FIN60003 Quantitative Analysis

Probability and probability distributions

Business Statistics:
A Decision-a!in" Approac#
Chapters 5 and 6
Discrete Distributions and
$ontinuous
Probability Distributions
%Nor&al Distribution'
3
$#apter (oals
After completing this chapter, you should be able to:

Distin"uis# bet)een discrete and continuous probability

distributions

$o&pute t#e e*pected value and standard deviation +or a

discrete probability distribution

Discuss t#e i&portant properties o+ t#e nor&al probability

distribution

,eco"nise )#en t#e nor&al distribution &i"#t apply in a

decision &a!in" process

Find probabilities usin" a nor&al distribution table and

apply t#e nor&al distribution to business proble&s
-
Introduction to Probability
Distributions

Random Variable

A .ariable t#at assi"ns a nu&erical value to eac#

outco&e o+ a rando& e*peri&ent or trial/
Random
Variables
Discrete
Random Variable
Continuous
Random Variable
Ch. 5 Ch. 6
0

A discrete rando& variable is a variable t#at

can assu&e only a countable nu&ber o+ values

Many possible outcomes:

nu&ber o+ co&plaints per day

nu&ber o+ 1.2s in a #ouse#old

nu&ber o+ rin"s be+ore t#e p#one is ans)ered

nly t!o possible outcomes:

"ender: &ale or +e&ale

de+ective: yes or no

spreads peanut butter +irst vs/ spreads 3elly +irst

Discrete Probability Distributions
6
$ontinuous Probability Distributions

A continuous rando& variable is a variable t#at

can assu&e any value on a continuu& %can
assu&e an uncountable nu&ber o+ values'

t#ic!ness o+ an ite&

ti&e re4uired to co&plete a tas!

te&perature o+ a solution

#ei"#t5 in inc#es

1#ese can potentially ta!e on any value5

dependin" only on t#e ability to &easure )it#
su++icient precision/
6
Discrete ,ando& .ariables

$an only assu&e a countable nu&ber o+ values

7*a&ples:

Roll a die t!ice

"et # be the number of times $ comes up
%then # could be &, ', or ( times)

*oss a coin 5 times.

"et # be the number of heads
%then # + &, ', (, ,, $, or 5)
8
7*peri&ent: 1oss 9 $oins/
:et * ; Nu&ber o+ #eads/
*
*
Discrete Probability Distribution
$ possible outcomes
*
*
-
-
- -
.robability Distribution
# Value .robability
& '/$ + .(5
' (/$ + .5&
( '/$ + .(5
& ' ( #
.5&
.(5
.
r
o
b
a
b
i
l
i
t
y





<
7*a&ple: 1oss 9 coins5
* ; Nu&ber o+ #eads
co&pute e*pected value o+ *:
0%#) + %& # .(5) 1 %' # .5&) 1 %( # .(5)
+ '.&
Discrete ,ando& .ariable
Su&&ary easures

7*pected .alue o+ a discrete distribution

%=ei"#ted Avera"e'
7%*' ; *
i
P%*
i
'

# .%#)
& .(5
' .5&
( .(5
Value .robability
>0
,ules o+ probability

7ac# probability &ust be at least ?ero

and less t#an >

Su& o+ probabilities &ust be >

> 0 ) (x p

=> ) (x p
Rule '
Rule (
>>
Discrete ,ando& .ariable
Su&&ary easures

7*a&ple: 1oss 9 coins5

* ; Nu&ber o+ #eads5 co&pute e*pected value o+ *:
$alculator into S1A1 &ode:
0 %*5y' 90 DA1A
> %*5y' 00 DA1A
9 %*5y' 90 DA1A
1o obtain 7AN Press @A:PAAB @* barB ;C >/0
2ote: 3ou must enter the 4alue of # first,
then its probability # '&& %as probabilities are 9 deci&al places'
%0r * >000 i+ probabilities are 3 deci&al places5 etc'
# .%#)
& .(5
' .5&
( .(5
Value .robability
5nstructions for 6harp 7,56/7,8/7,89:
>9

