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Quantitative_Methods

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- Neuromancer
- The E-Myth Revisited: Why Most Small Businesses Don't Work and
- How Not to Be Wrong: The Power of Mathematical Thinking
- Drive: The Surprising Truth About What Motivates Us
- Chaos: Making a New Science
- The Joy of x: A Guided Tour of Math, from One to Infinity
- How to Read a Person Like a Book
- Moonwalking with Einstein: The Art and Science of Remembering Everything
- The Wright Brothers
- The Other Einstein: A Novel
- The 6th Extinction
- The Housekeeper and the Professor: A Novel
- The Power of Discipline: 7 Ways it Can Change Your Life
- The 10X Rule: The Only Difference Between Success and Failure
- A Short History of Nearly Everything
- The Kiss Quotient: A Novel
- The End of Average: How We Succeed in a World That Values Sameness
- Made to Stick: Why Some Ideas Survive and Others Die
- Algorithms to Live By: The Computer Science of Human Decisions
- The Universe in a Nutshell

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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

What is Meant by Statistics?

organizing, presenting, analyzing, and

interpreting numerical data to assist in

making more effective decisions.

OR A set of mathematically based tools

and techniques to transform raw data

into few summary measures

1-2

Why Study Statistics?

2. Statistical techniques are used to make decisions

that affect our daily lives

3. The knowledge of statistical methods will help you

understand how decisions are made and give you a

better understanding of how they affect you.

Is a vital tool in research.

No matter what line of work you select, you will find

yourself faced with decisions where an

understanding of data analysis is helpful.

1-3

Why Study Statistics

providing evidence based information or

quantifiable basis.

This increases the confidence in decision

making

TASK 1: Give a detailed account on how

and why managers use Statistics?

1-4

What is Meant by Statistics?

to numerical information

Examples: the average starting salary of college graduates, the

number of deaths due to alcoholism last year, the change in the

Dow Jones Industrial Average from yesterday to today, and the

number of home runs hit by the Chicago Cubs during the 2007

season.

We often present statistical information in a

graphical form for capturing reader attention

and to portray a large amount of information.

1-5

Formal Definition of Statistics

analyzing, and interpreting data to assist in making more effective

decisions.

Some examples of the need for data collection.

1. Research analysts for Merrill Lynch evaluate many facets of a

particular stock before making a “buy” or “sell” recommendation.

2. The marketing department at Colgate-Palmolive Co., a manufacturer

of soap products, has the responsibility of making recommendations

regarding the potential profitability of a newly developed group of

face soaps having fruit smells.

3. The United States government is concerned with the present

condition of our economy and with predicting future economic trends.

4. Managers must make decisions about the quality of their product or

service.

1-6

Who Uses Statistics?

extensively by marketing,

accounting, quality control,

consumers, professional sports

people, hospital administrators,

educators, politicians, physicians,

etc...

1-7

Types of Statistics – Descriptive Statistics and

Inferential Statistics

summarizing, and presenting data in an

informative way.

EXAMPLE 1: The United States government reports the population of the

United States was 179,323,000 in 1960; 203,302,000 in 1970;

226,542,000 in 1980; 248,709,000 in 1990, and 265,000,000 in 2000.

earnings of production workers was $17.90 for April 2008.

1-8

Types of Statistics – Descriptive Statistics and

Inferential Statistics

prediction, or generalization about a

population, based on a sample.

meaning. A population or sample may consist of individuals or

objects

1-9

Population versus Sample

measurements of interest under study.

a population of interest

1-10

Why take a sample instead of studying every

member of the population?

2. Destruction of item being studied may be

required

3. Not possible to test or inspect all members

of a population being studied

4. Time constraint

1-11

A Sampling Unit

observed with respect to the random variable

under study.

The question is “What is a Random

Variable?”

Any attribute of interest on which data is

collected and analysed.

Eg brand of coffee preferred, daily

occupancy rates, output per worker etc.

1-12

Population Parameter

a population e.g population average,

population proportion.

population data to compute its value.

1-13

Sample Statistic

a sample e.g sample average and sample

proportion.

Give any two examples of appropriate

sample statistics in business.

1-14

Usefulness of a Sample in Learning about a

Population

population is done extensively in business,

agriculture, politics, and government.

monitor the popularity of their programs by

hiring Nielsen and other organizations to

sample the preferences of TV viewers.

1-15

Components of Statistics

few summary descriptive measures.

2. Inferential statistics: generalises sample

findings to the broader population.

