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INTRODUCTION

TO

PROBABILITY

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Introduction to Probability

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3. INTRODUCTION TO PROBABILITY
OBJECTIVES
On completion of this unit students should be able to:
1. Calculate and interpret simple probabilities using counting and tree diagrams
2. Calculate probabilities of mutually exclusive events, independent events and complementary
events
3. From a crosstabulation calculate conditional probabilities
4. Use the probability distribution of a discrete random variable to calculate probabilities and
to calculate and interpret the expected value and standard deviation of the random variable.

3.1

Prelude

Roger Federer is to play Andy Roddick. Who will win? If you select Federer it is unlikely that you will
be totally certain of his victory but rather you would say that he would probably win, or that he had a
better (or higher) chance than Roddick of winning.
The topic of probability aims to quantify this sense of probably or more likely or higher chance. If we
say that 100% probability means that a player is certain to win and 0% means that they are certain to
lose then 50% would mean that both players have the same chance. If you select Federer to win, what
percentage probability would you allocate?
60%
80%
95%

only slightly more likely to win


quite likely to win, only a small chance of losing
almost certain to win

There are many other situations where the outcome is uncertain but where a probability can be assigned.
Many of these are subjective so that different people will give different estimates of the probability.
Examples include sporting contests, whether it will rain tomorrow and share prices rising or falling.
In other situations the probability can be calculated exactly by simple counting methods and appropriate
assumptions. For example in tossing a fair coin the probability of a head is 50% or 0.5. This is because
there are only two equally likely outcomes. We would say that the chance is 1 out of 2, or 1/2 = 0.5.
This example suggests a simple definition of probability in the case where all events are equally likely:
Pr(event) =

number of ways the event occurs


total number of possible events

Example 3-1
In one roll of a fair 6 sided die (singular of dice) what is:
(a) Pr(6)
(b)
Pr(even number)
(c) Pr(number less than 5)
(d)
Pr(2 and 4)?
Solution
(a)
(b)
(c)
(d)

Pr(6) = 1/6
Pr(even number) = 3/6 =0.5
Pr(number < 5) = 4/6 = 2/3
Pr(2 and 4) = 0/6 = 0

as there is only one 6 and six faces in total


as there are 3 even number faces
as there are four numbers less than 5
as 2 and 4 cannot occur together.

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Introduction to Probability

Note that, as in the above example, probabilities are positive proper fractions, that is probabilities are
numbers between 0 and 1 (inclusive). However in everyday language we may also convert them to
percentages.

3.2

Tree Diagrams

As events become more complicated we need some special methods to help us count the number of
different events. A simple visual method is the tree diagram. For tossing a fair coin the diagram looks
like this:

The total number of events equals the number of branches at the end of the (horizontal!) tree. For a fair
coin this is 2.
Example 3-2
Draw a tree diagram for the random event of rolling a fair die.
Solution

Tree diagrams are especially useful when two or more events take place together or successively.
Example 3-3
Two fair coins are tossed. How many outcomes are there? How many of these have 1 head and 1 tail?
Solution

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There are four outcomes, namely: {H,H}, {H,T}, {T,H} and {T,T}. Of these, two have one head and
one tail. Hence
Pr(1 head and 1 tail) = 2/4 = 0.5

as the four events are equally likely.

Note that in this example the sum of the four probabilities, each equal to one quarter (= 0.25), is 1. This
is always true for the complete collection of outcomes that make up one random experiment.
Basic properties of probabilities:
(i) probabilities are greater than or equal to zero and less than or equal to 1, ie 0 pi 1
(ii) the sum of all possible probabilities is one, ie
pi = 1 .

3.3

Probabilities from Data


Another source of exact probabilities is frequency tables.
Example 3-4
One hundred people are surveyed to identify their bank. From the following table what is the probability
that a person selected at random from the 100 people is a customer of the Comm bank?
Bank
Bonza
Comm
Natty
Melb
Total

No. of
customers
20
26
34
20
100

Solution
Pr(Comm) = 26/100 = 0.26, as each person has the same chance of selection in random sampling.
Hence each person is equally likely to be selected.

3.4

Relationships between Events


There are several ways in which two events can be related. The ideas will be illustrated using the simple
random experiments of coin and dice and also tabulations of data. These relationships apply to any type
of probabilities including subjective and exact probabilities.

3.4.1

The Complement of an Event


The complement of an event is the collection of all the other possible events. So in one toss of a fair
coin the complement of a head is a tail; for one roll of a fair die the complement of the even numbers {2,
4, 6} is the set of odd numbers {1, 3, 5}. Since the sum of the probabilities of all events equals 1 we
have the connection that
Pr(event) + Pr(complement) = 1.

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Introduction to Probability

Example 3-5
For the bank customer data in Example 3-4 find the complement of:
(a) {Bonza} and (b) {Bonza, Melb} and the probabilities of these complements.
Solution
(a)
The

complement

of

{Bonza}

Since Pr({Bonza}) + Pr({Comm, Natty, Melb})


then Pr({Comm, Natty, Melb})

(b)

{Comm,

Natty,

=
=
=
=

1
1 Pr({Bonza})
1 20/100
0.8

Melb}.

The complement of {Bonza, Melb} is {Comm, Natty}. Hence:


Pr({Comm, Natty})

3.4.2

is

=
=
=

1 Pr({Bonza, Melb})
1 40/100
0.6

Mutually Exclusive Events


Two events are mutually exclusive if they have no events in common. This is equivalent to saying that
if one event occurs it is impossible for the other event to occur (at the same time). For example in
rolling a fair die these pairs of events are mutually exclusive:

{2} and {4}.