Standard Deviation o+ a discrete distribution

)#ere:
7%*' ; 7*pected value o+ t#e rando& variable
* ; .alues o+ t#e rando& variable
P%*' ; Probability o+ t#e rando& variable #avin"
t#e value o+ *
Discrete ,ando& .ariable
Su&&ary easures
P%*' 7%*'D E* F
9
*
=

(continued)
>3

7*a&ple: 1oss 9 coins5 * ; Nu&ber o+ #eads5

co&pute standard deviation %recall 7%*' ; >'
Discrete ,ando& .ariable
Su&&ary easures
P%*' 7%*'D E* F
9
*
=

/606 /00 %/90' >' %9 %/00' >' %> %/90' >' %0 F

9 9 9
*
= = + + =
(continued)
.ossible number of heads
+ &, ', or (
Gr use @A:PAAB @F
*
B ; 0/ 606 %use PGPH:A1IGN SD'
>-
Proble&

0-- parts a and c

>0
7*ercise: Discrete Probability
Distribution
=#at is t#e probability t#at t#e
su& o+ t#e values t#ro)n is:
>/ 74ual to 6I
9/ (reater t#an <I
3/ :ess t#an 3I
-/ (reater t#an >9I
1#e probability o+ t)o
successive rolls o+ 6I
:et * ; su& o+ t#e values on
t#e t)o dice/
>/ P% * ; 6 '
9/ P% * C < '
3/ P% * J 3 '
-/ P% * C>9 '
P% * ; >9 '
7*peri&ent: 1ossin" 9 Fair Si* Sided Dice/
Ne*t &ap out all possible outco&es o+ t#e t#ro)s o+ t)o dice/
>6
Possible Gutco&es
' ( , $ 5 6
' ', ' ', ( ', , ', $ ', 5 ', 6
( (, ' (, ( (, , (, $ (, 5 (, 6
, ,, ' ,, ( ,, , ,, $ ,, 5 ,, 6
$ $, ' $, ( $, , $, $ $, 5 $, 6
5 5, ' 5, ( 5, , 5, $ 5, 5 5, 6
6 6, ' 6, ( 6, , 6, $ 6, 5 6, 6

1#ere are 36 e4ually li!ely ordered outco&es possible/

9
i
r
s
t

D
i
e

u
t
c
o
m
e
6econd Die utcome
>6
Possible Gutco&es
' ( , $ 5 6
' 9 3 - 0 6 6
( 3 - 0 6 6 8
, - 0 6 6 8 <
$ 0 6 6 8 < >0
5 6 6 8 < >0 >>
6 6 8 < >0 >> >9

1#ere are 36 e4ually li!ely ordered outco&es possible

1#e su&s o+ t#e t#ro)s ran"e +ro& 9->9/

9
i
r
s
t

D
i
e

u
t
c
o
m
e
6econd Die utcome
>8
Possible Gutco&es
' ( , $ 5 6
' ( 3 $ 0 6 6
( 3 $ 0 6 6 8
, $ 0 6 6 8 <
$ 0 6 6 8 < '&
5 6 6 8 < '& >>
6 6 8 < '& >> '(

1#ere are 36 e4ually li!ely ordered outco&es possible

1#e su&s o+ t#e t#ro)s ran"e +ro& 9 to>9/

1#e values o+ * %su& o+ t#e values on t#e t)o dice' are

not e4ually li!ely/
9
i
r
s
t

D
i
e

u
t
c
o
m
e
6econd Die utcome
><
Discrete Probability Distribution
* 9 3 - 0 6 6 8 < >0 >> >9
.
'/,6
.&(77
(/,6
.&55
,/,6
.&8,,
$/,6
.'''
5/,6
.',88
6/,6
.'666
5/,6
.',88
$/,6
.''''
,/,6
.&8,,
(/,6
.&55
'/,6
.&(77
.
r
o
b
a
b
i
l
i
t
y