3. Statistical modelling: builds models of

relationships between variables by

constructing equations (or models) to

estimate one of these variables based on

values of related variables.

1-16

Data and Data Quality

Define data.

The usefulness of data depends of the

quality of data collected.

The quality of data depends on:

i) The data type

ii) The source of data

iii) Methods of data collection.

1-17

Types of Variables

studied is nonnumeric or categorical.

EXAMPLES: Gender, religious affiliation, type of automobile owned,

state of birth, eye color are examples.

numerically and in real numbers

EXAMPLES: balance in your checking account, age of a student,

minutes remaining in class, or number of children in a family, price of

a product, distance travelled by a car.

1-18

Quantitative Variables - Classifications

or continuous.

there are usually “gaps” between values. Is whole number (or

integer) data.

EXAMPLE: the number of bedrooms in a house, or the number of

hammers sold at the local Home Depot (1,2,3,…,etc).

specified range. Any number that can occur in an interval

height of students in a class, passengers’ hand luggage

(0.8kg), volume of fuel 50l ; 45.5l

1-19

Summary of Types of Variables

1-20

Four Levels of Measurement or

Measurement scales

Nominal level - data that is Interval level - similar to the ordinal

classified into categories and level, with the additional property

cannot be arranged in any that meaningful amounts of

particular order. differences between data values

can be determined. There is no

natural zero point.

EXAMPLES: eye color, gender, EXAMPLE: Temperature on the

religious affiliation. Fahrenheit scale.

Ordinal level – data arranged in Ratio level - the interval level with an

some order, but the differences inherent zero starting point.

between data values cannot be Differences and ratios are

determined or are meaningless. meaningful for this level of

measurement.

EXAMPLE: During a taste test of 4 soft

drinks, Mellow Yellow was ranked EXAMPLES: Monthly income of surgeons, or

number 1, Sprite number 2, Seven-up distance traveled by manufacturer’s

number 3, and Orange Crush number 4. representatives per month.

1-21

Nominal-Level Data

Properties:

1. Observations of a qualitative variable can

only be classified and counted.

2. There is no particular order to the labels.

3. Eg. Gender (1-male; 2- female); mode of

transport ( 1- bus, 2-car, 3-train, 4- bicycle)

1-22

Ordinal-Level Data

Properties:

1. Data classifications are

represented by sets of labels or

names (high, medium, low);

lower, middle, upper, that have

relative values.

2. Because of the relative values,

the data classified can be

ranked or ordered.

3. Is associated with categorical

data

1-23

Interval-Level Data

1. Data classifications are ordered according to the amount of the

characteristic they possess.

2. They possess two properties:

Rank order- same as ordinal data

Distance- how much more or less an object possess of a xrstic

Example: Women’s dress sizes

listed on the table.

1-24

Examples of interval-scaled data

employed after completing your first degree?

1. Very low 2. Low 3. Moderate 4. high 5. Very

high

How satisfied are you with your current job

description?

1. Very dissatisfied 2. Dissatisfied 3. Satisfied 4.

Very Satisfied

Has no zero point

1-25

Ratio-Level Data

quantitative variables. Eg employee ages, customer

incomes, distance travelled (km) number of shopping

trips per month (0; 1; 2; 3; etc

Ratio level is the “highest” level of measurement.

Properties:

1. Data classifications are ordered according to the amount of the

characteristics they possess.

2. Equal differences in the characteristic are represented by equal

differences in the numbers assigned to the classifications.

1-26

Properties of Ratio data

an absolute origin of zero) that allow such data to be

added, subtracted, multiplied or divided.

Is the strongest data for statistical analysis since the

most amount of statistical information can be

extracted.

More statistical methods can be applied to ratio data

than any other type.

The zero property means that ratios can be

computed eg 5 is half of 10.

1-27

Why Know the Level of Measurement of a

Data?

dictates the calculations that can be done to

summarize and present the data.

To determine the statistical tests that should

be performed on the data

1-28

Summary of the Characteristics for

Levels of Measurement

1-29

Data Sources

from within the company.

Data can be sourced externally, existing

outside an organisation e.g from external

databases.

Most commonly, researchers use primary

data that is recorded for the first time at

source.

Sometimes secondary data is used, data that

already exist.

1-30

Primary and Secondary data

disadvantages of using:

i. Primary data.

ii. Secondary data.

1-31

Data collection methods

i. Observation.

ii. Panels

iii. Focus groups

iv. Surveys

Face-to-face interviews

Telephone interviews

Computer assisted interviews

personal interviews,

e-surveys).

