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Statistics for Business and

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

Inspect 70 Radios # Defective 0, 1, 2, ..., 70

Answer 33 Questions # Correct 0, 1, 2, ..., 33

Count Cars at Toll # Cars 0, 1, 2, ...,


Between 11:00 & 1:00 Arriving
Continuous Random Variables
Data Types

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.)

2. Continuous Random Variable


Whole or fractional number
Obtained by measuring
Infinite number of values in interval
Too many to list like a discrete random variable
Continuous Random Variable
Examples
Experiment Random Possible
Variable Values
Weigh 100 People Weight 45.1, 78, ...
Measure Part Life Hours 900, 875.9, ...
Amount spent on food $ amount 54.12, 42, ...
Measure Time Inter-Arrival 0, 1.3, 2.78, ...
Between Arrivals Time
Probability Distributions for
Discrete Random Variables
Discrete
Probability Distribution
1. List of all possible [x, p(x)] pairs
x = value of random variable (outcome)
p(x) = probability associated with value
2. Mutually exclusive (no overlap)
3. Collectively exhaustive (nothing left out)
4. 0 p(x) 1 for all x
p(x) = 1
Discrete Probability
Distribution Example
Experiment: Toss 2 coins. Count number of
tails.
Probability Distribution
Values, x Probabilities, p(x)
0 1/4 = .25
1 2/4 = .50
2 1/4 = .25

1984-1994 T/Maker Co.


Visualizing Discrete
Probability Distributions
Listing Table
{ (0, .25), (1, .50), (2, .25) } f(x) p(x)
# Tails Count
0 1 .25
1 2 .50
Graph
2 1 .25
p(x)
.50
.25 Formula
.00 x n!
p (x ) = px(1 p)n - x
0 1 2 x!(n x)!
Summary Measures
1. Expected Value (Mean of probability distribution)
Weighted average of all possible values
= E(x) = x p(x)
2. Variance
Weighted average of squared deviation about
mean
2 = E[(x (x p(x)
3. Standard Deviation
2
Summary Measures
Calculation Table

x p(x) x p(x) x (x (x p(x)

Total xp(x) (x p(x)


Thinking Challenge

You toss 2 coins. Youre


interested in the number of
tails. What are the expected
value, variance, and
standard deviation of this
random variable, number of
tails?
1984-1994 T/Maker Co.
Expected Value & Variance
Solution*

x p(x) x p(x) x (x (x p(x)

0 .25 0 -1.00 1.00 .25


1 .50 .50 0 0 0
2 .25 .50 1.00 1.00 .25
= 1.0


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

1. Two different sampling methods


Infinite population without replacement
Finite population with replacement
2. Sequence of n identical trials
3. Each trial has 2 outcomes
Success (desired outcome) or Failure
4. Constant trial probability
5. Trials are independent
Binomial Probability
Distribution Function
n x n x n! n x
p( x) p q p (1 p)
x

x x ! (n x)!

p(x) = Probability of x Successes


n = Sample Size
p = Probability of Success
x = Number of Successes in Sample
(x = 0, 1, 2, ..., n)
Binomial Probability
Distribution Example
Experiment: Toss 1 coin 5 times in a row. Note
number of tails. Whats the probability of 3 tails?
n!
p( x) p x (1 p) n x
x !(n x)!
1984-1994 T/Maker Co.

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

p(x 3) p(x 2) = .812 .500 = .312


Binomial Distribution
Characteristics
n = 5 p = 0.1
Mean
E ( x) n p
Standard Deviation
n p (1 p) n = 5 p = 0.5
Binomial Distribution
Thinking Challenge
Youre a telemarketer selling service
contracts for Macys. Youve sold 20
in your last 100 calls (p = .20). If you
call 12 people tonight, whats the
probability of
A. No sales?
B. Exactly 2 sales?
C. At most 2 sales?
D. At least 2 sales?
Binomial Distribution Solution*
n = 12, p = .20
A. p(0) = .0687
B. p(2) = .2835
C. p(at most 2) = p(0) + p(1) + p(2)
= .0687 + .2062 + .2835
= .5584
D. p(at least 2) = p(2) + p(3)...+ p(12)
= 1 [p(0) + p(1)]
= 1 .0687 .2062
= .7251
Poisson Distribution
Discrete Probability
Distributions
Discrete
Probability
Distributions

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

1984-1994 T/Maker Co.


