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Economics
Chapter 4
Random Variables &
Probability Distributions
Learning Objectives
1. Distinguish Between the Two Types of
Random Variables
2. Describe Discrete Probability Distributions
3. Describe the Binomial and Poisson
Distributions
4. Describe the Uniform and Normal
Distributions
Learning Objectives
(continued)
5. Approximate the Binomial Distribution
Using the Normal Distribution
6. Explain Sampling Distributions
7. Solve Probability Problems Involving
Sampling Distributions
Thinking Challenge
Youre taking a 33 question
multiple choice test. Each
question has 4 choices. Clueless
on 1 question, you decide to
guess. Whats the chance youll
get it right?
If you guessed on all 33
questions, what would be your
grade? Would you pass?
Types of Random Variables
Data Types
Data
Quantitative Qualitative
Discrete Continuous
Discrete Random Variables
Data Types
Data
Quantitative Qualitative
Discrete Continuous
Discrete
Random Variable
1. Random variable
A numerical outcome of an experiment
Example: Number of tails in 2 coin tosses
2. Discrete random variable
Whole number (0, 1, 2, 3, etc.)
Obtained by counting
Usually a finite number of values
Poisson random variable is exception ()
Discrete Random Variable
Examples
Experiment Random Possible
Variable Values
Make 100 Sales Calls # Sales 0, 1, 2, ..., 100
Data
Quantitative Qualitative
Discrete Continuous
Continuous
Random Variable
1. Random Variable
A numerical outcome of an experiment
Weight of a student (e.g., 115, 156.8, etc.)
Discrete Probability
Distributions
Discrete
Probability
Distributions
Binomial Poisson
Binomial Distribution
Discrete Probability
Distributions
Discrete
Probability
Distributions
Binomial Poisson
Binomial Distribution
Number of successes in a sample of n
observations (trials)
Number of reds in 15 spins of roulette wheel
Number of defective items in a batch of 5 items
Number correct on a 33 question exam
Number of customers who purchase out of 100
customers who enter store
Binomial Distribution Properties
x x ! (n x)!
5!
p(3) .53 (1 .5)53
3!(5 3)!
.3125
Binomial Probability Table
n=5
(Portion)
p
k .01 0.50 .99
0 .951 .031 .000
1 .999 .188 .000
2 1.000 .500 .000
3 1.000 .812 .001
4 1.000 .969 .049
Cumulative Probabilities
Binomial Poisson
Poisson Distribution
1. Number of events that occur in an interval
events per unit
Time, Length, Area, Space
2. Examples
Number of customers arriving in 20 minutes
Number of strikes per year in the U.S.
Number of defects per lot (group) of DVDs
Poisson Process
1. Constant event
probability
Average of 60/hr is
1/min for 60 1-minute
intervals
2. One event per interval
Dont arrive together
3. Independent events
Arrival of 1 person does
not affect anothers
arrival
-
e
x
p ( x)
x!
3.6
4 -3.6
e
p (4) .1912
4!
Poisson Probability Table
(Portion)
Cumulative Probabilities
p(x 4) p(x 3) = .706 .515 = .191
Thinking Challenge
You work in Quality Assurance
for an investment firm. A clerk
enters 75 words per minute
with 6 errors per hour. What is
the probability of 0 errors in a
255-word bond transaction?
Data
Quantitative Qualitative
Discrete Continuous
Probability Distributions for
Continuous Random
Variables
Continuous Probability
Density Function
1. Mathematical formula Frequency
2. Shows all values, x, and (Value, Frequency)
frequencies, f(x)
f(x) Is Not Probability f(x)
3. Properties
f (x )dx 1 x
All x
(Area Under Curve) a b
f ( x ) 0, a x b Value
Continuous Random Variable
Probability
b
Probability Is Area P (a x b ) a f ( x ) dx
Under Curve!
f(x)
x
a b
Uniform Normal
Uniform Distribution
Continuous Probability
Distributions
Continuous
Probability
Distribution
Uniform Normal
Uniform Distribution
1. Equally likely outcomes
f(x)
2. Probability density 1
function d c
1
f ( x) x
d c c a b d
Uniform Normal
Importance of
Normal Distribution
1. Describes many random processes or
continuous phenomena
2. Can be used to approximate discrete
probability distributions
Example: binomial
3. Basis for classical statistical inference
Normal Distribution
A C
X
Normal Distribution
Probability
Probability is
area under
curve!
d
P(c x d ) f ( x) dx
c
?
f(x)
x
c d
The Standard Normal Table:
P(0 < z < 1.96)
Standardized Normal
Probability Table (Portion)
Z .04 .05 .06 =1
1.8 .4671 .4678 .4686
.4750
1.9 .4738 .4744 .4750
2.0 .4793 .4798 .4803
= 0 1.96 Z
2.1 .4838 .4842 .4846 Shaded area
Probabilities exaggerated
The Standard Normal Table:
P(1.26 z 1.26)
Standardized Normal Distribution
=1
.5000
P(z > 1.26)
.3962 = .5000 .3962
= .1038
1.26 Z
=0
The Standard Normal Table:
P(2.78 z 2.00)
Standardized Normal Distribution
=1
P(2.78 z 2.00)
.4973
= .4973 .4772
.4772 = .0201
2.78 2.00 Z
=0
Shaded area exaggerated
The Standard Normal Table:
P(z > 2.13)
Standardized Normal Distribution
=1
f(X)
X Thats an infinite
number of tables!
Standardize the
Normal Distribution
X
Z
Normal Standardized Normal
Distribution Distribution
= 1
X = 0 Z
One table!