1-32

What are the advantages and

disadvantages of gathering data

using each method listed

above?

1-33

Describing Data:

Frequency Tables, Frequency

Distributions, and Graphic Presentation

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Frequency Table and Frequency Distribution

into mutually exclusive classes showing the number Class interval: The class interval is obtained by

subtracting the lower limit of a class from

of observations in each class. the lower limit of the next class.

Class frequency: The number of observations

in each class.

Class midpoint: A point that divides a class into

two equal parts. This is the average of the

upper and lower class limits.

classes showing the number of observations in each class.

1-35

Pie Charts and Bar Charts

PIE CHART A chart that shows the proportion or percent that each class

represents of the total number of frequencies.

horizontal axis and the class frequencies on the vertical axis. The

class frequencies are proportional to the heights of the bars.

1-36

Relative Class Frequencies

relative class frequencies to show the

fraction of the total number of observations in

each class.

A relative frequency captures the relationship

between a class total and the total number of

observations.

1-37

EXAMPLE – Creating a Frequency

Distribution Table

wants to develop tables, charts,

and graphs to show the typical

selling price on various dealer

lots. The table on the right

reports only the price of the 80

vehicles sold last month at

Whitner Autoplex.

1-38

Constructing a Frequency Table - Example

into the classes.

each class.

1-39

Relative Frequency Distribution

distribution, each of the class frequencies is divided by the

total number of observations.

1-40

Graphic Presentation of a Frequency

Distribution

Histograms

Frequency polygons

Cumulative frequency distributions

1-41

Histogram

horizontal axis and the class frequencies on the vertical axis. The

class frequencies are represented by the heights of the bars and

the bars are drawn adjacent to each other.

1-42

Frequency Polygon

A frequency polygon

also shows the shape

of a distribution and is

similar to a histogram.

It consists of line

segments connecting

the points formed by

the intersections of the

class midpoints and the

class frequencies.

1-43

Histogram Versus Frequency Polygon

data (highs, lows, points of concentration, etc.)

The histogram has the advantage of depicting each class as a

rectangle, with the height of the rectangular bar representing

the number in each class.

The frequency polygon has an advantage over the histogram. It

allows us to compare directly two or more frequency

distributions.

1-44

Cumulative Frequency Distribution

1-45

Describing Data:

Numerical Measures

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Parameter Versus Statistics

1-47

Population Mean

For ungrouped data, the population mean is the sum of all the population values divided by the total number of

population values. The sample mean is the sum of all the sample values divided by the total number of sample

values.

EXAMPLE:

1-48

The Median

MEDIAN The midpoint of the values after they have been ordered from the smallest to the largest, or the largest to

the smallest.

1. There is a unique median for each data set.

2. It is not affected by extremely large or small values and is therefore a valuable measure of central tendency

when such values occur.

3. It can be computed for ratio-level, interval-level, and ordinal-level data.

4. It can be computed for an open-ended frequency distribution if the median does not lie in an open-ended

class.

EXAMPLES:

The ages for a sample of five college students are: The heights of four basketball players, in inches, are:

21, 25, 19, 20, 22

Arranging the data in ascending order gives:

Arranging the data in ascending order gives:

73, 75, 76, 80.

19, 20, 21, 22, 25.

Thus the median is 75.5

1-49

The Mode

1-50

The Relative Positions of the Mean,

Median and the Mode

1-51

The Geometric Mean

Useful in finding the average change of percentages, ratios, indexes, or growth rates over time.

It has a wide application in business and economics because we are often interested in finding the

percentage changes in sales, salaries, or economic figures, such as the GDP, which compound or

build on each other.

The geometric mean will always be less than or equal to the arithmetic mean.

The formula for the geometric mean is written:

EXAMPLE:

Suppose you receive a 5 percent increase in salary this year and a 15 percent

increase next year. The average annual percent increase is 9.886, not 10.0. Why is

this so? We begin by calculating the geometric mean.

1-52

Measures of Dispersion

A measure of location, such as the mean or the median, only describes the center of the data. It is valuable from

that standpoint, but it does not tell us anything about the spread of the data.

For example, if your nature guide told you that the river ahead averaged 3 feet in depth, would you want to wade

across on foot without additional information? Probably not. You would want to know something about the variation

in the depth.

A second reason for studying the dispersion in a set of data is to compare the spread in two or more distributions.

