Business Statistics, 4e: by Ken Black

Business Statistics, 4e, by Ken Black. 2003 John Wiley & Sons.
6-1
Business Statistics, 4e
by Ken Black

Chapter 6

Continuous
Distributions

I n God we trust, others
must bring data
(Robert Hayden, A US
Professor)
Discrete Distributions
6-2
Learning Objectives
Understand concepts of the uniform
distribution.
Appreciate the importance of the normal
distribution.
Recognize normal distribution problems, and
know how to solve them.
Decide when to use the normal distribution to
approximate binomial distribution problems,
and know how to work them.
Decide when to use the exponential distribution
to solve problems in business, and know how to
work them.
6-3
Uniform Distribution
f x
b a
for a x b
for
( ) =
s s
1
0 all other values
Area = 1
f x ( )
x
1
b a
a
b
Uniform distribution, also called rectangular dist, in which
the function has same height over a range of values.
6-4
Uniform Distribution of Lot Weights
f x
for x
for
( ) =
s s
1
47 41
41 47
0 all other values
Area = 1
f x ( )
x
1
47 41
1
6
=
41 47
6-5
Uniform Distribution Probability
P X
b a
x x
x x
( )
1 2
2 1
s s =
P X ( ) 42 45
45 42
47 41
1
2
s s =
=
42
45
f x ( )
x
41 47
45 42
47 41
1
2
=
Area
= 0.5
6-6
Uniform Distribution
Mean and Standard Deviation
Mean
=
+
a b
2
Mean
=
+
41 47
2
88
2
44 = =
Standard Deviation
o =
b a
12
Standard Deviation
o =
= =
47 41
12
6
3 464
1 732
.
.
Uniform Distribution: Applications
Variation of weights of a 400gms cereal box is
between 380 to 420 gms. (or any bundle) could
have uniform distribution. What is the probability
of observing weights between 380 and 390 gms?
Variation in time that takes to complete 1000
shirts. If it takes about 30 to 40 hours of work,
how many would be completed between 30 to 31
hours.
modeling time interval as a random variable
where frequency could be no of customers.
As a crude measure of distribution to any problem
involving continuous random variable.
6-7
6-8
Characteristics of the Normal
Distribution
Continuous distribution
Symmetrical distribution
Asymptotic to the
horizontal axis
A family of curves
Area under the curve
sums to 1.
Area to right of mean is
1/2.
Area to left of mean is
1/2.
1/2 1/2
X
Normal Distribution: Example
Modern portfolio theory commonly
assumes that the returns of a diversified
asset portfolio follow a normal distribution.
In operations management, process
variations often are normally distributed.
In human resource management, employee
performance sometimes is considered to be
normally distributed.

6-9
Normal Distribution: Examples
- daily changes in/ or closing prices of stocks
- weight of cereal boxes or anything for that
matter,
- customer servicing time,
- measurement of length of a screw,
- errors, counts of WBC, blood pressure
measure, job stress,
- petrol consumption of a car
- Your grades,
6-10
6-11
Probability Density Function
of the Normal Distribution
f x
x
Where
e
e
( )
:
=
|
\
|
.
|
=
=
=
1
2
1
2
2
o t
o
t
mean of X
standard deviation of X
= 3.14159 . . .
2.71828 . . .
X
6-12
Normal Curves for Different
Means and Standard Deviations
20 30 40 50 60 70 80 90 100 110 120
o = 5
o = 5
o = 10
Normal Distribution
6-13
Any variable that can be described as having Normal
distribution has its probability distribution depended on only two
quantities: mean and variance; i.e. the knowledge of these two
quantities is enough to find out the probability of the r.v. from
corner to corner of its distribution.
68% within 1 sd from mean; 95% within 1.96 sd; 99.7% within
3 sd.

6-14
A company produces lightbulbs whose lifetimes follow a
normal distribution with mean 1200 hours and standard
deviation 250 hours. If a lightbulb is chosen randomly
from the company s output, what is the probability that
its lifetime will be between 900 and 1300 hours?

How to find such probability?
6-15
Standardized Normal Distribution
A normal distribution with
a mean of zero, and
a standard deviation of
one
Z Formula
standardizes any normal
distribution
Z Score
computed by the Z
Formula
the number of standard
deviations which a value
is away from the mean
Z
X
=

o
o =
1
= 0
6-16
Z Table
Second Decimal Place in Z
Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09

0.00 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.10 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.20 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.30 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517

0.90 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.00 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.10 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.20 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015

2.00 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817

3.00 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990
3.40 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4998
3.50 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998

6-17
-3 -2 -1 0 1 2 3
Table Lookup of a
Standard Normal Probability
P Z ( ) . 0 1 0 3413 s s =
Z 0.00 0.01 0.02