Poisson Probability
Distribution Function
x -
e
p (x )
x!

p(x) = Probability of x given


= Expected (mean) number of successes
e = 2.71828 (base of natural logarithm)
x = Number of successes per unit
Poisson Distribution
Characteristics
= 0.5
Mean
E ( x)
N
x p( x)
i 1
= 6
Standard Deviation

Poisson Distribution Example
Customers arrive at a
rate of 72 per hour.
What is the probability
of 4 customers arriving
in 3 minutes?
1995 Corel Corp.
Poisson Distribution Solution
72 Per Hr. = 1.2 Per Min. = 3.6 Per 3 Min. Interval

-
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?

1984-1994 T/Maker Co.


Poisson Distribution Solution:
Finding *
75 words/min = (75 words/min)(60 min/hr)
= 4500 words/hr
6 errors/hr = 6 errors/4500 words
= .00133 errors/word
In a 255-word transaction (interval):
= (.00133 errors/word )(255 words)
= .34 errors/255-word transaction
Poisson Distribution Solution:
Finding p(0)*
-
e
x
p( x)
x!
.34
0 -.34
e
p(0) .7118
0!
Data Types

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

1984-1994 T/Maker Co.


Continuous Probability
Distributions
Continuous
Probability
Distribution

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

3. Mean and Standard Deviation


cd d c

2 12
Uniform Distribution Example
Youre production manager of a
soft drink bottling company. You
believe that when a machine is set
to dispense 12 oz., it really
dispenses 11.5 to 12.5 oz. inclusive.
Suppose the amount dispensed has
a uniform distribution. What is the SODA
probability that less than 11.8 oz. is
dispensed?
Uniform Distribution Solution
f(x)
1 1 1.0

d c 12.5 11.5
1
1.0
1
x
11.5 11.8 12.5

P(11.5 x 11.8) = (Base)(Height)


= (11.8 - 11.5)(1) = .30
Normal Distribution
Continuous Probability
Distributions
Continuous
Probability
Distribution

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

1. Bell-shaped & f(x )


symmetrical
2. Mean, median, mode
are equal
x
3. Middle spread is
1.33
Mean
4. Random variable has Median
infinite range Mode
Probability
Density Function
1 x 2
1

f ( x) e 2

f(x) = Frequency of random variable x


= Population standard deviation
= 3.14159; e = 2.71828
x = Value of random variable ( < x < )
= Population mean
Effect of Varying
Parameters ( & )
f(X)
B

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

.3962 .3962 P(1.26 z 1.26)


= .3962 + .3962
= .7924
1.26 1.26 Z
=0
Shaded area exaggerated
The Standard Normal Table:
P(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

.4834 P(z > 2.13)


.5000
= .4834 + .5000
= .9834
2.13 Z
=0
Shaded area exaggerated
Non-standard Normal
Distribution
Normal distributions differ by Each distribution would
mean & standard deviation. require its own table.

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

2.9 5 7.1 X -.21 0 .21 Z


Shaded area exaggerated
Non-standard Normal = 5, = 10:
P(X 8)
X 85
Z .30
10
Normal Standardized Normal
Distribution Distribution
= 10 =1
.5000
.3821
.1179

=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

=5 7.1 8 X =0 .21 .30 Z


Shaded area exaggerated
Normal Distribution Thinking
Challenge
You work in Quality Control for
GE. Light bulb life has a normal
distribution with = 2000 hours
and = 200 hours. Whats the
probability that a bulb will last
A. between 2000 and 2400
hours?
B. less than 1470 hours?
Solution* P(2000 X 2400)
X 2400 2000
Z 2.0
200
Normal Standardized Normal
Distribution Distribution
= 200 =1

.4772

= 2000 2400 X =0 2.0 Z


Solution* P(X 1470)
X 1470 2000
Z 2.65
200
Normal Standardized Normal
Distribution Distribution
= 200 =1
.5000

.0040 .4960

1470 = 2000 X -2.65 = 0 Z


Finding Z Values
for Known Probabilities
What is Z, given Standardized Normal
P(Z) = .1217? Probability Table (Portion)