RANGE

MEAN DEVIATION

1-53

EXAMPLE – Mean Deviation

EXAMPLE:

The number of cappuccinos sold at the Starbucks location in the Orange Country

Airport between 4 and 7 p.m. for a sample of 5 days last year were 20, 40, 50, 60,

and 80. Determine the mean deviation for the number of cappuccinos sold.

x

20 40 50 60 80

50

n 5

Step 2: Subtract the mean (50) from each of the observations, convert to positive if difference

is negative

Step 3: Sum the absolute differences found in step 2 then divide by the number of

observations

1-54

Variance and Standard Deviation

VARIANCE The arithmetic mean of the squared deviations from the mean.

The variance and standard deviations are nonnegative and are zero only

if all observations are the same.

For populations whose values are near the mean, the variance and

standard deviation will be small.

For populations whose values are dispersed from the mean, the

population variance and standard deviation will be large.

The variance overcomes the weakness of the range by using all the

values in the population. PLEASE NOTE THAT THE DENOMINATOR IS

“N” for a population but “n-1” for sample variance

1-55

EXAMPLE – Population Variance and

Population Standard Deviation

The number of traffic citations issued during the last five months in Beaufort County, South Carolina, is

reported below:

N 12 12

Step 2: Find the difference between each observation and the mean, and square that difference.

Step 3: Sum all the squared differences found in step 3

Step 4: Divide the sum of the squared differences by the number of items in the population.

2 ( X ) 2

1,488

124

N 12

1-56

Sample Variance and

Standard Deviation

Where :

s 2 is the sample variance

X is the value of each observatio n in the sample

X is the mean of the sample

n is the number of observatio ns in the sample

EXAMPLE

The hourly wages for a sample of part-time

employees at Home Depot are: $12, $20,

$16, $18, and $19.

THAT THE DENOMINATOR IS “N” for a

population but “n-1” for sample variance

1-57

Chebyshev’s Theorem and Empirical Rule

contributed by the Dupree Paint

employees to the company’s profit-

sharing plan is $51.54, and the standard

deviation is $7.51. At least what percent

of the contributions lie within plus 3.5

standard deviations and minus 3.5

standard deviations of the mean?

1-58

The Arithmetic Mean and Standard

Deviation of Grouped Data

EXAMPLE:

Determine the arithmetic mean vehicle selling

EXAMPLE

price given in the frequency table below.

PLEASE NOTE THAT THE Compute the standard deviation of the vehicle

DENOMINATOR IS “N” for a population selling prices in the frequency table below.

variance but “n-1” for sample variance

1-59

Describing Data:

Displaying and Exploring Data

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Dot Plots

A dot plot groups the data as little as possible and the identity of an individual observation is not lost.

To develop a dot plot, each observation is simply displayed as a dot along a horizontal number line

indicating the possible values of the data.

If there are identical observations or the observations are too close to be shown individually, the dots are

“piled” on top of each other.

EXAMPLE

Reported below are the number of vehicles sold in the last 24 months at Smith Ford Mercury Jeep, Inc.,

in Kane, Pennsylvania, and Brophy Honda Volkswagen in Greenville, Ohio. Construct dot plots

and report summary statistics for the two small-town Auto USA lots.

1-61

Stem-and-Leaf

Stem-and-leaf display is a statistical technique to present a set of data. Each numerical value is divided

into two parts. The leading digit(s) becomes the stem and the trailing digit the leaf. The stems are located

along the vertical axis, and the leaf values are stacked against each other along the horizontal axis.

Two disadvantages to organizing the data into a frequency distribution:

(1) The exact identity of each value is lost

(2) Difficult to tell how the values within each class are distributed.

EXAMPLE

Listed in Table 4–1 is the number of 30-second radio advertising spots purchased by each of the 45

members of the Greater Buffalo Automobile Dealers Association last year. Organize the data into a

stem-and-leaf display. Around what values do the number of advertising spots tend to cluster?

What is the fewest number of spots purchased by a dealer? The largest number purchased?

1-62

Quartiles, Deciles and Percentiles

The standard deviation is the most widely used measure of dispersion.

Alternative ways of describing spread of data include determining the location of values that divide a set of

observations into equal parts.

To formalize the computational procedure, let Lp refer to the location of a desired percentile. So if we wanted

to find the 33rd percentile we would use L33 and if we wanted the median, the 50th percentile, then L50.

The number of observations is n, so if we want to locate the median, its position is at (n + 1)/2, or we could

write this as (n + 1)(P/100), where P is the desired percentile

1-63

Percentiles - Example

EXAMPLE

Listed below are the commissions earned last month by a sample of 15 brokers at Salomon

Smith Barney’s Oakland, California, office.