{even numbers} and {odd numbers}.

(c/f Example 3-1(d))

However the following two events are not mutually exclusive: {1, 2, 3, 4} and {2, 4, 6}, as they have
both 2 and 4 in common. This means that if, with one roll of the die, we get, say, a 4 then both events
have occurred.
In Australian Rules football scoring has two mutually exclusive outcomes: a goal and a behind. (A
behind is a near miss of the goal on either side.)
Example 3-6
Which of the following are mutually exclusive pairs of events?
(a)
(b)
(c)
(d)
(e)
(f)

Rolling a 7 or an 8 with a pair of dice


Living in Geelong and working in Melbourne.
Being under 21 years of age and being Prime Minister of Australia.
Being a parliamentarian and being a farmer.
Drawing a red card or drawing an Ace out of an ordinary deck of playing cards.
Forming a five person committee that contains 2 women or that contains three
women.

Solution
(a), (c) and (f) are mutually exclusive pairs of events.
If two events are mutually exclusive then Pr(either one or the other occurs) = Pr(one) + Pr(other). If we
denote two events using the letters A and B then if they are mutually exclusive
Pr(A or B) = Pr(A) + Pr(B)

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Example 3-7
For one roll of a fair die, what is the probability of a 2 or a 4?
Solution
We can calculate Pr(2 or 4) as 2/6 by the counting method, as there only two numbers in the event. But
since {2} and {4} are mutually exclusive and Pr(2) = 1/6 = Pr(4) then
Pr(2 or 4) = 1/6 + 1/6 = 2/6
In the bank data of Example 3-4, as each of the 100 customers belongs to only one bank the total
frequency is 100 and belonging to a bank gives four mutually exclusive events. Example 3-4(b) we can
calculate the probabilities in this way:

and

Pr({Bonza or Melb}) = 20/100 + 20/100 = 0.4


Pr({Comm or Natty}) = 26/100 + 34/100 = 0.6

Consider the following table. One hundred people were asked which charities they supported.
Charity
Frequency
Salvation Army
44
Smith Family
35
Heart Foundation
22
Deaf and Blind
24
Guide Dogs
28
total
153
As the total is more than 100 some people are supporting more than one charity. Hence this is not a set
of mutually exclusive events and it would be incorrect to say, for example,
Pr({Salvation Army or Smith Family})

= Pr({Salvation Army}) + Pr({Smith Family})


= 44/153 + 35/153
as some people are counted twice in this calculation.

3.4.3

Independent Events
This is a quite different type of relationship to mutually exclusive as the property of independence is
conferred by the physical method of performing the events. The basic method for guaranteeing
independence is to select the items at random. This means that the selection of any one particular item
has no influence on what other items will be selected.
Some simple examples of random events that are independent are:

Tossing a fair coin several times. Each toss is (physically) independent of previous tosses as
these cannot affect the outcome of any later toss. So if the first toss is a head on the second toss
heads and tails are equally likely.

Rolling two fair dice together. Whatever comes up on one face cannot affect the other. Of
course the two dice may collide but this can only lead to an accidental change in the numbers.
There is no systematic effect such as if one is an even number then the other must be an odd
number.

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Introduction to Probability

Two weeks Tattslotto numbers. The numbered balls are thoroughly mixed and each one is
selected at random. The numbers selected in one week have no effect on which numbers are
selected in subsequent weeks.

Using a computer program that generates random numbers, to select individuals for a survey.
This method is used to randomly select telephone numbers for opinion polls.

Example 3-8
Which of the following pairs of events are independent and which are not independent?
(a)
(b)
(c)
(d)

Being a girl and having red hair.


Having a flat tyre and being late for work.
Living in Hawthorn and being over 2 metres tall.
A student studying hard and passing an exam.

Solution
(a) and (c) are independent. (b) and (d) are (probably) dependent.

Example 3-9
In one toss of a fair coin we get 10 straight heads. On the next toss is tails more likely than heads?
Solution
No! As each toss is independent of all other tosses then heads and tails are equally likely at every toss,
regardless of what has happened before.

If two events are independent then the probability that both happen together can be calculated from their
individual probabilities. Call two events A and B. If A and B are independent events then:
Pr(A and B) = Pr(A).Pr(B)
Example 3-10
Two fair coins are tossed together. What is the probability that both coins show a head?
Solution
Since Pr(head) = 0.5 for each coin, and the coins are tossed independently of each other then:
Pr(2 heads) = 0.5x0.5 = 0.25.
This agrees with, and supplements, the tree diagram analysis in example 3.3.

3.4.4

Conditional Probability
If two events are not independent then they are dependent. In this case the probability of one event
occurring is affected by whether or not the other related event has occurred. Related events are often
displayed in crosstabulations where two variables are measured for a set of individuals.

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Example 3-11
A Bondi Beach nightclub has the following data on the age and marital status of 140 customers:

Age
Single

Under 30
77

30 and over
28

14

21

Marital Status
Married
(a)
(b)
(c)
(d)
(e)

Convert this table to show probabilities.


Comment on the age of customers attending the club.
Comment on the marital status of customers attending the club.
What is the probability of finding a customer who is single and under the age of 30?
If a customer is under 30, what is the probability that he or she is single?

