Continuous Probability Distributions: Business Statistics: Communicating With Numbers, 4e

6
Continuous Probability
Distributions
Business Statistics:
Communicating with Numbers, 4e
By Sanjiv Jaggia and Alison Kelly
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
3/9/2021 consent of McGraw Hill.
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Chapter 6 Learning Objectives (LOs)
LO 6.1 Describe a continuous random variable.
LO 6.2 Calculate and interpret probabilities for a random
variable that follows the continuous uniform
distribution.
LO 6.3 Explain the characteristics of the normal distribution.
variable that follows the normal distribution.
variable that follows the exponential distribution.
variable that follows the lognormal distribution.
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STATISTICS: COMMUNICATING
© 2022 McGraw WITH NUMBERS,
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No reproduction Jaggia, Kellywithout the prior written
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consent of McGraw Hill.
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 6-2
Introductory Case: Demand for Salmon
• Akiko Hamaguchi, manager of a small sushi restaurant Little
Ginza, in Phoenix, Arizona, has to estimate the daily amount
of salmon needed.
– Akiko has estimated the daily consumption of salmon to be normally
distributed with a mean of 12 pounds and a standard deviation of 3.2
pounds.
– Buying 20 pounds of salmon every day has resulted in too much
wastage.
• Based on this information, Akiko would like to:
1. Calculate the probability that the demand for salmon at Little Ginza is
above 20 pounds.
2. Calculate the probability that the demand for salmon at Little Ginza is
below 15 pounds.
3. Determine the amount of salmon that should be bought daily so that
the restaurant meets demand on 90% of the days.
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6.1 Continuous Random Variables and the
Uniform Distribution (1)
• A continuous random variable is characterized by
uncountable values in an interval.
– Cannot describe the values with a list
– Example: return on a mutual fund, time to complete a task
• Unlike a discrete random variable, the probability that a
continuous random variable assumes a particular value is
zero.
– 𝑃 𝑋 = 𝑥 = 0 for any value
– Cannot assign a nonzero probability to each of the uncountable
values and have the probabilities sum to one
• Calculate the probability within some specific interval.
– 𝑃 𝑎≤𝑋≤𝑏 =𝑃 𝑎<𝑋<𝑏 =𝑃 𝑎<𝑋≤𝑏 =𝑃 𝑎≤𝑋<𝑏
– 𝑃 𝑋 = 𝑎 = 0 and 𝑃 𝑋 = 𝑏 = 0
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• The counter part to the probability mass function is the
probability density function, 𝑓(𝑥).
– The graph of 𝑓 𝑥 approximates the relative frequency polygon for the
population
– 𝑓 𝑥 ≥ 0 for all possible value of X
– The area under 𝑓 𝑥 over all values of X must equal one
• The probability the variable assumes a value with an interval,
𝑃(𝑎 ≤ 𝑋 ≤ 𝑏) is defined as the area under 𝑓 𝑥 between points 𝑎
and 𝑏.
• The cumulative distribution function is denoted 𝐹 𝑥 .
– 𝐹 𝑥 =𝑃 𝑋≤𝑥
– Area under the probability density function up to the value x
– 𝑃 𝑎 ≤ 𝑋 ≤ 𝑏 = 𝐹 𝑏 − 𝐹(𝑎)
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• One of the simplest continuous probability distributions is
called the continuous uniform distribution.
• This distribution is appropriate when the underlying random
variable has an equally likely chance of assuming a value
within a specified range [a,b].
1
for 𝑎 ≤ 𝑥 ≤ 𝑏
• 𝑓 𝑥 = ൝𝑏−𝑎
0 for 𝑥 < 𝑎 or 𝑥 > 𝑏
𝑎+𝑏
• 𝐸 𝑋 =𝜇= 2
• 𝑆𝐷 𝑋 = 𝜎 = 𝑏 − 𝑎 2 Τ12
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• The probability density function does not directly represent
probability.
– The area under the curve represents probability
– This is the area of a rectangle: base times height
1
– Length of an interval ∗ 𝑏−𝑎
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• Example: Sales for a particular cosmetic line
follow a continuous uniform distribution with