$2,287 $1,940 $2,311 $2,054 $2,406 $1,471 $1,460

Locate the median, the first quartile, and the third quartile for the commissions earned.

$2,038 $2,047 $2,054 $2,097 $2,205 $2,287 $2,311

$2,406

Step 2: Compute the first and third quartiles. Locate L25 and L75 using:

25 75

L25 (15 1) 4 L75 (15 1) 12

100 100

Therefore, the first and third quartiles are located at the 4th and 12th

positions, respective ly

L25 $1,721

L75 $2,205

1-64

Boxplot - Example

Step 2: Draw a box that starts at Q1 (15 minutes) and ends at Q3 (22

minutes). Inside the box we place a vertical line to represent the median (18 minutes).

Step 3: Extend horizontal lines from the box out to the minimum value (13

minutes) and the maximum value (30 minutes).

1-65

Skewness

Another characteristic of a set of data is the shape.

There are four shapes commonly observed: symmetric, positively skewed, negatively skewed, bimodal.

– A value near -3, indicates considerable negative skewness.

– A value such as 1.63 indicates moderate positive skewness.

– A value of 0, which will occur when the mean and median are equal, indicates the distribution is

symmetrical and that there is no skewness present.

1-66

Contingency Tables – An Example

the quality assurance inspector reviewed each window for all quality aspects. Each was

classified as acceptable or unacceptable and by the shift on which it was produced.

Thus we reported two variables on a single item. The two variables are shift and

quality. The results are reported in the following table.

Using the contingency table able, the quality of the three shifts can be compared. For

example:

1. On the day shift, 3 out of 20 windows or 15 percent are defective.

2. On the afternoon shift, 2 of 15 or 13 percent are defective and

3. On the night shift 1 out of 15 or 7 percent are defective.

4. Overall 12 percent of the windows are defective

1-67

Probability Concepts

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Probability, Experiment, Outcome, Event:

Defined

one, inclusive, describing the relative

possibility (chance or likelihood) an event will

occur.

An experiment is a process

that leads to the occurrence

of one and only one of several

possible observations.

An outcome is the particular

result of an experiment.

An event is the collection of

one or more outcomes of an

experiment.

1-69

Approaches in Probability

Classical Approach

It is an approach in which the sampling

distribution of all outcomes is known with

certainty i.e the outcomes from a given

experiment are fixed.

The probabilities of the events are equally

likely e.g tossing a die, tossing a coin (head

or tail)

1-70

Relative Approach

determining the probability of an event

happening.

It doesn’t yield equally likely probabilities.

The probabilities are not constant/ static as

compared to the Classical approach e.g the

number of accidents occurring, recurrence of

drought after every 10 yrs,

1-71

Classical and Empirical Probability

die. What is the probability of the event The empirical approach to probability is based on what is

“an even number of spots appear face called the law of large numbers. The key to establishing

up”? probabilities empirically is that more observations will

provide a more accurate estimate of the probability.

The possible outcomes are:

EXAMPLE:

On February 1, 2003, the Space Shuttle Columbia

exploded. This was the second disaster in 113 space

missions for NASA. On the basis of this information,

what is the probability that a future mission is

successfully completed?

a four, and a six) in the collection of six Probabilit y of a successful flight

Number of successful flights

equally likely possible outcomes. Total number of flights

111

0.98

113

1-72

Subjective/ Judgemental Approach

someone’s personal judgement/ evaluation

of the chance of an event of interest

happening.

Is impulsive, the probabilities generated are

debatable of subject to scrutiny.

1-73

Mutually Exclusive Events and

Collectively Exhaustive Events

Events are mutually exclusive if the occurrence of any one event means that

none of the others can occur at the same time.

Events are collectively exhaustive if at least one of the events must occur

when an experiment is conducted.

The sum of all collectively exhaustive and mutually exclusive events is 1.0 (or

100%)

collectively exhaustive

and mutually exclusive

events

Events are independent if the occurrence of one event does not affect the

occurrence of another.

1-74

Subjective Probability - Example

base a probability, it may be arrived at subjectively.

1. Estimating the likelihood the New England Patriots will play in the

Super Bowl next year.

2. Estimating the likelihood you will be married before the age of 30.

3. Estimating the likelihood the U.S. budget deficit will be reduced by

half in the next 10 years.