Solution
In this table we have recorded the age and marital status of 140 people. Each cell gives a different
combination of age and marital status. For example there are 14 people aged under 30 who are married.
(a)

We divide each frequency by 140 to convert the frequencies to probabilities.

Age
Single

Under 30
0.55

30 and over
0.20

0.10

0.15

Marital Status
Married
(b)

Note that the sum of the four probabilities is 1.

(c)

The majority of customers, 65%, are aged under 30.

(d)

The majority of customers, 75%, are single.

(e)

Pr(single and under 30) = 0.55

(f)

This question asks for a conditional probability. The condition is that the customer is under
30. This means that we must go back to the original table and only consider the under 30
column of the age variable.

Age
Single

Under 30
77

Marital Status
Married

14

There are 91 customers under 30. Hence the (conditional) probability that a customer is single, given
that they are under 30, is 77/91 = 0.846. Since the unconditional probability that a customer is single is
0.75 (from (c)) this shows that being single and being under 30 are not independent as these two
probabilities are not equal.

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Introduction to Probability

3.5

Two General Examples


Example 3-12
A companys employees have been classified according to age and salary as shown below:
< $25,000
< 30
30 to 45
>45
TOTAL

32
10
1
43

$25,000 to
$45,000
3
18
10
31

> $45,000

TOTAL

0
21
5
26

35
49
16
100

One employee is selected at random and two events are defined as follows:
A: The employee is under 30
B: The employees salary is under $25,000.
Express each of the following probabilities in words and find their numerical values:
(a) Pr(A)
(b) Pr(B
(c) Pr(A and B)
(d) Pr(A or B)
(e) Pr(A occurs given that B occurs)

(f) Pr(B occurs given that A occurs)

(g) Find the probability that the employees salary is at least $25,000 given that the employee is at least
30 years of age.
(h) Are events A and B mutually exclusive?
(i) Are events A and B independent events?
Solution
(a) Pr(A) = 35/100 = 0.35

Pr(employee is under 30) is 0.35

(b) Pr(B) = 43/100 = 0.43

Pr(employees salary is under $25,000) is 0.43

(c) Pr(A and B) = 32/100 = 0.32

Pr(employee is under 30 and salary is under


$25,000) is 0.32

(d) Pr(A or B) = (32 + 3 + 0 + 10 + 1)/100


= 46/100 = 0.46

Pr(employee is under 30 or salary is under


$25,000) is 0.46

(e) Pr(A occurs given that B occurs) = 32/43


= 0.744

Pr(an employee with salary under $25,000 is


also under 30) is 0.744

(f) Pr(B occurs given that A occurs) = 32/35


= 0.914

Pr(an employee under 30 also has a salary under


$25,000) is 0.914

(g) Pr(salary at least $25,000 given age at least 30)


= (18 + 21 + 10 + 5)/(10 + 18 + 21 + 1 + 10 + 5)
= 54/65
= 0.831
(h) A and B are not mutually exclusive as an employee can be both.
(i) From (a) and (b), Pr(A)xPr(B) = 0.35x0.43 = 0.151, which is different from (c). Hence A
and B are not independent.

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Example 3-13
Note: The solutions to each part of this question will be given immediately after the question part.
Bendigo Power Generation Pty Ltd (BPG) is currently starting work on a project designed to increase
the generating capacity of one of its plants in the Bendigo District of Central Victoria. The project is
divided into two sequential stages: stage 1 (design) and stage 2 (construction). While each stage will be
scheduled and controlled as closely as possible, management cannot predict beforehand the exact
elapsed time for each stage of the project. An analysis of similar construction projects over the past 3
years has shown completion times for the design stage of 2, 3, or 4 months and completion times for the
construction stage of 6, 7, or 8 months.
(a) Draw a tree diagram for the BPG project, including a listing of all possible outcomes.

(b) Based on their experience and judgment, management concluded that the experimental outcomes
were not equally likely. By conducting a study of the completion time for similar projects
undertaken by BPG over the past three years management found the data on the next page.
Using this data, calculate the probabilities associated with each sample point and add these
probabilities to the tree diagram (on next page).
Completion time (months)
Stage 1

Stage 2

Sample Point

2
2
2
3
3
3
4
4
4

6
7
8
6
7
8
6
7
8

(2,6)
(2,7)
(2,8)
(3,6)
(3,7)
(3,8)
(4,6)
(4,7)
(4,8)

No. of past projects having these


completion times
6
6
2
4
8
2
2
4
6
TOTAL = 40 projects

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Introduction to Probability

These possible outcomes can also be presented in a table


Stage 1
Design
Stage 2
Construction

6
7
8

2
0.15
0.15
0.05

3
0.10
0.20
0.05

4
0.05
0.10
0.15

(c) Due to the critical need for additional power, management has set a goal of 10 months for the total
project completion time. Hence the entire project will be completed late if the total elapsed time to
complete both stages exceeds 10 months. What is the probability that the project will be finished on
time, that is, in 10 months or less?
Pr(on time) = (0.15 + 0.15 + 0.05) + (0.10 + 0.20) + 0.05 = 0.70
We can add these probabilities because they are all mutually exclusive outcomes.
(d) What is the most likely or most probable completion time?
Pr(8 months) = 0.15
Pr(11 months) = 0.15

Pr(9 months) = 0.25


Pr(12 months) = 0.15

Pr(10 months) = 0.30

Therefore the most likely completion time of the project 10 months.