a lower limit of $2,500 and an upper limit of
$5,000.
• What are the mean and standard deviation?
2500+5000
–𝜇= = $3,750
2
–𝜎= 5000 − 2500 2 Τ12 = $721.69
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• Example, continued.
• What is the probability the sales exceed $4,000?
1
𝑃 𝑋 > 4000 = 1000 × = 0.40
5000 − 2500
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• What is the probability the sales are between $3,200 and
$3,800?
1
𝑃 3200 ≤ 𝑋 ≤ 3800 = 600 × = 0.24
5000 − 2500
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6.2 The Normal Distribution (1)
• The normal probability distribution or normal distribution
is the familiar bell-shaped distribution.
– Also called Gaussian distribution
– Most extensively used distribution
– Closely approximates the probability distribution for a wide
range of random variables
• Analyze the underlying data to determine if the normal
distribution is appropriate.
– Histograms, boxplots
– Here assume the random variable is normally distributed
• The normal distribution is the cornerstone of statistical
inference.
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• Characteristics of the normal distribution:
– Bell-shaped and symmetric around its mean;
mean/median/mode are the same
– Described by two parameters: the mean and the variance
– Asymptotic: tails get closer and closer to the horizontal axis
but never touch it
• A graph depicting the normal probability density
function is often referred to as the normal curve or bell
curve.
• Generally use the cumulative distribution function to
compute probabilities: the area under the normal curve
up to the value .
• Use tables or software to find probabilities.
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• Example: ages of employees in Industries A, B and C
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• Example: ages of employees in Industries A, B and C
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• The standard normal distribution is a special case of
the normal distribution, denoted by Z.
– The mean is
– The standard deviation is
– Lowercase z to denote a value Z may assume
• The value z is the z-score from Chapter 3.
– The number of standard deviations a given value is away from
the mean
– Converting values into z-scores is called standardizing the
data
• Text include a standard normal table or z table
– Provides areas under the z curve:
– Left-hand page: z values less than or equal to 0
– Right-hand page: z values greater than or equal to 0
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• Standard normal probability density function
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• Example: 𝑃 𝑍 ≤ 1.52 = 0.9357
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• Example: 𝑃 𝑍 ≤ −1.96 = 0.0250
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• Example
• 𝑃 0 ≤ 𝑍 ≤ 1.96 = 𝑃 𝑍 ≤ 1.96 − 𝑃 𝑍 ≤ 0 = 0.9750 − 0.50 = 0.4750
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• Example
• 𝑃 1.52 ≤ 𝑍 ≤ 1.96 = 𝑃 𝑍 ≤ 1.96 − 𝑃 𝑍 ≤ 1.52 = 0.9750 − 0.9357 = 0.0393
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• Example
• 𝑃 −1.52 ≤ 𝑍 ≤ 1.96 = 𝑃 𝑍 ≤ 1.96 − 𝑃 𝑍 ≤ −1.52 = 0.9750 − 0.0643 = 0.9107
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• Example: find z that satisfies the following
• 𝑃 𝑍 ≤ 𝑧 = 0.6808; 𝑧 = 0.47
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• 𝑃 𝑍 > 𝑧 = 0.0212 → 1 − 𝑃 𝑍 ≤ 𝑧 = 0.9788 → 𝑧 = 2.03
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• 𝑃 −𝑧 ≤ 𝑍 ≤ 𝑧 = 0.95 → 𝑃 𝑍 < −𝑧 = 0.025 and 𝑃 𝑍 > 𝑧 = 0.025
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• We can transform any normally distributed random variable into the
standard normal random variable.
• Let 𝑋 have a normal distribution with mean 𝜇 and standard deviation 𝜎.
𝑋−𝜇
– 𝑋 can be transformed into 𝑍 using Z = 𝜎
𝑥−𝜇
– Any 𝑥 can be transformed into 𝑧 using z = 𝜎
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• Example: Scores on a management aptitude