1-75

Summary of Types of Probability

1-76

Rules of Addition

Rules of Addition EXAMPLE:

Special Rule of Addition - If two events

A and B are mutually exclusive, the An automatic Shaw machine fills plastic bags with a mixture of

probability of one or the other event’s beans, broccoli, and other vegetables. Most of the bags contain

occurring equals the sum of their the correct weight, but because of the variation in the size of the

probabilities.

beans and other vegetables, a package might be underweight or

P(A or B) = P(A) + P(B) overweight. A check of 4,000 packages filled in the past month

revealed:

The General Rule of Addition - If A

and B are two events that are not

mutually exclusive, then P(A or B) is

given by the following formula:

P(A or B) = P(A) + P(B) - P(A and B)

underweight or overweight?

1-77

The Complement Rule

The complement rule is used to determine EXAMPLE

the probability of an event occurring An automatic Shaw machine fills plastic bags with a mixture of

by subtracting the probability of the beans, broccoli, and other vegetables. Most of the bags contain

event not occurring from 1. the correct weight, but because of the variation in the size of the

P(A) + P(~A) = 1 beans and other vegetables, a package might be underweight or

or P(A) = 1 - P(~A). overweight. Use the complement rule to show the probability of

a satisfactory bag is .900

P(B) = 1 - P(~B)

= 1 – P(A or C)

= 1 – [P(A) + P(C)]

= 1 – [.025 + .075]

= 1 - .10

= .90

1-78

The General Rule of Addition and Joint Probability

survey of 200 tourists who visited Florida JOINT PROBABILITY A probability that measures

during the year. The survey revealed that 120 the likelihood two or more events will happen

went to Disney World, 100 went to Busch concurrently.

Gardens and 60 visited both.

visited either Disney World or Busch

Gardens?

= 120/200 + 100/200 – 60/200

= .60 + .50 – .80

1-79

Special and General Rules of Multiplication

The special rule of multiplication requires that The general rule of multiplication is used to find the joint

two events A and B are independent. probability that two independent events will occur.

Two events A and B are independent if the

occurrence of one has no effect on the

probability of the occurrence of the other.

This rule is written: P(A and B) = P(A)P(B)

EXAMPLE

EXAMPLE

A golfer has 12 golf shirts in his closet. Suppose 9 of these shirts

A survey by the American Automobile are white and the others blue. He gets dressed in the dark,

association (AAA) revealed 60 percent of its so he just grabs a shirt and puts it on. He plays golf two

members made airline reservations last year. days in a row and does not do laundry.

Two members are selected at random. Since

What is the likelihood both shirts selected are white?

the number of AAA members is very large,

we can assume that R1 and R2 are

independent. What is the probability both

made airline reservations last year?

Solution: The event that the first shirt selected is white is W1. The

The probability the first member made an airline probability is P(W1) = 9/12

reservation last year is .60, written as P(R1) = The event that the second shirt (W2 )selected is also white. The

.60

conditional probability that the second shirt selected is white,

The probability that the second member selected

made a reservation is also .60, so P(R2) = .60. given that the first shirt selected is also white, is

Since the number of AAA members is very large, you P(W2 | W1) = 8/11.

may assume that R1 and R2 are independent. To determine the probability of 2 white shirts being selected we

use formula: P(AB) = P(A) P(B|A)

P(R1 and R2) = P(R1)P(R2) = (.60)(.60) = .36 P(W1 and W2) = P(W1)P(W2 |W1) = (9/12)(8/11) = 0.55

1-80

Contingency Tables

A CONTINGENCY TABLE is a table used to classify sample observations according to two or more identifiable

characteristic

EXAMPLE:

A sample of executives were surveyed about

their loyalty to their company. One of the Event A1 happens if a randomly selected executive

questions was, “If you were given an offer will remain with the company despite an equal or

by another company equal to or slightly slightly better offer from another company. Since

better than your present position, would there are 120 executives out of the 200 in the

you remain with the company or take the survey who would remain with the company

other position?” The responses of the 200 P(A1) = 120/200, or .60.

executives in the survey were cross- Event B4 happens if a randomly selected executive

classified with their length of service with has more than 10 years of service with the

the company. What is the probability of company. Thus, P(B4| A1) is the conditional

randomly selecting an executive who is probability that an executive with more than 10

loyal to the company (would remain) and years of service would remain with the company.

who has more than 10 years of service? Of the 120 executives who would remain 75 have

more than 10 years of service, so

P(B4| A1) = 75/120.