(e) What is the probability that the project will be completed within a year?
Pr(completed within a year) = 1 because the largest possible prediction time is 12 months.

Complete Exercise Set 3A Calculating Probabilities on page 211

3.6

Discrete Probability Distributions

3.6.1

Random Variables
In the previous sections and exercises the examples were concerned with random events and the
probabilities of the different outcomes of these events. For example in one toss of a fair coin there were
two outcomes, Head and Tail, each with probability 0.5; in Example 3-4 people were customers of one
of four banks and the probability of being a customer of each bank was calculated from the frequencies.
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In all these examples we have two things: a random variable, namely the outcome of a random
experiment, and a set of probabilities corresponding to each of the outcomes. When we combine these
two we have the probability distribution of the random variable.
In our examples in this section probability distributions will be displayed as a table, as in Example 3-14.
This is because all the random variables are discrete ie the outcomes are all distinct numbers or
categories. (Random variables can also be continuous, in which case a graph or table is used to
represent the probability distribution. An important example is discussed in section 4 below.)
Random variables are given a single letter name such as X or Y. Thus in one toss of a fair coin X is the
outcome, either a head or a tail.
Example 3-14
(a) What is the probability distribution for one toss of a fair coin?
Tossing a fair coin

x
Pr(x)

Head
0.5

(b) What is the probability distribution for one roll of a fair die?
Rolling a fair Die
1
2
x
1/6
1/6
Pr(x)

Tail
0.5

3
1/6

4
1/6

5
1/6

6
1/6

What is the probability of getting a number greater than 4? Name the probability rule that you need
to calculate this probability.
Pr(X > 4) = Pr(5) + Pr(6) = 1/6 + 1/6 = 2/6 = 1/3. Since 5 and 6 are mutually exclusive events we
can add the individual probabilities.
(c) Students in a university residence visit a nearby Pizza Parlour with varying frequencies per month.
Let X be the number of times a student visits the Pizza Parlour each month. The probability
distribution of X could look like this:
x
Pr(x)

0
0.1

1
0.3

2
0.4

3
0.2

If a student is selected at random find the probability that he/she will visit the Pizza Parlour:
i) No times.

Pr(X = 0) = 0.1

ii) Once.

Pr(X = 1) = 0.3

iii) Two or more times

Pr(X 2) = 0.4 + 0.2 = 0.6, as the values of X


are mutually exclusive.

NOTE: All the usual probability conditions are satisfied


Pr(X) = 1, i.e. the sum of all the probabilities is one, and
0 Pr(X) 1 for all values of X.

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Introduction to Probability

3.6.2

Graphs of Probability Distributions


We can make a graph of a probability distribution by putting the X values on the horizontal axis and the
probabilities on the vertical axis.
Example 3-15
Graphs of two of the probability distributions from Example 3-14, (a) and (c).
(a)

(c)

In these graphs it is the top of the vertical lines that represents the probabilities. The rest of the line is
drawn only to make the point more visible.

3.6.3

Expected Value and Standard Deviation of a Random Variable


Given a set of data we can calculate the sample mean and standard deviation. Similarly, given a
probability distribution we can calculate the mean and standard deviation of the corresponding random
variable. The formulae and procedures are very similar to those for sample data and can be carried out
for discrete distributions using Microsoft Excel.
The mean of a numerical random variable X is also called the Expected Value of X, written E(X). The
name derives from the idea that the mean is the value of X that would be expected as the most likely or
average value in the long run. It is calculated from the formula:

= E ( X ) = X . Pr( X )
The variance of a numerical random variable X is often written Var(X). For a discrete random variable,

Var ( X ) = E ( X 2 ) 2
The standard deviation is

Var ( X )
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Example 3-16
Calculate the mean value of the result of one roll of a fair die.
Solution

1
6

1
6

1
6

1
6

1
6

= E ( X ) = X . Pr( X ) = 1 + 2 + 3 + 4 + 5 + 6

1 21
=
= 3.5
6 6

The average of all the faces is 3.5, which can be seen by adding the numbers from 1 to 6 and then
dividing by 6.
Example 3-17
What is the average number of times per month that a student (from Example 3-14(c)) goes to the Pizza
Parlour?
Solution
The average number of times per student is the expected value of X.

= E ( X ) = X . Pr( X ) = 0 0.1 + 1 0.3 + 2 0.4 + 3 0.2 = 1.7


ie a student selected at random is expected to go to the Pizza Parlour on average 1.7 times per
month.
The expected value and variance of a discrete random variable can be calculated using Microsoft Excel
as in the following example.
Example 3-18
Calculate the mean and standard deviation of the Pizza Parlour data of Example 3-14(c).
Solution

Using Microsoft Excel 2007 to calculate the


expected value, variance and standard deviation of
a discrete random variable
Step 1:
Enter
the
probability
distribution

In a new Excel spreadsheet, name cell A1 X and cell A2 Pr(X).

Enter the values of X and Pr(X) given on p.13 so that your spreadsheet
appears as shown below.

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Introduction to Probability

Step 2:
Calculating the
expected value

In cell C1, type X*Pr(X).

To calculate the expected value we need to first multiply the outcome (X)
of each event in column 1 by its probability Pr(X) in column 2 of the
spreadsheet. Therefore, go to cell C2 and type = a2*b2 and press ENTER.

