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Probability Concepts and Applications

# Probability Concepts and Applications

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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 theory is an important part of statistical theory that bridges descriptive and inferential statistics. It is the science of uncertainty or chance, or likelihood.

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08/19/2013

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Lirenso: RES 341
Probability: Concepts and ApplicationsObjectives
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 descriptiveand inferential statistics. It is the science of uncertainty or chance, or likelihood.A probability value ranges between 0 and 1 inclusive and represents thelikelihood that a particular event will happen. A probability value of 0 means thereis no chance that an will happen and a value of 1 means there is 100 percentchance that the event will happen.Understanding probability is helpful for decision-making. Conducting anexperiment or sample test provides an outcome that can be used to compute thechance of events occurring in the future. An
experiment
is the observation of some activity or the act of taking some measurement. Whereas, an
outcome
is aparticular result of an experiment. The collection of one or more outcomes of anexperiment is known as an
event
. For example, a market testing of a sample of new breakfast cereal, new beer, new wine, new magazine, etc. gives the Director of Production or Director of Marketing a company a preliminary idea (outcome)whether consumers would like the product if it is produced and distributed in bulk.There are three definitions of probability. The first one is known as
classical  probability
. The classical definition applies when there are
n
equally likelyoutcomes to an experiment. It is obtained by dividing the number of favorableoutcomes by the total number of possible outcomes.The probability of certain events is already known or the resulting probabilitiesare definitive. For example:
(1)
The chance that a woman gives birth to a male or female baby (
p = 0.50 or ½
),
(2)
The chance that tail or head appears in a toss of coin (
p = 0.50 or ½
), 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 isdetermined dividing the number of times an event happens by the total number of observations. For example:
1

Lirenso: RES 341
(1)383 of 751 business graduates were employed in the past. The probabilitythat a particular graduate will be employed in his or her major area is383/751 = 0.51 or 51%.(2)The probability that your income tax return will be audited if there are twomillion mailed to your district office and 2,400 are to be audited is2,400/2,000,000 = 0.0012 or 0.12%.The third is a
subjective probability
. Subjective probability is a probabilityassigned to an event based on whatever evidence is available. It is an educatedguess.

Unlike empirical probability, it is not based on past experience. Subjectiveprobability is obtained by evaluating the available options and by assigning theprobability. Examples of events that require computing subjective probability:(1)Estimating the probability that a person wins a jackpot lottery.(2)Estimating the probability that the GM will lose its first ranking in car sales.
2. Events
Events can be classified as
mutually exclusive, joint, independent, conditional
or
complement
. Combining probabilities of events requires using the rules of addition and multiplication (see table below). A) Two events are
mutually exclusive
if by virtue of one event happening theother cannot happen. For example, A business can’t be bankrupt, break-evenand profitable at the same. It can only be one of the three. Similarly, being a maleor female are mutually exclusive and collectively exhaustive events. None one isboth and everyone is one or the other.
Example: The two most common primary causes of death in the US are heart attack and cancer.Heart attack is the cause for one-third (0.33) of the Americans who die each year and cancer isthe cause for one-fifth (0.20) of the deaths each year. If 2003 is like 2002, the probability that arandomly selected American will die of either a heart attack or cancer is the sum of these twoprobabilities.
0.33 + 0.20 = 0.53
. [
B) Events are
joint
if two or more events happen at the same time. For example,driving autos is one event and talking on the cell phone is another event. Whenyou see someone talking on the cell phone while driving an automobile it is a joint event.
Example: If 90% of the Citibank customers have a saving account, 40% have a market rateaccount, and 60% have both, the probability that a randomly selected Citibank customer will haveeither saving or market rate account will be computed as:
0.90 + 0.40 – 0.60 = 0.70
[
C) Events are
independent
if the occurrence of one event does not affect theoccurrence of another event.
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Lirenso: RES 341
Example:Suppose the probability that a student gets an “A” grade is
0.50
in statistics and
0.60
(0.50) x (0.60) = 0.30
[
Special Rule of Multiplication].
(1)Two traffic lights on Broadway Road operate independently. Your probability of beingstopped at the first one is 0.4 and your probability of being stopped at the second one is0.7. The probability of being stopped at:A) both lights =
0.4 x 0.7 = 0.28
B) neither light =
0.6 x 0.3 = 0.18
C) the first but not the second =
0.4 x 0.3 = 0.12
D) the second but not the first =
0.7 x 0.6 = 0.42

BASIC RULES OF PROBABILITY
No.EVENTSFEATURESKEYCONNECTINGWORDSAPPLICABLERULEFORMULA
1Mutuallyexclusive No overlappingevents - if one eventhappens the other one can’t occur atthe same timeThe probability of
A
occurring
or
the probability of
B
P(A
or
B) = P(A)+ P(B)
2Not mutuallyexclusive(Joint/Compound)Overlapping/Concurrent events – two or more eventshappen at the sametimeThe probability that
either

A
may occur
or

B
may occur followed by the possibility that
both
A

and

B
P (A
or
B) = P(A)+ P(B) –  P(A
and
B)
3IndependentThe occurrence oevent
A
has noeffect on theoccurrence of another event
B
The probability that
A

and
B
will occur Special Rule of Multiplication
P(A
and
B) = P(A)P(B)
4ConditionalDependent events – the probability of a particular eventoccurring given thatanother event hasoccurred
P(B|A)
– probabilitythat event
B
willoccur
given that
event
A
P(A
and
B) = P(A)P(B|A)
5ComplementAll events in thesample space thatare not part of thespecified event – determined bysubtracting the probability of anevent not happeningfrom the probabilityof happeningEvent Not occurring – or  Neither/nor willhappenComplement Rule
P(A) = 1 – P (~ A)
3