Lirenso: RES 341

1 Probability: Concepts and Applications

Objectives Define terminology related to probability. Differentiate between probability and non-probability sampling designs. Describe the probability distribution of a random variable. Explain the concept of a normal probability distribution. Explain the standard normal distribution. 1. Probability 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. probability value ranges between ! and " inclusive and represents the likelihood that a particular event will happen. probability value of ! means there is no chance that an will happen and a value of " means there is "!! percent chance that the event will happen. #nderstanding probability is helpful for decision-making. $onducting an experiment or sample test provides an outcome that can be used to compute the chance of events occurring in the future. n experiment is the observation of some activity or the act of taking some measurement. %hereas, an outcome is a particular result of an experiment. &he collection of one or more outcomes of an experiment is known as an event. 'or example, a market testing of a sample of new breakfast cereal, new beer, new wine, new maga(ine, etc. gives the Director of Production or Director of )arketing a company a preliminary idea *outcome+ whether consumers would like the product if it is produced and distributed in bulk. &here are three definitions of probability. &he first one is known as classical probability. &he classical definition applies when there are n e,ually likely outcomes to an experiment. It is obtained by dividing the number of favorable outcomes by the total number of possible outcomes. &he probability of certain events is already known or the resulting probabilities are definitive. 'or example(1) &he chance that a woman gives birth to a male or female baby *p = 0.50 or +, (2) &he chance that tail or head appears in a toss of coin *p = 0.50 or +, and (3) &he chance that one spot will appear in die-rolling *p = 0.16 or 1/6+. &he second one is empirical probability that is based on past experience. &his is determined dividing the number of times an event happens by the total number of observations. 'or example-

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*"+ ./. of 01" business graduates were employed in the past. &he probability that a particular graduate will be employed in his or her ma2or area is ./.301" 4 !.1" or 1"5. *6+ &he probability that your income tax return will be audited if there are two million mailed to your district office and 6,7!! are to be audited is 6,7!!36,!!!,!!! 4 !.!!"6 or !."65. &he third is a subjective probability. 8ub2ective probability is a probability assigned to an event based on whatever evidence is available. It is an educated guess. #nlike empirical probability, it is not based on past experience. 8ub2ective probability is obtained by evaluating the available options and by assigning the probability. Examples of events that re,uire computing sub2ective probability*"+ Estimating the probability that a person wins a 2ackpot lottery. *6+ Estimating the probability that the 9) will lose its first ranking in car sales. 2. Events Events can be classified as mutually exclusive, joint, independent, conditional or complement. $ombining probabilities of events re,uires using the rules of addition and multiplication *see table below+. + &wo events are mutually exclusive if by virtue of one event happening the other cannot happen. 'or example, business can:t be bankrupt, break-even and profitable at the same. It can only be one of the three. 8imilarly, being a male or female are mutually exclusive and collectively exhaustive events. ;one one is both and everyone is one or the other.
Example- &he two most common primary causes of death in the #8 are heart attack and cancer. <eart attack is the cause for one-third *!...+ of the mericans who die each year and cancer is the cause for one-fifth *!.6!+ of the deaths each year. If 6!!. is like 6!!6, the probability that a randomly selected merican will die of either a heart attack or cancer is the sum of these two probabilities. 0.33 0.20 ! 0."3. =Special Rule of Addition].

>+ Events are joint if two or more events happen at the same time. 'or example, driving autos is one event and talking on the cell phone is another event. %hen you see someone talking on the cell phone while driving an automobile it is a 2oint event.
Example- If ?!5 of the $itibank customers have a saving account, 7!5 have a market rate account, and @!5 have both, the probability that a randomly selected $itibank customer will have either saving or market rate account will be computed as0.#0 0.$0 % 0.&0 ! 0.'0 =General Rule of Addition].

$+ Events are independent if the occurrence of one event does not affect the occurrence of another event.