To copy this formula to the other cells in column C, right-click cell C2 and
select Copy from the resulting drop-down menu. Then press the Shift key,
scroll down with the left mouse button so that C3 to C5 are also
highlighted, right-click the mouse again, and select Paste.
Your
spreadsheet should then appear as shown below.

We now need to add the values in column C since the expected value is the
sum
X . Pr( X )

We will do this in row 7 of the spreadsheet here. First, type E(X) in cell
A7 so we can keep track of our calculations. Then, in cell B7, type
=sum(c2:c5) and press ENTER, to obtain the result below.

The mean E(X) is 1.7

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Step 3:
Calculating

E( X 2 )

To calculate the variance, we first need to calculate E ( X 2 ) , which is equal


to

* P( X ) . Therefore, type X^2 in cell D1 and X^2*Pr(X) in E1.

To calculate X^2 for the first outcome (X) in row 2, go to cell D2 and type
=a2^2 and press ENTER.

Then copy this formula to the other cells in column D by right-clicking cell
D2 and selecting Copy from the resulting drop-down menu. Press the Shift
key, scroll down with the left mouse button so that D3 to D5 are also
highlighted, right-click the mouse again, and select Paste.

To calculate X^2*Pr(X) we want to multiply the value in a given cell of


column D by the corresponding cell in column B. Therefore, go to cell E2
and type =d2*b2 and press ENTER. Then copy and paste this formula to
cells E3 through E5 so that your spreadsheet appears as below.

We will calculate E ( X 2 ) in row 8. First, type E(X^2) in cell A8. Then,


in cell B8, we will sum the X 2 * P( X ) values. That is, we will sum cells
E2 to E5. Hence, in cell B8, type = sum(e2:e5) and press ENTER.

Hence E ( X 2 ) = 3.7
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Introduction to Probability

Step 4:
calculating the
variance

We will now calculate Var(X) in row 9, so type Var(X) in cell A9. Since
Var ( X ) = E ( X 2 ) 2 and we calculated E ( X 2 ) in cell B8 and in cell
B7, go to cell B9 and type =b8-b7^2 and press ENTER.

Hence, variance = 0.81


Step 5:
Calculating the
standard
deviation

We will calculate the standard deviation in row 10 of our spreadsheet.


First, type Standard Deviation in cell A10. The standard deviation is the
square root of the variance (which we calculated in cell B9), which can be
calculated using the sqrt function in Excel. That is, go to cell B10 and type
=sqrt(b9) and press ENTER.

The value of the standard deviation is 0.9 in this example.

Example 3-19
A company operates a chain of takeaway food outlets. It intends to build an additional outlet and
surveys the following possible locations:

Ringwood
Footscray
St. Kilda

Probability of
Success
0.6
0.4
0.5

Estimated Profit
if Successful
$35,000
$60,000
$45,000

Estimated Profit
if Unsuccessful
$2,500
$7,000
$6,000

Which location should be chosen? Consider both the expected profit and the risk involved as measured
by the standard deviation.
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Solution
For each location we can calculate the expected value of the profit from the probability distribution. For
Ringwood the distribution is:
x (profit $)
35,000
2,500
0.6
0.4
Pr(x)
The probability of failure is 1 0.6 = 0.4 as failure is the complement of success.
For Footscray the distribution is:
x (profit $)
Pr(x)

60,000
0.4

7,000
0.6

45,000
0.5

6,000
0.5

For St. Kilda the distribution is:


x (profit $)
Pr(x)

For Ringwood, the expected value is = E(X) = 0.6x35,000 + 0.4x2,500 = 22,000.

We obtain the three expected profits and standard deviations individually, using Microsoft Excel as in
Example 3-18.
Location
Ringwood
Footscray
St.Kilda

Expected profit ($)


22,000
28,200
25,500

Standard deviation ($)


15,922
25,965
19,500

Coeff of variation
72%
92%
76%

Hence we could choose Footscray as it is the most profitable location but noting that the expected profit
is the most variable and hence the most risky. St Kilda is a compromise with the second highest
expected profit but the second lowest risk as measured by the coefficient of variation.

Complete Exercise Set 3B Probability Distributions on page 244

19 | P a g e

Introduction to Probability

3.7

References:

Anderson, D.R, et al Statistics for Business and Economics, Australian edition 1989.
Chapter 4, pages 79 - 107
Chapter 5, pages 125 - 132

Levine, D. M. Krehbiel, T. C., Berenson, M. L./ Business Statistics: A First Course, Second Edition
2000, Prentice Hall.
Chapter 4, pages 154 170, 179 - 183

McLean, A., Stephens, B., Business Mathematics and Statistics, Longman 1996.
Chapter 20, pages 451 477
Chapter 21, pages 488 494

Selvanathan, A., Selvanathan, S., Keller, G., Warrack, B., Australian Business Statistics, Abridged third
edition, Nelson 2004.
Chapter 4, pages 114 140
Chapter 5, pages 182 190

Waxman, P., Business Mathematics and Statistics, Third edition, 1993.


Chapter 19, pages 453 - 475.

TERMS YOU SHOULD KNOW:


Probability
Tree diagram
Basic requirements of probability
Mutually exclusive
Independent events
Conditional probability
Random variable
Probability distribution
Expected value

Event
Definition of probability of an event
Complement
Addition Law
Multiplication Law
Discrete random variable
Probability function
Standard deviation

USEFUL FORMULAE:
Pr(event ) = 1 Pr(complement )
E(X) = = xp(x)

Pr(A or B) = Pr(A) + Pr(B), for mutually exclusive events


Pr(A and B) = Pr(A)Pr(B), for independent events

20 | P a g e

3.8

Exercises
Exercise Set 3A Calculating Probabilities (Solutions can be found on page
266)
1. Over a long period of time, the queue length of customers at the teller section of a major bank was
observed to have the following probability distribution;
Number in queue
Probability

0
0.1

1
0.2

2
0.2

3
0.3

4 or more
0.2

Find the probability of


(a)
At most two people in the queue.
(b)

No more than three people in the queue.