1-81

Tree Diagrams

conditional and joint probabilities. It is

particularly useful for analyzing business

decisions involving several stages.

A tree diagram is a graph that is helpful in

organizing calculations that involve

several stages. Each segment in the tree

is one stage of the problem. The branches

of a tree diagram are weighted by

probabilities.

1-82

Permutation and Combination

objects selected from n possible

choose r objects from a group of n objects

objects. The order of arrangement is without regard to order.

important in permutations.

EXAMPLE EXAMPLE

Suppose that in addition to selecting the There are 12 players on the Carolina Forest High

group, he must also rank each of the School basketball team. Coach Thompson

players in that starting lineup according to must pick five players among the twelve on

their ability. the team to comprise the starting lineup.

How many different groups are possible?

12! 12!

12 P 5 95,040 12 C5 792

(12 5)! 5!(12 5)!

1-83

Probability Distributions

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

What is a Probability Distribution?

PROBABILITY DISTRIBUTION A listing of all the outcomes of an experiment and the probability associated

with each outcome.

1. The probability of a particular outcome is between 0 and 1 inclusive.

2. The outcomes are mutually exclusive events.

3. The list is exhaustive. So the sum of the probabilities of the various events is equal to 1.

Experiment:

heads. The possible results are: Zero heads, One

head, Two heads, and Three heads.

of heads?

1-85

Random Variables

RANDOM VARIABLE A quantity resulting from an experiment that, by chance, can assume different values.

variable that can assume only certain clearly infinite number of values within a given range. It is

separated values. It is usually the result of usually the result of some type of measurement

counting something.

EXAMPLES EXAMPLES

1. The number of students in a class. 1. The length of each song on the latest Tim McGraw

2. The number of children in a family. album.

3. The number of cars entering a carwash in a 2. The weight of each student in this class.

hour. 3. The temperature outside as you are reading this

4. Number of home mortgages approved by book.

Coastal Federal Bank last week. 4. The amount of money earned by each of the more

than 750 players currently on Major League Baseball

team rosters.

1-86

The Mean and Variance of a Discrete

Probability Distribution

MEAN

•The mean is a typical value used to represent the central location of a probability distribution.

•The mean of a probability distribution is also referred to as its expected value.

• Measures the amount of spread in a distribution

• The computational steps are:

1. Subtract the mean from each value, and square this difference.

2. Multiply each squared difference by its probability.

3. Sum the resulting products to arrive at the variance.

The standard deviation is found by taking the positive square root of the variance.

1-87

Mean, Variance, and Standard

Deviation of a Probability Distribution - Example

Pelican Ford. John usually MEAN

sells the largest number of

cars on Saturday. He has

developed the following

probability distribution for

the number of cars he

expects to sell on a

particular Saturday.

VARIANCE

DEVIATION

1-88

Binomial Probability Distribution

A Widely occurring discrete probability distribution EXAMPLE

Characteristics of a Binomial Probability Distribution There are five flights daily from Pittsburgh via

1. There are only two possible outcomes on a particular US Airways into the Bradford,

trial of an experiment. Pennsylvania, Regional Airport. Suppose

the probability that any flight arrives late is

2. The outcomes are mutually exclusive, .20.

3. The random variable is the result of counts. What is the probability that none of the flights

4. Each trial is independent of any other trial are late today?

What is the variance of the number of late

flights?

1-89

Binomial Distribution - Example

EXAMPLE Binomial – Shapes for Varying (n constant)

Five percent of the worm gears produced by

an automatic, high-speed Carter-Bell

milling machine are defective.

selected at random none will be

defective? Exactly one? Exactly two?

Exactly three? Exactly four? Exactly

five? Exactly six out of six?

1-90

Poisson Probability Distribution

The Poisson probability distribution describes the number of times some event occurs during a specified

interval. The interval may be time, distance, area, or volume.

(1) The probability is proportional to the length of the interval.

(2) The intervals are independent.

Examples include:

• The number of misspelled words per page in a newspaper.

• The number of calls per hour received by Dyson Vacuum Cleaner Company.

• The number of vehicles sold per day at Hyatt Buick GMC in Durham, North Carolina.

• The number of goals scored in a college soccer game.

1-91

Poisson Probability Distribution - Example

EXAMPLE

Assume baggage is rarely lost by Northwest Airlines.

Suppose a random sample of 1,000 flights shows a

total of 300 bags were lost. Thus, the arithmetic

mean number of lost bags per flight is 0.3

(300/1,000). If the number of lost bags per flight

follows a Poisson distribution with u = 0.3, find the

probability of not losing any bags.

