampling methods
• The concept of the sampling distribution
• To compute probabilities related to the sample mean
and the sample proportion
• The importance of the Central Limit Theorem
 Unit 3: Sampling Theory
Introduction to Sampling

We taste two to three A chemist takes a sample

grapes before of alcohol to determine
purchasing a whole whether it is proof or not.
bunch.

Does the selected sample represent the characteristics of the whole bunch?

Statisticians, however, recommend a scientific approach to sampling, which helps gets an

accurate sample, which in most cases represent the characteristics of the whole bunch.
Know more about sampling, as recommended by statisticians, in this unit.
Population Vs. Sample
• Population
• Set of all elements of interest in a study
• Complete enumeration – Census

• Sample
• Subset of the population
• Sampling

• The purpose of statistical inference is to develop estimates

& test hypotheses about the characteristics of a population
using the info obtained in the sample
 Unit 3: Sampling Theory

Finite Population:
If the population consists of a finite number of
individuals, then it is called a Finite Population.

Infinite Population:
In a statistical survey aimed at determining average
per capita income of the people in a city, all earning
individuals in the city form the population.
Why Sample?
• Selecting a sample is less time-consuming than
selecting every item in the population (census).

• Selecting a sample is less costly than selecting every

item in the population.

• An analysis of a sample is less cumbersome and

more practical than an analysis of the entire
population.
A Sampling Process Begins With A Sampling Frame

• The sampling frame is a listing of items that make up the population

• Frames are data sources such as population lists, directories, or maps
• Inaccurate or biased results can result if a frame excludes certain
portions of the population
• Using different frames to generate data can lead to dissimilar
conclusions
Sampling techniques
Random/ Probability sampling
Non probability/Non random sampling
• Simple random sample • Purposive
• With replacement
• Without replacement • Convenience
• Stratified sample • Quota
• Proportionate • Judgment
• optimal
• Systematic sample • Snowball
• Cluster sample
• Multi stage sample
Types of Samples
Samples

Non-Probability Probability Samples

Samples

Simple Stratified
Random
Judgment Convenience

Systematic Cluster
Types of Samples:
Nonprobability Sample
• In a nonprobability sample, items included are
chosen without regard to their probability of
occurrence.
• In convenience sampling, items are selected based only on
the fact that they are easy, inexpensive, or convenient to
sample.
• In a judgment sample, you get the opinions of pre-selected
experts in the subject matter.
Types of Samples:
Probability Sample
• In a probability sample, items in the sample
are chosen on the basis of known probabilities.

Probability Samples

Simple
Random Systematic Stratified Cluster
Probability Sample:
Simple Random Sample
• Every individual or item from the frame has an
equal chance of being selected

• Selection may be with replacement (selected

individual is returned to frame for possible
reselection) or without replacement (selected
individual isn’t returned to the frame).

• Samples obtained from table of random numbers or

computer random number generators.
Selecting a Simple Random Sample Using A Random Number
Table
Portion Of A Random Number Table
Sampling Frame For 49280 88924 35779 00283 81163 07275
Population With 850 11100 02340 12860 74697 96644 89439
09893 23997 20048 49420 88872 08401
Items
Item Name Item #
Bev R. 001 The First 5 Items in a simple
random sample
Ulan X. 002 Item # 492
. . Item # 808
Item # 892 -- does not exist so ignore
. . Item # 435
. . Item # 779
Item # 002
. .
Joann P. 849
Paul F. 850
Simple Random Sampling…
• Lottery Method
• Random Number Tables
• Tippetts Table (digits taken from the census report and
combined by 4s to give 10400 four figure numbers)
• Fisher & Yates Table
• Kendall & Babington Smith’s Tables
Problem 1
• Assume a finite population of 350. Using the
last 3 digits of the following 5 digit numbers
(601, 022….) determine the first 4 elements
that will be selected for the simple random
sample
98601 73022 83448 02147 34229
27553 84147 93289 14209
Ans
# 022 147 229 289
Simple Random Sampling…
Random Number Table