(c)

At least one person in the queue.

(d)

Two or more people in the queue.

(e)

Given there is at least one person in the queue, what is the probability that there are 4 or
more?

2. An airline has offered a special vacation package to Fiji. The length of stay is either for 3 days or 7
days, and the type of accommodation can be either economy, regular, or deluxe. Consider the
experiment of observing the choices made by the next person signing up for the package.
(a)

How many experimental outcomes are possible?

(b)

Draw a tree diagram for this experiment.

3. An investor has two stocks: stock A and stock B. Each stock may increase in value, decrease in value,
or remain unchanged. Consider the experiment as the investment in both of the two stocks.
(a)

How many experimental outcomes are possible?

(b)

Draw a tree diagram for the experiment.

(c)

How many of the experimental outcomes result in an increase in value for at least one of the
two stocks?

(d)

How many of the experimental outcomes result in an increase in value for both of the
stocks?

4. Suppose that a manager of a large apartment complex provides the following subjective probability
estimates about the number of vacancies that will exist next month:
Vacancies
0
1
2
3
4
5

Probability
.05
.15
.35
.25
.10
.10

21 | P a g e

Introduction to Probability

List the components of each of the following events and calculate the probability of the events:
(a)
No vacancies.
(b)

At least four vacancies.

(c)

Two or fewer vacancies.

5. The manager of a furniture store sells from zero to four china cabinets each week. Based on past
experience, the following probabilities are assigned to sales of zero, one, two, three, or four cabinets:
Pr(0) = 0.08
Pr(1) = 0.18
Pr(2) = 0.32
Pr(3) = 0.30
Pr(4) = 0.12
1.00
(a)

Are these valid probability assignments? Why or why not?

(b)

Let A be the event that two or fewer are sold in one week. Find Pr(A).

(c)

Let B be the event that four or more are sold in one week. Find Pr(B).

6. A sample of 100 customers of the Adelaide Gas and Electric Company resulted in the following
frequency distribution of monthly charges.
Amount $
0-49
50-99
100-149
150-199
200-249

Number
13
22
34
26
5

(a)

Let A be the event that monthly charges are $150 or more. Find Pr(A).

(b)

Let B be the event that monthly charges are less than $150. Find (Pr(B).

7. A survey of 50 students at a technical college regarding the number of extracurricular activities resulted
in the following data
Number of Activities
Frequency

0
8

1
20

2
12

3
6

4
3

5
1

(a)

Let A be the event that a student participates in at least 1 activity. Find Pr(A).

(b)

Let B be the event that a student participates in 3 or more activities. Find Pr(B).

(c)

What is the probability that a student participates in exactly 2 activities?

22 | P a g e

8. A garage sells from 0 to 4 car batteries each week. Based on past experience, the following probabilities
are assigned to sales of 0, 1, 2, 3 or 4 batteries.

(a)

Pr(0) = 0.19
Pr(1) = 0.24
Pr(2) = 0.35
Pr(3) = 0.14
Pr(4) = 0.08
1.00
Are these valid probability assignments? Why or why not?

(b)

Let A be the event that two or fewer are sold in one week. Find Pr(A).

(c)

Let B be the event that four or more are sold in one week. Find Pr(B).

(d)

Are A and B mutually exclusive? Find Pr(A and B) and Pr(A or B).

9. A purchasing agent has placed two rush orders for a particular raw material from two different suppliers,
A and B. If neither order has arrived in 4 days the production process must be shut down until at least
one of the orders arrives. The probability that supplier A can deliver the material in 4 days is 0.55. The
probability that supplier B can deliver the material in 4 days is 0.35. Draw a tree diagram to help you
answer the following questions.
(a)

What is the probability that both suppliers deliver the material within 4 days? Since two
separate suppliers are involved we are willing to assume independence.

(b)

What is the probability that the production process is shut down in 4 days because of a
shortage in raw material (that is, both orders are late)?

(c)

What is the probability that at least one supplier delivers the material in 4 days?

10. To install a pool fence, a company responds to all sales inquiries by first sending a brochure. It then
attends the property to measure and quote, and finally installs the fence. It classifies the outcome of all
sales inquiries into three mutually exclusive categories depending on how far the customer progresses in
the inquiry:- request for brochure; measure and quote given; and pool fence purchased. From its records
for the last 6 months it has extracted the result of all inquiries and the suburb of the customer. The
results are summarised in the table below.

Request
for
brochure
Measure
and
quote
Fence purchased
Total

Eastern suburbs
100

Western suburbs
50

Other
50

Total
200

50

10

20

80

50
200

0
60

20
90

70
350

(a)

What is the probability that a sales contact results in a pool fence sale?

(b)

What is the probability that a sales inquiry from a person in the Eastern suburbs results in a
pool fence sale?

(c)

What is the probability that a measure and quote inquiry comes from the Eastern or Western
suburbs?