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Example8uppose the probability that a student gets an A B grade is 0."0 in statistics and 0.&0 in <istory. ssume that the grade received in statistics is independent of the grade received in <istory. &he probability that the student will receive an A B grade in both sub2ects *statistics and <istory+ is computed as(0."0) x (0.&0) ! 0.30 =Special Rule of Multiplication]. *"+ &wo traffic lights on >roadway Coad operate independently. Dour probability of being stopped at the first one is !.7 and your probability of being stopped at the second one is !.0. &he probability of being stopped at+ both lights 4 0.$ x 0.' ! 0.2* >+ neither light 4 0.& x 0.3 ! 0.1* $+ the first but not the second 4 0.$ x 0.3 ! 0.12 D+ the second but not the first 4 0.' x 0.& ! 0.$2

BASIC RULES OF PROBABILITY

No. 1 EVENTS Mutually exclusive FEATURES No overlappin events ! if one event "appens t"e ot"er one can#t occur at t"e sa$e ti$e *verlappin ( )oncurrent events + t,o or $ore events "appen at t"e sa$e ti$e %"e occurrence of event A "as no effect on t"e occurrence of anot"er event B /ependent events + t"e pro&a&ility of a particular event occurrin iven t"at anot"er event "as occurred All events in t"e sa$ple space t"at are not part of t"e specified event + deter$ined &y su&tractin t"e pro&a&ility of an event not "appenin fro$ t"e pro&a&ility of "appenin KEY CONNECTING WORDS %"e pro&a&ility of A occurrin or t"e pro&a&ility of B occurrin %"e pro&a&ility t"at either A $ay occur or B $ay occur follo,ed &y t"e possi&ility t"at both A a ! B $ay occur. %"e pro&a&ility t"at A a ! B ,ill occur APPLICABLE RULE Special Rule of Addition FORMULA P(A or B) = P(A)+ P(B)

Not $utually exclusive ('oint( )o$pound) -ndependent

General Rule of Addition

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

Special Rule of Multiplication

P(A and B) = P(A)P(B)

)onditional

P(B|A) + pro&a&ility t"at event B ,ill occur "i#e that event A "as already occurred 1vent Not occurrin + or Neit"er(nor ,ill "appen

General Rule of Multiplication

P(A and B) = P(A)P(B|A)

)o$ple$ent

)o$ple$ent Rule

P(A) = 1 P (~ A)

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D+ Events are conditional if a particular event occurs given that another event has occurred. >ayesian theorem can be used to revise prior probabilities and validate earlier decisions.
'or example- &hree defective electric toothbrushes were accidentally shipped to a drugstore by $lean-brush products along with "0 non-defective ones. + %hat is the probability that the first two electric toothbrushes sold will be returned to the drugstore because they are defectiveE *3+20) (2+1#) ! &+3*0 ! 0.01"'# =General Rule of Multiplication].

>+ %hat is the probability that the first two electric toothbrushes sold will not be defectiveE (1'+20) (1&+1#) ! 2'2+3*0 ! 0.'1"* =General Rule of Multiplication].

E+ &he set of all possible outcomes of an experiment is known as sample space. &he sample space for die-rolling is F",6,.,7,1,@G. n event in the sample space that is not part of the specified event is known as the complement. #nder conditions where one even occurs as a subset of another event, the probability of the first event cannot be higher than the probability of the one for which it is a subset.
Example- 8uppose the probability that mortgage loans are approved by lenders in your state is !.0! *0!5+. >y the complement rule, the probability that loans may not be approved for a randomly selected applicant is !..! *.!5+. 1 , .'0 ! .30

contingency table with two variables, values of one variable placed in rows and the other in columns, can be used to estimate simple - joint probabilities of the two events. &his can be demonstrated by using the following example. n airline company completed an on-board passenger survey of 7!! customers in an attempt to measure the number of bags checked by those traveling on business or for pleasure. Cesults are shown in the table belowPassenger >usiness Pleasure &otal ! $hecked 1! 6! 0! " $hecked @! /! "7! 6 $hecked .! ?! "6! . or more "! @! 0! &otal "1! 61! 7!!

1) %"e pro&a&ility t"at a custo$er c"ec2s exactly 2 &a s 123(.33 4 $.%$ 2) %"e pro&a&ility t"at a passen er ,"o responded to t"e survey ,as a &usiness custo$er is 103(.33 4 $.%&' 3) %"e pro&a&ility t"at a custo$er c"ec2ed fe,er t"an 2 &a s 53(.33 6 1.3(.33 4 213(.33 4 $.'(' .) %"e pro&a&ility t"at a custo$er c"ec2ed $ore t"an one &a is 123(.33 6 53(.33 4 173(.33 4 $.)&

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%"e &rea2do,n of t"e si$ple and 8oint pro&a&ilities can &e displayed rap"ically usin t"e tree diagram.