exam are normally distributed with a mean of 72
and a standard deviation of 8.
a. What is the probability that a randomly selected
manager will score above 60?
b. What is the probability that a randomly selected
manager will score between 68 and 84?
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• Let represent scores with and
a.
b.
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• Given probabilities, we can use the inverse
transformation 𝑋 = 𝜇 + 𝑍𝜎 to compute values of 𝑋.
• Example: Scores on a management aptitude exam
are normally distributed with a mean of 72 and a
standard deviation of 8.
a. What is the lowest score that will place a manager in the
top 10% (90th percentile) of the distribution?
b. What is the highest score that will place a manager in the
bottom 25% (25th percentile) of the distribution?
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• Let represent scores with and .
a. The 90th percentile is a numerical

value such that . Look up 0.90 in the
z table to get . The value of .
b. The 25th percentile is a numerical

value such that . Look up 0.25 in the
z table to get . The value of .
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• It is tedious to compute binomial probabilities for
larger values of n.
• With large values of n, the binomial distributed can
be approximated by the normal distribution.
– 𝜇 = 𝑛𝑝
– 𝜎 = 𝑛𝑝𝑞
• It is easy to compute binomial probabilities with
Excel and R.
• The normal distribution approximation is extremely
important when making inference for the population
proportion, p.
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• Excel and R Functionality
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6.3 Other Continuous Probability
Distributions (1)
• The exponential distribution is a useful
nonsymmetric continuous probability
distribution.
• Related to Poisson: number of occurrences
over a given interval of time or space.
• Now we are interested in the time/space
between the occurrences or arrivals.
• The exponential random variable is
nonnegative.
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Distributions (2)
• The probability distribution is defined in terms of its
rate parameter 𝜆.
– Same 𝜆 as with Poisson
– Average number of arrivals per unit of time/space
• For an exponential random variable, the mean is
the inverse of 𝜆: the average time between arrivals.
• Used to model lifetimes or failure times.
• The exponential distribution is “memoryless”.
– Constant failure rate
– A new failure (time) is independent of the previous
failures (times)
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Distributions (3)
• The probability density function is given by
– is the rate parameter

– , the base of the natural logarithm
• The mean and standard deviation are equal
• For , the cumulative distribution function is
• =
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Distributions (4)
• The probability density function for various rates
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Distributions (5)
• Example: the time between e-mail messages
during work hours is exponentially distributed
with a mean of 25 minutes.
a. Calculate the rate parameter 𝜆.
b. What is the probability that you do not get
an e-mail for more than one hour?
c. What is the probability that you get an e-
mail within 10 minutes?
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Distributions (6)
1 1
a. 𝜆 = 𝐸(𝑋)
= 25
= 0.04 emails per minute
b. 𝑃 𝑋 > 60 = 𝑒 −0.04(60) = 0.0907
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Distributions (7)
• Example continued
c. 𝑃 𝑋 ≤ 10 = 1 − 𝑒 −0.04 10 = 1 − 0.6703 = 0.3297
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Distributions (8)
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Distributions (9)
• The lognormal distribution is defined with a reference to
the normal distribution.
• It is positively skewed and relevant for a positive
random variable.
• Example: asset prices
• The failure rate may increase or decrease over time.
• Flexibility has led to broad applications.
• Example: new equipment
– In the break-in period, failure rates are high
– Survives the break-in period, subsequent failure is reduced
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Distributions (10)
• Let X be a normally distributed random variable
with mean and standard deviation .
• The random variable follows the lognormal
distribution with a probability density function as
– is the base of the natural logarithm

• Probabilities are easily evaluated by reference to
the normal distribution.
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Distributions (11)
• Shapes of the lognormal density function for 𝜇 = 0 and
various values of 𝜎
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Distributions (12)
• Let X be a normal random variable with mean and
standard deviation .
• is the lognormal variable.
• The mean and standard deviation of Y:
• The mean and standard deviation of X:
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Distributions (13)
• Example: let X be a normal random variable with mean and
• Example: let X be a normal random variable with mean and

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Distributions (14)
• Example: let where X is normally distributed with mean and
• Find
• Find the 90th percentile of Y.

– Find y such that
– Find the cumulative probability 0.90 on the z table,
– Compute
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Distributions (15)
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6

By Sanjiv Jaggia and Alison Kelly

–𝜎= 5000 − 2500 2 Τ12 = $721.69

• Example: Scores on a management aptitude

a. The 90th percentile is a numerical

b. The 25th percentile is a numerical

– is the rate parameter

• For , the cumulative distribution function is

– is the base of the natural logarithm

• The mean and standard deviation of X:

• Example: let X be a normal random variable with mean and

• Find the 90th percentile of Y.

– Find the cumulative probability 0.90 on the z table,

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