(d)

Are the events 'Request for brochure' and 'client is from the Eastern suburbs' independent?
Give a reason for your answer.
23 | P a g e

Introduction to Probability

Exercise Set 3B Discrete Probability Distributions (Solutions can be found on page 30)
1. The heights of the Hawthorn Basketball Club team playing next week (including injury replacements)
are:
Height (cm)
No. of Players

170
1

175
2

180
2

185
2

190
1

195
4

200
1

205
2

210
1

(a)

What is the probability of selecting a player at random who is 195cm tall?

(b)

What is the probability of selecting a player at random who is 210cm tall?

(c)

Find the probability distribution of this random variable. Determine the expected height of a
Hawthorn Basketball Club team member using Microsoft Excel.

2. The demand for a product of Gippsland Industries varies greatly from month to month. Based on the
past 2 years of data, the following probability distribution shows the companys monthly demand.
300
0.20

Unit demand
Probability

400
0.30

500
0.35

600
0.15

(a)

If the company places monthly orders based on the expected value of the monthly demand,
what should Gippslands monthly order quantity be for this product?

(b)

Assume that each unit demanded generates $70 in revenue and that each unit ordered costs
$50. How much will the company gain or lose in a month if it places an order based on your
answer to part (a) and where the actual demand for the item is 300 units?

(c)

What is the standard deviation for the number of units demanded?

3. An investor has a certain amount of money available to invest now. Three alternative portfolio
selections are available. The estimated profits of each portfolio under three economic conditions are
shown in the table below.

Event
Economy declines
No change
Economy expands

A
$500
$1,000
$2,000

Portfolio Selection
B
-$2,000
$2,000
$5,000

(a)

Which portfolio has the highest expected return?

(b)

Which portfolio has the lowest risk?

(c)

Which investment would you recommend?

C
-$7,000
-$1,000
$20,000

Probability
0.3
0.5
0.2

24 | P a g e

4. Consider the state of the economy. There are three possible changes in the economy between this year
and next. For each type of change the probability and likely return are given in the following table.
State of Economy
Recession
Stable
Boom

Probability of State
p(x)
0.25
0.5
0.25

Return if state occurs


(x)
-0.05
0.15
0.35

Find the expected return and the standard deviation.


5. A state lottery is conducted in which 10,000 tickets are sold for $1 each. Six winning tickets are
randomly selected: one grand prize winner of $5,000, one second prize winner of $2,000, one third prize
winner of $1,000 and three other winners of $500 each.
(a)

Construct a probability distribution, with the random variable (X) equivalent to the net
return.

(b)

Compute the expected value of playing this game.

(c)

Would you play this game? Why or why not?

6. The demand for a dried fish product which is a specialty of Tran Trung Industries varies greatly from
month to month. Based on the past three years of data, the following probability distribution shows the
companys monthly demand.
Demand (kgs)
Probability

200
0.15

300
0.30

400
0.40

500
0.15

(a)

If the company prepares monthly production on the basis of the expected value of the
monthly demand, what quantity of dried fish should Tran Trung Industries prepare?

(b)

Assume that each kilogram of fish demanded generates $25 in revenue and that each
kilogram of dried fish produced costs $17. How much will the company gain or lose if its
monthly production is based on your answer from (a) and the actual demand for the product
is 300 kgs?

7. The J.R. Ryland Computer Company is considering a plant expansion that will enable the company to
begin production of a new computer product. The companys managing director must determine
whether to make the expansion a medium or large-scale project. An uncertainty involves the demand for
the new product, which for planning purposes may be low demand, medium demand, or high demand.
The probability estimates for the demands are .20, .50 and .30, respectively. Letting X and Y indicate
the annual profit in $1,000s, the firms planners have developed profit forecasts for the medium and
large-scale expansion projects.

Expansion Profits

Demand

Low
Medium
High

Medium-scale
x
Pr(x)
50
0.20
150
0.50
200
0.30

Large-scale
y
Pr(y)
0
0.20
100
0.50
300
0.30

25 | P a g e

Introduction to Probability

(a)

Compute the expected value for the profit associated with the two expansion alternatives.
Which decision is preferred for the objective of maximising the expected profit?

(b)

Compute the standard deviation for the profit associated with the two expansion alternatives.
Which decision is preferred for the objective of minimising the risk or uncertainty?

ANSWERS TO EXERCISES
Exercises 3A Answers
1. (i)

Pr(X 2) = Pr(0) + Pr(1) + Pr(2) = 0.1 + 0.2 + 0.2 = 0.5

(ii)

Pr(X 3) = Pr(X 2) + Pr(3) = 0.5 + 0.3 = 0.8 OR Pr(X 3) = 1 Pr( 4) = 1 0.2 = 0.8

(iii)

Pr(X 1) = 1- Pr(0) = 1 0.1 = 0.9


OR Pr(X 1) = Pr(1) + Pr(2) + Pr(3) + Pr( 4) = 0.2 + 0.2 + 0.3 + 0.2 = 0.9

(iv)

Pr(X 2) = Pr(2) + Pr(3) + Pr( 4) = 0.2 + 0. 3 + 0.2 = 0.7

(v)

Pr(X 4 | X 1) =

Pr( X 4) 0.2
= 0.22
=
Pr( X 1) 0.9

2. (a)
Number of outcomes = No. of nights stay No. of accommodation types = 2 3 = 6
possible outcomes
(b)

26 | P a g e

3. (a)

Number of outcomes = No. of A changes No. of B changes = 3 3 = 9 possible outcomes