Tree Dia"ra* +or Air,i e- Pa--e "er03 103 93 33 13 93 203 73 :3 23

.33

3. .iscrete Probability .istributions Probabilities values for experiments whose outcomes are numerical are known as random variables. Candom variables can be discrete *have a finite number of sample space+ or continuous *have an infinite number of sample space+. n example of discrete probability distributions is binomial distribution =8ee &able 6 in the ppendixH. Properties of >inomial distribution Each trial *I+ may be selected from infinite population without replacement or from a finite population *;+ with replacement. Each trial *I+ is mutually exclusive and collectively exhaustive Each trial *I+ has two possible outcomes, success or failure. Each trial has a fixed probability of success or failure *;+. >inomial probability formula for any trial is<(x) 4 ===n> x(1!)n x x>(n!x)> ?"ere@ n is t"e nu$&er of trials. x is t"e nu$&er of success or failures is t"e pro&a&ility of success or failure on eac" trial. &he above formula can also be written as followsP*x+ 4 n$r x (1)n-x %here n$r stands for combination.

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&he probability notation summary for different values of P *x+ is given in the table below. It is important to understand the meaning of terms such as Aat leastB, Amore t/anB, Aat mostB, Aless t/anB, Abet0een 11 and 12 inclusiveB, and Abet0een 11 and 12.B &hey indicate cumulative binomial probabilities that involve adding the values up or down. )8 Excel can be used to determine the binomial probabilities of an event.
2ind t/e probability t/at x ta3es on a value t/at is 4 t least x )ore than x t most x Kess than x >etween x1 and x2 inclusive >etween x1 and x2 Probability 5otation

P*I x+ P*I J x+ P*I x+ P*I L x+ P*x1 x x2+ P*x1 L x L x2+

Example8uppose road emergency service has been @!5 successful in the past reaching its customers within .! minutes. %hat is the probability of obtaining three successful calls within an acceptable time in a sample of five monitored service calls in this particular se,uenceE &his problem can be solved in thre different ways. "+ It can be computed using the binomial probability distribution formula. In the above problem; 4 3.93A n 4 0A B 4 3. <(x=3) 4 0> 3.933(1!3.93)! 3 3>(! 3)> 4 3.3.9 6+ &his value can also be read directly from the >inomial Distribution table. In the table where n 4 1, the intersection of row x 4 . and column M 4 !.@! would give a probability of 0.3$&. .+ %e can use Excel, probability distributions function. Nther types of discrete probability distribution are <ypergeometric, Poisson and Exponential. <ypergeometric is different from binomial and its probability changes from one trial *experiment+ to another. Poisson is known as a probability of (ero and works with averages, instead of ;. $. 5ormal Probability .istributions Nne particular continuous probability distribution is normal distribution. It is a symmetric, bell-shaped distribution that takes a normal random variable, with O being the mean of the normal random variable, I being any value below or above O, and P being the standard deviation from the center of distribution.

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Properties of the normal probability distribution &he normal curve is bell shaped and has a single peak at the exact center of the distribution. &he mean, median, and mode of distribution are e,ual and located at the peak. <alf of the area under the curve is above the peak, and other half is below it. &here are several families of the normal distribution curve. &he standard one has a random variable Z, O 4 ! and P 4 ". >ased on the Empirical Cule, there are .P on each side of the curve. Probability value is (ero at 7P and beyond from the center. &he probability values for each Q-value are listed in &able "? for Q value located to the left of O and in the same table for the Q-value located to the right of O+. s explained in %eek &hree Kecture, the Q-value measures the number of standard deviations that a data value is from the population mean. &he value of Z is obtained using the formula6 ! 1 % 7 *Rs: can be substituted for P if the population parameter is unknown) 8 negative Q value shows that the random variable is located to the left of O and a positive Q value means the random variable is located to the right of the center. &he rules for solving different normal probability problems are given below. R.,e- +or So,#i " Nor*a, Probabi,it/ Prob,e*- Ma .a,,/ .
9ule " 6 . 7 :o 2ind4 P*Z !+ P*Z " !+ P*!1 Z !2+ Area under t/e curve4 below a value of Z above a value of Z >etween two values of Z exactly the value of Z ;oo3 <p4 the Z value and use the table directly &he Z value and subtract the value in the table from " NC the negative of the Z value and use the table directly >oth Z values and subtract the lower value from the higher value the Z value in table directly *left side of the curve if Z#value is negative *right side of the curve if Z#value is positive+ in &able "?.