0.00 0.0000 0.0040 0.0080
0.10 0.0398 0.0438 0.0478
0.20 0.0793 0.0832 0.0871

1.00 0.3413 0.3438 0.3461

1.10 0.3643 0.3665 0.3686
1.20 0.3849 0.3869 0.3888
6-18
Applying the Z Formula
X is normally distributed with = 485, and =105 o
P X P Z ( ) ( . ) . 485 600 0 1 10 3643 s s = s s =
For X = 485,
Z =
X-
o
=
=
485 485
105
0
For X = 600,
Z =
X-
o
=
=
600 485
105
1 10 .
Z 0.00 0.01 0.02

0.00 0.0000 0.0040 0.0080
0.10 0.0398 0.0438 0.0478

1.00 0.3413 0.3438 0.3461

1.10 0.3643 0.3665 0.3686

1.20 0.3849 0.3869 0.3888
6-19
Normal Approximation
of the Binomial Distribution
The normal distribution can be used to approximate
binomial probabilities (with large n, binomial dist -> to
N). (show simulation). For large n, binomial dist.
cumbersome.
Translation Procedure
Convert binomial parameters to normal parameters
Does the interval lie between 0 and n? If
so, continue; otherwise, do not use the normal
approximation.
Another rule of Thumb: use N if n.p>5 and n.q>5
Correct for continuity
Solve the normal distribution problem
o
3
6-20
Conversion equations

Conversion example:
Normal Approximation of Binomial:
Parameter Conversion
o
=
=
n p
n p q
Given that X has a binomial distribution, find
and P X n p
n p
n p q
( | . ).
( )(. )
( )(. )(. ) .
> = =
= = =
= = =
25 60 30
60 30 18
60 30 70 3 55
o
6-21
Interval Check
o
o
o
= =
=
+ =
3 18 3 355 18 10 65
3 7 35
3 28 65
( . ) .
.
.
0 10 20 30 40 50 60
n
70
6-22
Correcting for Continuity
Values
Being
Determined
Correction
X>
X>
X<
Xs
sXs
<X<
+.50
-.50
-.50
+.05
-.50 and +.50
+.50 and -.50
The binomial probability,
and
is approximated by the normal probability
P(X 24. 5| and
P X n p ( | . )
. ).
> = =
> = =
25 60 30
18 3 55 o
6-23
0
0.02
0.04
0.06
0.08
0.10
0.12
6 8 10 12 14 16 18 20 22 24 26 28 30
Graphs
6-24
Computations
25
26
27
28
29
30
31
32
33
Total
0.0167
0.0096
0.0052
0.0026
0.0012
0.0005
0.0002
0.0001
0.0000
0.0361
X P(X)
( )
The normal approximation,
P(X 24.5| and > = =
= >
|
\
|
.
|
= >
= s s
=
=
o 18 355
24 5 18
355
183
5 0 183
5 4664
0336
. )
.
.
( . )
. .
. .
.
P Z
P Z
P Z
Exponential Distribution
6-25
If 2 accidents happen on average in 10 minutes, how much
time elapses on average before next accident happens?

It is closely related to Poisson. Poisson, a discrete
distribution, describes random occurrences over some interval.

Exponential, a continuous distribution, describes probability
distribution of time between random occurrences.

If arrivals follow a Poisson dist, time between arrivals will
follow an exponential dist.
6-26
Continuous
Family of distributions
Skewed to the right
X varies from 0 to infinity
Apex is always at X = 0
Steadily decreases as X gets larger
Probability function
f X X
X
e
( ) , = > >
for 0 0
6-27
Examples: time lapse between arrivals of customers, the
distance between major defects in a highway, time
between two successive breakdown of a machine, time
gap between two successive arrivals to a waiting line.

Also often used to model the failure time of manufactured
items; tells us that prob of survival of a product decays
exponentially, as f(x>x0)= e
-x0

Mean of exponential distribution: E(x)= 1/
Standard deviation of exponential distribution= 1/
6-28
Graphs of Selected Exponential
Distributions
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0 1 2 3 4 5 6 7 8
= 2.0
= 1.0
= 0.5
= 0.2
is the frequency with which the event occurs.
Exponential distribution
6-29
Say, arrivals at a bank are Poisson distributed with a of
1.2 customers every minute. What is the mean interarrival
time? What is the probability that at least 2 minutes will
elapse between one arrival and the next arrival?

Interarrival times of random arrivals are exponentially
dist with mean and standard deviation both 1/=0.833
minutes. On average 0.833 minutes will elapse between
arrivals at the bank. The prob of an interval of 2 minutes
or more between arrivals can be calculated by
6-30
Exponential Distribution:
Probability Computation
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0 1 2 3 4 5
= 1.2
( )
( )
P X X
X
P X
e
e
> =
> = =
=
0
0
2 12
12 2
0907
| .
( . )( )
.
About 9.07% of the time, 2minutes or more will elapse between
Arrivals.

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

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