Literature Review Probability theory is an important part of statistical theory that bridges descriptive and inferential statistics.

It is the science of uncertainty or chance, or likelihood. A probability value ranges between 0 and 1 inclusive and represents the likelihood that a particular event will happen. A probability value of 0 means there is no chance that an event will happen and a value of 1 means there is 100 percent chance that the event will happen. If simplified, there are three approaches to probability. The fiBDTt one is known as classical probability. The classical definition applies when there are n equally likely outcomes to an experiment. It is obtained by dividing the number of favorable outcomes by the total number of possible outcomes. The probability of certain events is already known or the resulting probabilities are definitive. For example: (1) The chance that a woman gives birth to a male or female baby (p = 0.50 or ), (2) The chance that tail or head appeaBDT in a toss of coin (p = 0.50 or ), and (3) The chance that one spot will appear in die-rolling (p = 0.16 or 1/6). The second one is empirical probability that is based on past experience. This is determined dividing the number of times an event happens by the total number of observations. For example: (1) 383 of 751 business graduates were employed in the past. The probability that a particular graduate will be employed in his or her major area is 383/751 = 0.51 or 51%. (2) The probability that your income tax return will be audited if there are two million mailed to your district office and 2,400 are to be audited is 2,400/2,000,000 = 0.0012 or 0.12%. The third is a subjective probability. Subjective probability is a probability assigned to an event based on whatever evidence is available. It is an educated guess. Unlike empirical probability, it is not based on past experience. Subjective probability is obtained by

evaluating the available options and by assigning the probability. Examples of events that require computing subjective probability: (1) Estimating the probability that a peBDTon wins a jackpot lottery. (2) Estimating the probability that the GM will lose its fiBDTt ranking in car sales.
BASIC RULES OF PROBABILITY

No.

EVENTS

FEATURES

KEY CONNECTING WORDS The probability of A occurring or the probability of B occurring The probability that either A may occur or B may occur followed by the possibility that both A and B may occur.

APPLICABLE RULE

FORMULA

Mutually exclusive

No overlapping events - if one event happens the other one cant occur at the same time Overlapping/ Concurrent events two or more events happen at the same time

Special Rule of P(A or B) = Addition P(A)+ P(B)

Not mutually exclusive (Joint/ Compound )

General Rule of Addition

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

Independe nt

The occurrence The probability of event A has that A and B no effect on will occur the occurrence of another event B

Special Rule of P(A and B) Multiplication = P(A)P(B)

Conditional Dependent P(B|A) events the probability that probability of a event B will

General Rule of

P(A and B) =

particular event occurring given that another event has occurred 5 Compleme nt All events in the sample space that are not part of the specified event determined by subtracting the probability of an event not happening from the probability of happening

occur given that Multiplication event A has already occurred

P(A)P(B|A)

Event Not occurring or Neither/nor will happen

Complement Rule

P(A) = 1 P (~ A)

Application in Business Problem - 01 A company introduces a new product in the market and expects to make a profit of BDT. 2.5 lakhs during the first year if the demand is "good", a profit of BDT. 1.5 lakhs if the demand is "moderate" and a loss of BDT. 1 lakh if the demand is "poor". Market Research Studies indicate that the probabilities for the demand to be good and moderate are 0.2 and 0.5 respectively. Find the company's expected profit and the standard deviation of profit. Solution: "x" indicate the profit made by the company during the first year [Since you are required to find the company's expected profit, the variable would represent the company's profits in the first year] The profit made by the company during the first year would be

+ BDT. 2.5 lakhs if the demand is "good" + BDT. 1.5 lakhs if the demand is "moderate" + BDT. 2.5 lakhs if the demand is "poor"

The values (in lakhs) carried by the variable ("x") would be either 1 or 1.5 or 2.5 "X" is a discrete random variable with range = {1, 1.5, 2.5} "X" represents the random variable and P(X = x) represents the probability that the value within the range of the random variable is a specified value of "x" Probability for the demand for the product introduced by the company to be Good P(Good) = 0.2 Moderate P(Moderate) = 0.5 Poor P(Poor) = 0.3

On the assumption that there are only three possibilities, i.e. for the demand to be either good, moderate or poor, The three events "Good", "Moderate" and "Poor" are exhaustive events. P(Good Moderate Poor) = 1 (1) Since only one of the events can occur, the three events "Good", "Moderate" and "Poor" are mutually exclusive P(Good Moderate Poor) = 0 (Or) P(Good Moderate Poor) = P(Good) + P(Moderate) + P(Poor) (2) From (1) and (2) we can write P(Good Moderate Poor) = P(Good) + P(Moderate) + P(Poor) = 1 P(Good) + P(Moderate) + P(Poor) = 1 0.2 + 0.5 + P(Poor) = 1 P(Poor) = 1 0.7 P(Poor) = 0.3 Probability for the profits made by the company (in lakhs) to be BDT. 2.5 P(X = 2.5) = P(2.5) = 0.2 BDT. 1.5 P(X = 1.5) = P(1.5) = 0.5 + BDT. 1 P(X = + 1) = P(+ 1) = 0.3 The probability distribution of "x" would be x P(X = x) or P 1 0.3 1.5 0.5 2.5 0.2

Calculations for Mean and Standard Deviations

x 1

P Px

x2

Px2 0.3

0.3 0.3 1

1.5 0.5 0.75 2.25 1.125 2.5 0.2 0.5 6.25 1.25 Total 1 1.55 2.675

The company's expected earnings Expectation of "x" E (x) = px = + BDT. 1.55 lakhs The company can expect to make a profit of BDT. 1,55,000 in the fiBDTt year Variance of the company's profits var (x) = E (x2) (E(x))2 = px2 ( px)2 = 2.675 (1.55)2 = 2.675 (2.4025)2 = BDT. 0.2725 lakhs Variance of the companys profits would be BDT. 27,250 approximately Standard Deviation of the company's profits SD (x) = + Var (x) = + 0.2725 = + BDT. 0.522 lakhs

Standard Deviation of the companys profits would be BDT. 52,200 approximately.

Problem-02