.

Use Appendix B.5 to find the probability that no bags will

be lost on a particular flight.

particular flight?

1-92

More About the Poisson Probability

Distribution

•The Poisson probability distribution is always positively skewed and the random variable has no

specific upper limit.

•The Poisson distribution for the lost bags illustration, where µ=0.3, is highly skewed.

1-93

Normal Probability Distribution

center of the distribution.

2. It is symmetrical about the mean Family of Distributions

3. It is asymptotic: The curve gets closer and closer

to the X-axis but never actually touches it.

4. The location of a normal distribution is

determined by the mean,, the dispersion or

spread of the distribution is determined by the

standard deviation,σ .

5. The arithmetic mean, median, and mode are

equal Different Means and Equal Means and

6. The total area under the curve is 1.00; half the Standard Deviations Different Standard

area under the normal curve is to the right of this Deviations

center point and the other half to the left of it

1-94

The Standard Normal Probability Distribution

normal distribution with a mean of 0 and

a standard deviation of 1.

It is also called the z distribution.

A z-value is the signed distance

between a selected value, designated X,

and the population mean , divided by

the population standard deviation, σ.

The formula is:

1-95

The Normal Distribution – Example

foremen in the glass

industry follow the

normal probability

distribution with a mean

of $1,000 and a

standard deviation of

$100.

What is the z value for the

income, let’s call it X, of

a foreman who earns

$1,100 per week? For a

foreman who earns

$900 per week?

1-96

The Empirical Rule - Example

program, the Autolite Battery

Company conducts tests on

battery life. For a particular

D-cell alkaline battery, the

mean life is 19 hours. The

useful life of the battery

follows a normal distribution

with a standard deviation of

1.2 hours.

1. About 68 percent of the

batteries failed between

what two values?

2. About 95 percent of the

batteries failed between

what two values?

3. Virtually all of the batteries

failed between what two

values?

1-97

Normal Distribution – Finding Probabilities

EXAMPLE

The mean weekly income of a shift

foreman in the glass industry is

normally distributed with a mean of

$1,000 and a standard deviation of

$100.

foreman whose weekly income is

between $1,000 and $1,100?

1-98

Normal Distribution – Finding Probabilities

(Example 2)

of shift foremen in the glass industry. The

distribution of weekly incomes follows the

normal probability distribution with a mean of

$1,000 and a standard deviation of $100.

What is the probability of selecting a shift foreman in What is the probability of selecting a shift foreman in the

the glass industry whose income is: glass industry whose income is:

Between $790 and $1,000? Between $840 and $1,200

1-99

Using Z in Finding X Given Area - Example

minimum mileage guarantee on its new MX100

tire. Tests reveal the mean mileage is 67,900

Solve X using the formula :

with a standard deviation of 2,050 miles and

that the distribution of miles follows the normal x - x 67,900

z

probability distribution. Layton wants to set the 2,050

minimum guaranteed mileage so that no more

than 4 percent of the tires will have to be

replaced. The value of z is found using the 4% informatio n

What minimum guaranteed mileage should Layton The area between 67,900 and x is 0.4600, found by 0.5000 - 0.0400

announce? Using Appendix B.1, the area closest to 0.4600 is 0.4599, which

gives a z alue of - 1.75. Then substituti ng into the equation :

x - 67,900

- 1.75 , then solving for x

2,050

- 1.75(2,050) x - 67,900

x 67,900 - 1.75(2,050)

x 64,312

1-100

Normal Approximation to the Binomial

The normal distribution (a continuous distribution) yields a good approximation of the binomial

distribution (a discrete distribution) for large values of n.

The normal probability distribution is generally a good approximation to the binomial probability

distribution when n and n(1- ) are both greater than 5. This is because as n increases, a

binomial distribution gets closer and closer to a normal distribution.

1-101

Normal Approximation to the Binomial - Example

Suppose the management of the Santoni Pizza Restaurant found that 70 percent of its new

customers return for another meal. For a week in which 80 new (first-time) customers

dined at Santoni’s, what is the probability that 60 or more will return for another meal?

Normal Approximation to the Binomial - Example

Restaurant found that 70 percent of its new

customers return for another meal. For a

week in which 80 new (first-time) customers

dined at Santoni’s, what is the probability

that 60 or more will return for another meal?

binomial distribution and find the z

corresponding to an X of 59.5 (x-.5, the

correction factor)

beyond

1-103

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