9 9 4 3 7 8 7 9 6 1 4 5 7 3 7 3 7 5 5 2 9 7 9 6 9 3 9 0 9 4 3 4 4 7 5 3 1 6 1 8
5 0 6 5 6 0 0 1 2 7 6 8 3 6 7 6 6 8 8 2 0 8 1 5 6 8 0 0 1 6 7 8 2 2 4 5 8 3 2 6
8 0 8 8 0 6 3 1 7 1 4 2 8 7 7 6 6 8 3 5 6 0 5 1 5 7 0 2 9 6 5 0 0 2 6 4 5 5 8 7
8 6 4 2 0 4 0 8 5 3 5 3 7 9 8 8 9 4 5 4 6 8 1 3 0 9 1 2 5 3 8 8 1 0 4 7 4 3 1 9
6 0 0 9 7 8 6 4 3 6 0 1 8 6 9 4 7 7 5 8 8 9 5 3 5 9 9 4 0 0 4 8 2 6 8 3 0 6 0 6
5 2 5 8 7 7 1 9 6 5 8 5 4 5 3 4 6 8 3 4 0 0 9 9 1 9 9 7 2 9 7 6 9 4 8 1 5 9 4 1
8 9 1 5 5 9 0 5 5 3 9 0 6 8 9 4 8 6 3 7 0 7 9 5 5 4 7 0 6 2 7 1 1 8 2 6 4 4 9 3
Probability Sample:
Systematic Sample
• Decide on sample size: n
• Divide frame of N individuals into groups of k
individuals: k=N/n
• Randomly select one individual from the 1st group
• Select every kth individual thereafter

N = 40 First Group
n=4
k = 10
Probability Sample:
Stratified Sample
• Divide population into two or more subgroups (called strata) according to
some common characteristic
• A simple random sample is selected from each subgroup, with sample sizes
proportional to strata sizes
• Samples from subgroups are combined into one
• This is a common technique when sampling population of voters, stratifying
across racial or socio-economic lines.

Population
Divided
into 4
strata
Probability Sample
Cluster Sample
• Population is divided into several “clusters,” each representative of the
population
• A simple random sample of clusters is selected
• All items in the selected clusters can be used, or items can be chosen from a
cluster using another probability sampling technique
• A common application of cluster sampling involves election exit polls, where
certain election districts are selected and sampled.

Population
divided into
16 clusters. Randomly selected
clusters for sample
Multi Stage Sampling
• Sampling carried out in stages
• Material regarded as being made up of a number
of I stage sampling units, each of which is made
up of a number of II Stage units and so on
• Example – sample of 5000 households in
Karnataka
• I Stage – State – divided into District
• II Stage – Districts – divided into villages
• III Stage – Villages – divided into households
Judgement Sampling
• Choice of a sample depends exclusively on the
judgement of the investigator
• Quality of the sample depends exclusively on the
judgement of the person selecting the sample
 Convenience Sampling
• Elements are included in the sample without pre
specified or known probability of being selected –
convenience of researcher
• A convenient chink or slice of the population is
taken
• Example
• From telephone directories
• Professor conducting research may use student
volunteers
 Quota Sampling
• Quotas are set based on a given criteria, but
within the quotas, the sample is judgmental
• Example
• If out of 100 people to be interviewed, 60 are to be
housewives, 25 farmers, 15 children less than 15 years
 Biased Sampling
• Picking a sample by choosing people who would
have very strong feelings on the issue
Snowball Sampling
• Survey subjects are selected based on referral
from other survey respondents
Probability Sample:
Comparing Sampling Methods
• Simple random sample and Systematic sample
• Simple to use
• May not be a good representation of the population’s
underlying characteristics
• Stratified sample
• Ensures representation of individuals across the entire
population
• Cluster sample
• More cost effective
• Less efficient (need larger sample to acquire the same level
of precision)
Evaluating Survey Worthiness
• What is the purpose of the survey?
• Is the survey based on a probability sample?
• Coverage error – appropriate frame?
• Nonresponse error – follow up
• Measurement error – good questions elicit good responses
• Sampling error – always exists
 Sampling Vs. Non Sampling Error

• Sampling Error
• As sample results are based on partial or
incomplete analysis of the population features,
any statistical inference based on the sample may
not always be correct
• Non sampling error
• Incorrect enumeration of population
• Non random selection of samples
• Use of faulty questionnaire
• Wrong editing, coding or analysis
Types of Survey Errors
• Coverage error or selection bias
• Exists if some groups are excluded from the frame and have no
chance of being selected

• Non response error or bias

• People who do not respond may be different from those who do
respond

• Sampling error
• Variation from sample to sample will always exist

• Measurement error
• Due to weaknesses in question design, respondent error, and
interviewer’s effects on the respondent (“Hawthorne effect”)
Types of Survey Errors
(continued)

• Coverage error Excluded from

frame

• Non response error Follow up on

nonresponses

• Sampling error Random

differences from
sample to sample
• Measurement error Bad or leading
question