=1 Z .00 .01 0.2


.1217
0.0 .0000 .0040 .0080

0.1 .0398 .0438 .0478

=0 ?
.31 Z 0.2 .0793 .0832 .0871

Shaded area 0.3 .1179 .1217 .1255


exaggerated
Finding X Values
for Known Probabilities
Normal Distribution Standardized Normal Distribution
= 10 =1
.1217 .1217

= 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

2. Compute the intervals x + s, x + 2s, x + 3s and


compare the percentage of data in these intervals to
the Empirical Rule (68%, 95%, 99.7%)
3. Calculate
IQR Q3 Q1

s s
If ratio is close to 1.3, data is approximately normal
Assessing Normality Continued
4. Draw a Normal Probability Plot
Expected Zscore

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

1. A 1/2 unit adjustment to


discrete variable
2. Used when approximating
a discrete distribution
with a continuous
distribution
3. Improves accuracy
3.5 4 4.5
(4 .5) (4 + .5)
Normal Approximation
Procedure
1. Calculate the interval:
3 np 3 np 1 p
If interval lies in range 0 to n, normal
approximation can be used
2. Express binomial probability in form
P x a or P x b P x a

3. For each value of interest, a, use:


z a .5 np np 1 p
Normal Approximation Example
What is the normal approximation of p(x = 4)
given n = 10, and p = 0.5?
P(x)
.3
.2
.1
.0 x
0 2 4 6 8 10
3.5 4.5
Normal Approximation Solution
1. Calculate the interval:

np 3 np1 p 10 0.5 3 10 0.51 0.5


5 3.35 1.64, 8.35
Interval lies in range 0 to 10, so normal
approximation can be used
2. Express binomial probability in form:
P x 4 P x 4 P x 3
Normal Approximation Solution

3. Compute standard normal z values:

(a + .5) n p 3.5 - 10(.5)


Z .95
n p (1 p ) 10(.5)(1 - .5)

(b + .5) n p 4.5 - 10(.5)


Z .32
n p (1 p ) 10(.5)(1 - .5)
Normal Approximation Solution

4. Sketch the approximate normal distribution:


.3289 =0
- .1255 =1
.2034
.1255

.3289

-.95 -.32 Z
Normal Approximation Solution

5. The exact probability from the binomial formula is .


2000 (versus .2034)
P(x)
.3
.2
.1
.0 x
0 2 4 6 8 10
Sampling Distributions
Parameter & Statistic
Parameter
P in Population
Summary measure about
& Parameter
population
S in Sample
Sample Statistic & Statistic
Summary measure about
sample
Common Statistics & Parameters
Sample Statistic Population Parameter

Mean X

Standard
Deviation S

Variance S2

Binomial ^
p p
Proportion
Sampling Distribution

1. Theoretical probability distribution


2. Random variable is sample statistic
Sample mean, sample proportion, etc.

3. Results from drawing all possible samples of


a fixed size
4. List of all possible [x, p(x)] pairs
Sampling distribution of the sample mean
Developing
Sampling Distributions
Suppose Theres a Population ...
Population size, N = 4
Random variable, x
Values of x: 1, 2, 3, 4
Uniform distribution

1984-1994 T/Maker Co.


Population Characteristics

Summary Measures Population Distribution


N

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

(1.0 2.5) (1.5 2.5) ... (4.0 2.5)


2 2 2
.79
16
Comparison

Population Sampling Distribution


P(x) P(x)
.3 .3
.2 .2
.1 .1
.0 x
.0 x
1 2 3 4 1.0 1.5 2.0 2.5 3.0 3.5 4.0

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

2. Less than population standard deviation


3. Formula (sampling with replacement)

x
n
Properties of the Sampling
Distribution of x
Properties of the Sampling
Distribution of x
Regardless of the sample size,
1. The mean of the sampling distribution equals the
population mean
x

2. The standard deviation of the sampling distribution


equals

x
n
Sampling from
Normal Populations
Sampling from
Normal Populations
Central Tendency Population Distribution
x = 10

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

7.8 8 8.2 X .50 0 .50 Z


Sampling from
Non-Normal Populations
Sampling from
Non-Normal Populations
Central Tendency
Population Distribution
x = 10

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

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