'/,6
(/,6
,/,6
$/,6
5/,6
6/,6
( , $ 5 6 7 8 ; '& '' '( #
0#ercise
9ind: i' P% * ; < ' ii' P% * C < ' iii' P% * J 3 ' iv' P% * C>9 '
iv' 1#e probability o+ t)o successive e*peri&ents resultin" in a >9/
90
Approac#es to For&in"
Probability Distributions
1#e probability distributions above #ave been +or&ed
usin" t#e Classical Approach to probability assi"n&ent/
Applications o+ t#is approac# are +airly li&ited/

GK +or "a&e situations li!e tossin" coins or t#ro)in" dice/

$an be used in so&e business application5 li!e t#e ,eal

$o&puter $o e*a&ple on p>00/
Ao) do )e +or& distributions +or real li+e situations li!e:

1#e )ei"#ts o+ students studyin" at S)inburne

1#e inco&es o+ students studyin" at S)inburne

1#e nu&ber o+ La&s occurrin" on a &anu+acturin" &ac#ine in

a +i*ed period o+ operationI
9>
Probability Distributions
in ,eal :i+e
1#e ,elative Fre4uency G+ Gccurrence approac# to
probability assi"n&ent can be used to +or& t#e
probability distribution i+ )e #ave enou"# data/
Gbservation o+ si&ilar ite&s %&an &ade or natural' under
si&ilar conditions tend to vary/
1#e pattern o+ values +or&s a distribution/
Applicable to a broad nu&ber o+ situation5 #o)ever
collectin" su++icient data is ti&e consu&in" and costlyM
99
Probability Distributions
in ,eal :i+e

A "reat variety o+ distributions occur in practice/

any &ay be appro*i&ated by a +e) t#eoretical &odels

called ,e+erence Distributions/

1#e &odels are e*pressed as a &at#e&atical +unction5

per&ittin" calculation o+ t#e proportion o+ values lyin" in
various re"ions alon" t#e scale o+ &easure&ent/

.alues o+ t#e distribution are available in tables/

1#e &odels can t#en be used as a ,e+erence

Distribution +or solvin" proble&s/
M *
e ' t %
' * % P
t *

=
2 2
2 / ) (
2
1
) (



=
x
e x f
.oisson
2ormal
93
,e+erence Distributions
1#e in+or&ation re4uired to build t#ese N1#eoreticalO
,e+erence Distributions is:

1#e appropriate &at#e&atical &odel/

7sti&ates o+ t#e appropriate &odel2s "eneratin"

para&eters li!e:

ean

Standard Deviation

:a&bda

Proportion p
1#ese para&eters can be esti&ated +ro& #istorical data5
provided t#at t#e process producin" t#e output is
statistically stable/
7sti&atin" para&eters re4uires less data t#an +or&in" t#e
distribution +ro& ,elative Fre4uencies G+ Gccurrence/
9-
any Probability Distributions
Continuous
Probability
Distributions
Bino&ial
Ayper"eo&etric
Poisson
.robability
Distributions
Discrete
Probability
Distributions
Nor&al
Hni+or&
7*ponential
Ch. 5 Ch. 6
90
Probability Distributions
Although there are many probability distributions, most situations in
industry can be described by one of the follo!ing:
.robability Distributions
Discrete
Probability Distributions
Continuous
Probability Distributions
Data +ro& $ounts Data +ro& easure&ent
Bino&ial
Poisson
Nor&al
Measurements
Attributes
Events
96
$ontinuous Probability Distributions

A continuous rando& variable is a variable t#at

can assu&e any value on a continuu& %can
assu&e an uncountable nu&ber o+ values'

t#ic!ness o+ an ite&

ti&e re4uired to co&plete a tas!

te&perature o+ a solution

#ei"#t5 in inc#es

1#ese can potentially ta!e on any value5

dependin" only on t#e ability to &easure )it#
su++icient precision/
96
1#e Nor&al Distribution

:ell 6haped<

6ymmetrical

Mean, Median and Mode are

0=ual
"ocation is determined by the
mean, >
6pread is determined by the
standard de4iation, ?
*he random 4ariable has an
infinite theoretical range:
P to
Mean
+ Median
+ Mode
#
f%#)
>
F
98
1#e Nor&al DistributionQ

any data distributions

are appro*i&ately
nor&al R bot# &an &ade
and natural

For e*a&ple:

#ei"#t5 )ei"#t

IQ scores and scienti+ic

&easures

ost i&portant
continuous distribution in
Statistics
By varyin" t#e para&eters
S and F5 )e obtain di++erent
nor&al distributions
9<
1#e Nor&al Distribution
S#ape
#
f%#)
>
?
$#an"in" > s#i+ts t#e
distribution le+t or ri"#t/
$#an"in" ? increases
or decreases t#e
spread/
30
Findin" Nor&al Probabilities
a b
x
f%#)
P a # b %
'

Probability is &easured by t#e area
under t#e curve
3>
f%#)
#
>
Probability as
Area Hnder t#e $urve
0.5 0.5
1#e total area under t#e curve is >/05 and t#e curve is
sy&&etric5 so #al+ is above t#e &ean5 #al+ is belo)
>/0 ' * P% = < <
0/0 ' * P%S = < <
0/0 S' * P% = < <
39
7&pirical ,ules
> '? encloses about
68@ of #<s
f%#)
#
> >+1
?
>1
?
=#at can )e say about t#e distribution o+ values
around t#e &eanI 1#ere are so&e "eneral rules:
? ?
68.(6@
33
1#e 7&pirical ,ule

> (? co4ers about ;5@ of #<s

# >
(? (?
;5.$$@
(continued)
3-
1#e 7&pirical ,ule

> (? co4ers about ;5@ of #<s

> ,? co4ers about ;;.7@ of #<s

# >
(? (?
# >
,? ,?
;5.$$@ ;;.7(@
(continued)
30
I&portance o+ t#e ,ule

I+ a value is about 9 or &ore standard

deviations a)ay +ro& t#e &ean in a nor&al
distribution5 t#en it is +ar +ro& t#e &ean

1#e c#ance t#at a value t#at +ar or +art#er

a)ay +ro& t#e &ean is %#i"#ly' unli!ely5 "iven
t#at particular &ean and standard deviation
Gccurrence T > in 90 opportunities
36
An e*a&ple

1#e #ei"#ts o+ )o&en are appro*/ nor&ally distributed

)it# ; >60 c& and ; 8 c&
36
7*a&ple///
%i' =#at U o+ )o&en are bet)een >--c& and
>66 c&sI

9 s/d/ eit#er side o+ t#e &ean5 t#ere+ore

appro*i&ately <0U
%ii' Bet)een >09 c& and >68 c&I

> s/d/ eit#er side o+ t#e &ean5 t#ere+ore

appro*i&ately 68U
+ '6& cm + 8 cm
38
7*a&ple///
%iii' (reater t#an >68c&I
+ '6& cm + 8 cm
3<
7*a&ple///
%iii' (reater t#an >68c&I

1#at is &ore t#an > s/d/ bi""er t#an t#e &ean

1#ere+ore >6U
+ '6& cm + 8 cm
-0
7*a&ple///
%iv' :ess t#an >36c&I

.ery +e) people

%>00-<</6'V9 ; 0/>0U
+ '6& cm + 8 cm
->
7*a&ple///

%b' 1allest 9/0U o+ )o&enI

+ '6& cm + 8 cm
-9
7*a&ple///

%b' 1allest 9/0U o+ )o&enI

Gver >66 c& tall

+ '6& cm + 8 cm
-3
1#e Standard Nor&al Distribution

Also !no)n as t#e N?O distribution

ean is de+ined to be 0

Standard Deviation is >

--
1#e Standard Nor&al Distribution

Also !no)n as t#e N?O distribution

ean is de+ined to be 0

Standard Deviation is >

A
f%A)
&
'
.alues above t#e &ean #ave positive ?-values5
.alues belo) t#e &ean #ave ne"ative ?-values
-0
1#e Standard Nor&al

Any nor&al distribution %)it# any &ean and

standard deviation co&bination' can be
trans+or&ed into t#e standard nor&al
distribution %?'