(b)

(c)

5 = (,) (,U) (,) (U,) (,)

(d)

1 = (,)

4. (a)

Pr(X = 0) = 0.05

(b)

Pr(X 4) = Pr(4) + Pr(5) = 0.1 + 0.1 = 0.2

(c)

Pr(X 2) = Pr(0) + Pr(1) + Pr(2) = 0.05 + 0.15 + 0.35 = 0.55

5. (a)
Yes. All the probabilities are between 0 and 1 (0 pr(x) 1)and the sum of the
probabilities is 1 (pr(x) = 1).
(b)

Pr(A) = Pr(0) + Pr(1) + Pr(2) = 0.08 + 0.18 + 0.32 = 0.58

(c)

Pr(B) = Pr(4) = 0.12

6. (a)
(b)

Pr(A) = Pr(X 150) =

26 + 5 31
=
= 0.31
100
100

Pr(B) = Pr(X < 150) = 1 0.31 = 0.69

27 | P a g e

Introduction to Probability

7. (a)

Pr(A) = Pr(X 1) =

20 + 12 + 6 + 3 + 1 42
=
= 0.84
50
50

(b)

Pr(B) = Pr(X 3) =

6 + 3 + 1 10
=
= 0.2
50
50

(c)

Pr(X = 2) =

12
= 0.24
50

8. (a)
Yes. All the probabilities are between 0 and 1 (0 pr(x) 1)and the sum of the
probabilities is 1 (pr(x) = 1).
(b)

Pr(A) = Pr(2) + Pr(1) + Pr(0) = 0.35 + 0.24 + 0.19 = 0.78

(c)

Pr(B) = Pr(4) = 0.08

(d)

Yes, there is no overlap in the number of batteries sold.


Pr(A and B) = 0
Pr(A or B) = Pr(A) + Pr(B) = 0.78 + 0.08 = 0.86

9.

(a)

Pr(Both on time) = Pr(OT, OT) = 0.1925

(b)

Pr(Both late) = Pr(L, L) = 0.2925

(c)

Pr(At least one on time) = Pr(OT, OT) + Pr(OT, L) + Pr(L, OT) = 0.1925 + 0.3575 + 0.1575
= 0.7075
OR Pr(At least one on time ) = 1 Pr(both late) = 1 0.2925 = 0.7075

28 | P a g e

10.

(a)

Pr(contact leads to sale) = 70/350 = 0.2

(b)

Pr(Eastern suburbs inquiry results in a sale) = 50/200 = 0.25

(c)

Pr(Measure and quote from Eastern to Western suburbs) = 60/80 = 0.75

(d)

If two events are independent, then Pr(A and B) = Pr(A) Pr(B)


Let Pr(A) = Pr(Request for a brochure) = 200/350 = 0.571
Let Pr(B) = Pr(Client from Eastern suburbs) = 200/350 = 0.571
Thus, Pr(A) Pr(B) = 0.571 0.571 = 0.326
Now, Pr(A and B) = 100/350 = 0.286
Since Pr(A and B) Pr(A) Pr(B)Pr(A) i.e. 0.286 0.326 the events are not
independent.

29 | P a g e

Introduction to Probability

EXERCISE 3B Answers

Pr(player is 195 cm tall) = 4/16 = 0.25

Pr(player is 210 cm tall) = 1/16 = 0.0625

Probability distribution.
Height
170
175
180
185
190
195
200
205
210
(cm)
Probability 0.0625 0.125 0.125 0.125 0.0625 0.25 0.0625 0.125 0.0625
Enter the height and the corresponding probabilities in two columns. To calculate the expected
value we need to first multiply the height of each in column 1 by its probability in column 2 of
the spreadsheet. Therefore, go to cell C2 and type = a2*b2 and press ENTER

Thus the expected height of a Hawthorn basketball club member is 190 centimetres.

a
b

Expected value=445
Revenue = 300 @ $70
= $21,000
Cost = 445 @ $50 = $22,250
Profit/Loss
= ($1,250)

Standard deviation=97.34
30 | P a g e

Highest expected return are Portfolios A and B, with an expected return of $1,400.

Lowest risk (as measured by the standard deviation) is Portfolio A with $522.

It depends on what one is looking for in an investment. Portfolio B has a good return and
medium risk, while Portfolio A has minimum risk but a lower return. Portfolio C offers a
good return with very high risk.

Thus the expected return is 15% and the standard deviation is 14% (Note the coefficient of
variation = 0.1414/0.15 = 94.27%, thus there is a great deal of uncertainty associated with
the returns).

Net return
$ (x)
Pr(x)

4999

1999

999

499

-1

0.0001

0.0001

0.0001

0.0003

0.9994

31 | P a g e

Introduction to Probability

Expected loss is 5 cents. A person is unlikely to win, but if one does, there are good returns.
A conservative gambler may be comfortable buying a ticket for such a small outlay (but
would be more cautious if the ticket cost say $100).

Expected value=$355
b

Revenue = 300 @ $25


= $7,500
Cost = 355 @ $17 = $6,035
Profit/Loss
= $1,465

Higher expected return is for the medium scale expansion, with an expected return of
$145,000.

The standard deviations are $52,200 and $111,360 respectively. Lowest risk (as measured
by the standard deviation) is the medium scale expansion. Most of the times we should
calculate Coefficient of Variation but in this case expected returns for each investment are
close hence we are looking at the standard deviations.

32 | P a g e