P*Q 4 (+

Example&he amount of money re,uested in home loan applications at Dawn Civer 'ederal 8avings are approximately normally distributed with O 4 S0!,!!! and P 4 S6!,!!. loan application is received this morning. %hat is the probability that+ the amount re,uested is S/!,!!! or moreE &he answer is !..!/1. #sing Q 4 I T O3 P Q 4 /!,!!! T 0!,!!!36!!!! 4 !.1. %hen Q 4 !.1!, the probability area is !..!/1 in standard normal table or ".!! T !.@?"1 4 !..!/1. >+ &he amount re,uested is less than S@1,!!!E &he answer is !.7!"6. #sing Q 4 I T O3 P, Q 4 @1,!!! T 0!,!!!36!!!! 4 -!.61. &his can be directly obtained from standard normal table, using row Q 4 -!.6 and column !.!1.

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". :/e Principles o= Countin> If the number of possible outcomes in an experiment is small, it is relatively easy to count them. If, however, there are a large number of possible outcomes, it would be tedious to count all the possibilities. &o facilitate counting, three counting formulas will be examined- the multiplication formula, the permutation formula, and the combination formula. A) :/e ?ultiplication 2ormula is: $otal number o% arran&ements = 'm('n(. Example- If a salesperson has seven shirts and 1 ties to display, .1 outfits are possible. &his means he or she has .1 different ways displaying the outfits. &his can be extended to more than two events. 'or three events m, n, and o- &otal number of arrangements U *m+*n+*o+. >+ :/e Permutation 2ormula &he permutation =ormula is applied to find the possible number of arrangements when there is only one group of ob2ects. Nrder is very important in permutation. ;ote the arrangements a b c and b a c are different permutations. &he formula to count the total number of different permutations is-

wheren is the total number of ob2ects *pool+. r is the number of ob2ects selected at a time. >efore we solve the two problems illustrated, note that permutations and combinations use a notation called n %actorial. It is written nV and means the product of n*n-"+, *n-6+, *n-.+, *n-7+, *n-1+, etc. For instance, 5! Means 5 x 4 x 3 x
2 x 1 = 120.

>y definition, (ero factorial, written !V, is ". &hat is, !V 4 ". Example- flag with three stripes of . colors can use any of six colors. <ow many flags are possible. &his is a permutation problem and the order of arranging the flags is important.

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Pr 4 @P.

@V 4 "6! *@-.+V

$+ :/e Combination 2ormula If the order of the selected ob2ects is not important, any selection is called a combination. &he formula to count the number of r ob2ect combinations from a set of n ob2ects is-

Example- Dou have @ colors to choose from and you wish to choose . for a flag. <ow many choices are possibleE &his is a combination problem the order of arranging colors in not important.
n

$r 4 @$.

@V 4 6! .V*@-.+V

Discussion Wuestions
". 9ive three real-life or business examples for each of the following+ )utually exclusive events >+ Xoint events $+ Independent events D+ $onditional events 6. $hances are 1!-1! that a newborn baby will be a girl. 'or families with five children, what is the probability that all the children are girlsE =<int- use binomial
probability distributionH

.. ssume a restaurant business succeeds @!5 of the time. 8uppose that there are three such restaurants open in your city. %hen they don:t compete with one another, it is reasonable to believe that their relative success would be independent. =<int- use binomial probability distributionH + %hat is the probability that all the three businesses succeedE >+ %hat is the probability that all the three businesses failE $+ %hat is the probability that at least one business succeedsE 4. recent study of the hourly wages of maintenance crews for ma2or airlines showed that the mean hourly salary was S"@.1!, with a standard deviation of S..1!. If we select a crew member at random, what is the probability the crew member earns-

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13

a. b. c. d.

Exactly S"/.!! per hourE >etween S"@.1! and S6!.!! per hourE )ore than S6!.!! per hourE Kess than S"1.!! per hourE

1. <ow do we know whether a given counting problem takes the permutation or combination method of selecting or arranging ob2ectsE