Need to trans+or& * units into ? units

-6
1ranslation to t#e Standard
Nor&al Distribution

1ranslate +ro& * to t#e standard nor&al

%t#e N?O distribution' by subtractin" t#e &ean
o+ * and dividin" by its standard deviation:

B is the number of standard de4iations

a!ay from the mean
F
S *
?

=
-6
7*a&ple

I+ * is distributed nor&ally )it# &ean o+ >00

and standard deviation o+ 005 t#e ? value +or
* ; 900 is

1#is says t#at * ; 900 is t#ree standard

deviations %3 incre&ents o+ 00 units'
above t#e &ean o+ >00/
3/0
00
>00 900
F
S *
? =

= 3/0
00
>00 900
F
S *
? =

= 3/0
00
>00 900
F
S *
? =

=
-8
$o&parin" * and ? units
A
'&&
,.& &
(5& #
Ce can e#press the problem in original units %#)
or in standardiAed units %A)
2ote that the distribution is the same, only the
scale has changed.
S ; >00
F ; 00
-<
Proble&

6->
00
1#e Standard Nor&al 1able

1#e Standard Nor&al table in t#e te*tboo!

%Appendi* D'
Also inside the back of the book.
"ives t#e probability +ro& t#e &ean %?ero'
up to a desired value +or ?
0>
09
1#e Standard Nor&al 1able

1#e Standard Nor&al table in t#e te*tboo!

%Appendi* D5 pa"e 89>-<# edV880-8
t#
ed'
"ives t#e probability +ro& t#e &ean %?ero'
up to a desired value +or ?
A
& (.&&
.$77(
7*a&ple:
P%0 J ? J 9/00' ; /-669
03
1#e Standard Nor&al 1able
1#e value )it#in t#e
table "ives t#e
probability +ro& ? ; 0
up to t#e desired ?
value
? 0/00 0/0> 0/09 Q
0/>
0/9



.$77(
9/0
.%& D A D (.&&) + .$77(
1#e ro) s#o)s
t#e value o+ ?
to t#e +irst
deci&al point
1#e colu&n "ives t#e value o+
? to t#e second deci&al point
(.&
/
/
/
(continued)
0-
(eneral Procedure +or
Findin" Probabilities
>/ Dra) t#e nor&al curve +or t#e proble& in
ter&s o+ *
9/ 1ranslate *-values to ?-values
3/ Hse t#e Standard Nor&al 1able
1o +ind P%a J * J b' )#en * is distributed
nor&ally:
00
W 1able e*a&ple
Suppose * is nor&al )it# &ean 8/0 and
standard deviation 0/0/ Find P%8 J * J >>'
P%8 J * J >>'
; P%0 J ? J 0/60'
B &.6& &
# '' 8
0
0
8 8
F
S *
? =

=
0/60
0
8 > >
F
S *
? =

=
'
st
Step
Dra) nor&al curve +or
proble& in ter&s o+
* values
$alculate ?-values:
(
nd
Step
06
W 1able e*a&ple
Suppose * is nor&al )it# &ean 8/0 and standard
deviation 0/0/ Find P%8 J * J >>'
P%0 J ? J 0/60'
A
&.6& &
#
'' 8
P%8 J * J >>'
; 8
; 0
; 0
; >
(continued)
06
B
&.6&
? .&& /0>
0/0 /><>0 /><00 /><80
.((57 /99<>
0/6 /9080 /96>> /96-9
0/8 /988> /9<>0 /9<3<
Solution: Findin" P%0 J ? J 0/60'
/9906
/09
&.6
/939-
Standard Nor&al Probability
1able %Portion'
&.&&
; P%0 J ? J 0/60'
P%8 J * J >>'
,
rd
Step
08
Findin" Nor&al Probabilities
Suppose * is nor&al )it# &ean 8/0 and
standard deviation 0/0/

No) Find P%* J >>'

Findin" Nor&al Probabilities
#
''
8.&
0<
Findin" Nor&al Probabilities
Suppose * is nor&al )it# &ean 8/0 and
standard deviation 0/0/

