Purdue University

ECON-322: Economic Statistics

Prepared by: Brandon H.

1. Important Statistical Terms
(i) Experiment (ii) Outcome (iii) Events

2. Important Properties of Probabilities
(a) 0 ! P(E
i
) ! 1, where i ~ (i) ~0 : Unlikely to occur (ii) ~1: Likely to occur
(b) P (E
1
) + P (E
2
) + + P (E
n
) = 1 : E of all outcomes must be equal to 1.

3. Understanding classical, empirical and subjective probability.

4. Rules of Addition (2)
(i) Special Rule of Addition
P (A or B) = P(A) + P(B)

(ii) General Rule of Addition
P (A or B) = P(A) + P(B) P(AB)


















Example:
P (A or C) = P (A) + P (C) = .25 + .75 = 1.0

5. Rule of complement
P (A) + P (
~
A) =1
Or P (A) = 1 P (
~
A)







Conditions:
If and only if events A and B are mutually exclusive.
Conditions:
If and only if events A and B are NOT mutually
exclusive.
Special Rule of Addition


Event A Event B
General Rules of Addition


Event A Event B
Rule of Complement


Event A
~
A
Example:
P(B) =
1 P(
~
B) = 1-P(A or C)
Conditions:
Determining P of an event
occuring by subtracting the
P of the event not occuring
from 1.
6. Joint Probability














7. Special and General Rules of Multiplications
(i) Special Rules of Multiplications
P (A and B) = P (A) P (B)

Example:
P (R
1
and R
2
) = P (R
1
) P (R
2
) = (.60)(.60) = 0.36

(ii) General Rules of Multiplications
P (A and B) = P (A)
*
P (B/A)

Example:
P (W
1
and W
2
) = P (W
1
) P (W
2
/ W
1
) = (9/12)(8/11) = 0.55

8. Principles of counting: Permutations and Combinations
(i) Combinations
!"# !
!!
!! !!! !
, where n=E
#
, r=#

Example:
!"# !
!!
!! !!! !
!
12
C
5

!"!
!! !"!! !
= 792

(ii) Permutations
!"# !
!!
!!! !


Example:
!"# !
!!
!!! !
!
12
P
5

!"!
!"!! !
= 95,040

9. Random Variables
(i) Random Variables: Quantity resulting for an experiment.

(ii) Discrete Random Variables : Random Variables : Counting something

(iii) Continuous Random Variable: Assuming an INFINATE number of VALUES at a given range
Result sometype of MEASUREMENT.

Joint Probability


Event A Event B

Overlay of both events
Conditions: Require two events to be independant
Conditions: Finding joint probabilities 2
dependant. Event occurs when events NOT
Independent.
Conditions:
- No of ways choosing r
objects from group.
- No order
Conditions:
Arrangements of R objects selected for
n possible objects
Order of arrangement is IMPORTANT
10. Mean and Variance of Discrete Random Variable
(i) Mean of Population Distribution
! ! ! ! ! ! or ! ! ! ! ! ! or ! !
!
!


(ii) Variance of Population Distribution
!
!
! ! ! !!
!
! ! or !
!
! ! ! !!
!
! !


(iii) Standard Deviation of Population Distribution
! ! ! ! !!
!
! ! or ! ! !
!
or ! ! ! ! !!
!
! !

Applying on table:

! f (x) ! !! !! !!!
!
!! !!!
!
! !!!
0
1
2
3
0.10
0.20
0.30
0.30
0 2.1
.1 2.1
.2 2.1
.3 2.1
4.41
1.21
0.01
0.81
0.441
0.242
0.003
0.242






11. Binomial Probability Distribution

! ! !
!
!
!
!
!
!! !!!
!!!





Conditions for usage of binomial probability distribution:
- Only 2 possible outcomes
- Mutually exclusive
- Random variable = result of counts
- Each trial independent of another

Example:
! ! !
!
!
!
!
!
!! !!!
!!!
!
!
!
!
!
!
!! !!!
!!!
= (0.20)
5
(1-0.20)
5-0
= 0.3277

mean: ! ! !" = 5 x 0.2 = 1.0
variance: !
!
! !" !! !!! = (5x0.2)(1-0.2) = 1x0.8 = 0.8
standard deviation: ! ! !" !! !!! = !!!"! = 0.0068

12. Binomial Probability Distribution
! ! !
!!
!! !!! !
!
!
!! !!!
!!!
, where x = 0,1,2,3

Example:
! ! !
!!
!! ! !! !
!
!
!! !!!
!!!
!
!"!
!! !" !! !
!!!"
!
!!!"
!"!!
! !!!"
! ! ! ! !!!!
" #$%& " #&
Standard Deviation:
!
!
! !! !!! !!!
!
!!!!! ! !!!!"# ! !!!"

where
c = combination
n = number of trial
x = random variable defined as # of success
13. Hypergeometric Probability Distribution
! ! !
!
!
!
!
!!
!!!
!
!!!
!
!
!
!
!
!




Example:

! ! !
!
!
!
!
!!
!!!
!
!!!
!
!
!
!
!
!
!
!"!
!! !"!
!"!
!! !!
!"!
!! !"!
! !!!"#

14. Poisson Probability Distribution: # times an event occurs during a specific time interval

! ! !
!
!
!
!!
!!
where e = 2.71929, x = random variable numerically defined.
! !"#
! ! ! !"

15. Continuous Probability Distributions













! ! !
!
! !!
! ! !"#!"!!"!

! !
!!!
!
, mean

! !
!!!
!
!"
, standard deviation


! ! !
!
! !!
!
! !!!
!
!!!


where
" = mean, ! = standard deviation
# = 3.14159, e = 2.71828

Standard Normal Probability
Distribution:
! !
! !!
!


Finding X when Z is given
! ! !" ! !

Binomial Normal Approximation
P ! !
!
!
!
!
!
!! !!!
!!!


! ! !
!
!
!
!!!!


for x ! 0, " > 0
e = 2.71828

where
c = combination
n = sample size / # of trails
s = # of success in population
N = size of population
Mean of occurances
"#$% "#$% "#&%
$
$ $
'()*+,-
.+,-/0 1$2+(&(3)/0