Non-standard Normal = 5, = 10:
P(5 < X< 6.2)
X 6.2 5
Z .12
10
Normal Standardized Normal
Distribution Distribution
= 10 =1
.0478
= 5 6.2 X = 0 .12 Z
Shaded area exaggerated
Non-standard Normal = 5, = 10:
P(3.8 X 5)
X 3.8 5
Z .12
10
Normal Standardized Normal
Distribution Distribution
= 10 =1
.0478
3.8 = 5 X -.12 = 0 Z
Shaded area exaggerated
Non-standard Normal = 5, = 10:
P(2.9 X 7.1)
X 2.9 5
Z .21
10
X 7.1 5
Z .21
Normal 10 Standardized Normal
Distribution Distribution
= 10 =1
.1664
.0832 .0832
=5 8 X =0 .30 Z
Shaded area exaggerated
Non-standard Normal = 5, = 10:
P(7.1 X 8)
X 7.1 5
Z .21
10
X 85
Z .30
Normal 10 Standardized Normal
Distribution Distribution
= 10 =1
.1179
.0347
.0832
.4772
.0040 .4960
=0 ?
.31 Z 0.2 .0793 .0832 .0871
= 5 8.1
? X = 0 .31 Z
X Z 5 .3110 8.1
Shaded areas exaggerated
Assessing Normality
Assessing Normality
1. Draw a histogram or stemandleaf display and
note the shape
Observed value
Normal Approximation of
Binomial Distribution
Normal Approximation of
Binomial Distribution
1. Not all binomial tables
exist
n = 10 p = 0.50
2. Requires large sample
size P(x)
.3
3. Gives approximate .2
probability only .1
.0 x
4. Need correction for 0 2 4 6 8 10
continuity
Why Probability
Is Approximate
Probability Added
P(x) by Normal Curve
.3
.2 Probability Lost by
Normal Curve
.1
.0 x
0 2 4 6 8 10
Binomial Probability: Normal Probability: Area Under
Bar Height Curve from 3.5 to 4.5
Correction for Continuity
.3289
-.95 -.32 Z
Normal Approximation Solution
Mean X
Standard
Deviation S
Variance S2
Binomial ^
p p
Proportion
Sampling Distribution
X i .3
P(x)
i 1
2.5 .2
N .1
.0 x
N
1 2 3 4
X
2
i
i 1
1.12
N
All Possible Samples
of Size n = 2
16 Samples 16 Sample Means
1st 2nd Observation 1st 2nd Observation
Obs 1 2 3 4 Obs 1 2 3 4
1 1,1 1,2 1,3 1,4 1 1.0 1.5 2.0 2.5
2 2,1 2,2 2,3 2,4 2 1.5 2.0 2.5 3.0
3 3,1 3,2 3,3 3,4 3 2.0 2.5 3.0 3.5
4 4,1 4,2 4,3 4,4 4 2.5 3.0 3.5 4.0
Sample with replacement
Sampling Distribution
of All Sample Means
16 Sample Means Sampling Distribution
1st 2nd Observation of the Sample Mean
Obs 1 2 3 4
1 1.0 1.5 2.0 2.5 P(x)
.3
2 1.5 2.0 2.5 3.0 .2
.1
3 2.0 2.5 3.0 3.5 .0 x
1.0 1.5 2.0 2.5 3.0 3.5 4.0
4 2.5 3.0 3.5 4.0
Summary Measures of
All Sample Means
N
X i
1.0 1.5 ... 4.0
X i 1
2.5
N 16
N 2
X i X
X i 1
2.5 x 2.5
1.12 x .79
Standard Error of the Mean
1. Standard deviation of all possible sample
means, x
Measures scatter in all sample means, x
Dispersion
= 50 X
x
n Sampling Distribution
Sampling with n=4 n =16
replacement X = 5 X = 2.5
X- = 50 X
Standardizing the Sampling
Distribution of x
X x X
Z
x
Sampling
n Standardized Normal
Distribution Distribution
X = 1
X X =0 Z
Thinking Challenge
Youre an operations analyst
for AT&T. Long-distance
telephone calls are normally
distribution with = 8 min.
and = 2 min. If you select
random samples of 25 calls,
what percentage of the
sample means would be
between 7.8 & 8.2 minutes?
1984-1994 T/Maker Co.
Sampling Distribution Solution*
X 7.8 8
Z .50
2
n 25
X 8.2 8
Z .50
2
Sampling n 25 Standardized Normal
Distribution Distribution
X = .4 =1
.3830
.1915 .1915
Dispersion
= 50
x X
n Sampling Distribution
Sampling with n=4 n =30
replacement X = 5 X = 1.8
X- = 50 X
Central Limit Theorem
As sample x
size gets n
sampling
large
distribution
enough
becomes almost
(n 30) ...
normal.
x
X
Central Limit Theorem Example
The amount of soda in cans of a
particular brand has a mean of
12 oz and a standard deviation of
.2 oz. If you select random
samples of 50 cans, what SODA
percentage of the sample means
would be less than 11.95 oz?
Central Limit Theorem Solution*
X 11.95 12
Z 1.77
.2
n 50
Sampling Standardized Normal
Distribution Distribution
X = .03
=1
.0384
.4616
11.95 12 X 1.77 0 Z
Shaded area exaggerated
Conclusion
1. Distinguished Between the Two Types of
Random Variables
2. Described Discrete Probability Distributions
3. Described the Binomial and Poisson
Distributions
4. Described the Uniform and Normal Distributions
5. Approximated the Binomial Distribution Using
the Normal Distribution
Conclusion (continued)
6. Explained Sampling Distributions
7. Solved Probability Problems Involving
Sampling Distributions