No) Find P%* J >>'

(continued)
B
&.6&
&.&&
/0000
/9906
P%* J >>'
; P%? J 0/60'
; P%? J 0' P P%0 J ? J 0/60'
; /0 P /9906 ; /6906
60
Hpper 1ail Probabilities
Suppose * is nor&al )it# &ean 8/0 and
standard deviation 0/0/

No) Find P%* C >>'

#
''
8.&
6>

No) Find P%* C >>'Q

(continued)
B
&.6&
&
B
&.6&
/9906
&
/0000
/00 - /
9906; /96-3
P%* C >>' ; P%? C 0/60' ; P%? C 0' - P%0 J ? J 0/60'
; /0 - /9906 ; /96-3
Hpper 1ail Probabilities
69
:o)er 1ail Probabilities
Suppose * is nor&al )it# &ean 8/0 and
standard deviation 0/0/

No) Find P%0 J * J 8'

#
5
8.&
63
:o)er 1ail Probabilities
No) Find P%0 J * J 8'Q
#
5
8.&
1#e Nor&al distribution is
sy&&etric5 so )e use t#e
sa&e table even i+ ?-values
are ne"ative:
P%0 J * J 8'
; P%-0/6 J ? J 0'
; /9906
(continued)
/9906
6-
$lass 1utorial Proble&

Proble& 6->0 %a' and %b'

60
66
Proble&s

6->>

6->3
66
$o&putin" Nor&al Probabilities
Asse&bly o+ &otor cycle parts is nor&ally
distributed )it# a &ean o+ 60 seconds and a
standard deviation o+ 0 seconds
Find t#e inter4uartile ran"e o+ asse&bly ti&es5
t#at is t#e &iddle 00U5 90t# percentile to t#e
60t# percentile
68
7*a&ple Q

For t#e 90t#

percentile5 +ind t#e
? value belo)
)#ic# 90U o+ t#e
values lie

:oo! up 0/90 in
t#e BGDX o+ t#e
table
0/90
0/90
6<
B
7*a&ple Q
.(5
Standard Nor&al Probability
1able %Portion'
&.&&
? /06 /06
0/0
/9>93 /9>06 /9><0
/9-0- /9-86
0/6
/966- /96<- /9893
0/8 /300> /3068 /3>06
/08
0/6
/90>6
:oo! up 0/90 in t#e BGDX o+ t#e table
.($86
&.6
.&7
E &.67
(ives a ? value o+ - 0/66
60
7*a&ple Q

No) )e need to
convert ? ; -0/66
to an * value

Y ; Z P ?F
; 60 P %-0/66 * 0'
;6>/60
0/90
Chat is the
F 4alue G
0/90
Ce Hno! the B
4alue is E &.67
6>
7*a&ple///

For t#e upper 4uartile %60U value'

&.75
Chat is FG

:oo! up 0/90 in t#e body o+ t#e table5

W ; 0/66

Y ;Z P ?F ; 60 P %0/66 * 0 ';68/30
69

1#us t#e Inter4uartile ran"e is:

6>/63 to 68/36 seconds

1#is &eans t#at t#e &iddle 00U o+ asse&bly

ti&es is bet)een t#ese t)o values
7*a&ple///
63
$lass 1utorial Proble&

Proble& 6->0 %c'

6-
60
Key 1er&s

$ontinuous ,ando&
.ariable

Discrete ,ando& .ariable

7*pected value

Nor&al distribution

Standard Nor&al
Distribution Standard
Nor&al 1able

?-.alue
66
7*ercises

8
t#
7dition
$#apter 0: 0/>95
0/>3 %o&it variance'5
0/>05 0/>65 0/>6
$#apter 6:
6/85 6/>>5 6/>35 6/>-5
6/>05 6/>85 6/><5 6/995
6/985 6/60

<
t#
7dition
$#apter 0: 0/>95
0/>3 %o&it variance'5
0/>05 0/>65 0/>6
$#apter 6:
6/85 6/>>5 6/>35 6/>-5
6/>05 6/>65 6/><5 6/995
6/985 6/6<