Using Probability and Probability

Distributions

1
 Important Terms
◼ Random Variable - Represents a possible numerical value from a
random event and it can vary from trial to trial
◼ Probability – the chance that an uncertain particular event will occur.
Probability value will be in the range of 0 to 1 (0 means the event will
not occur, 1 means the event will occur, anything between 0 and 1
reflects the uncertainty of the event occurring)
◼ Experiment – a process that produces a single outcomes for uncertain
events whose result can’t be predicted with certainty.
◼ Elementary Event – the most basic outcome possible from a simple
experiment
◼ Sample Space – the collection of all possible experimental outcomes
that can result from a selection, decision, or experiment
◼ Event – A collection of possible experimental outcomes
Example:

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 Using Tree diagram
◼ You can use a tree diagram to define the sample space
 Example
A partner of Able Accounting, a large regional accounting firm,
is analyzing the performance of her many audit teams. She is
particularly interested in whether the audits are finished by the
projected completion date (audit done early, audit done on
time, audit done late). She is interested in determining the
sample space (possible outcomes) for two randomly selected
audits.
◼ Determine the event of at least one of the two audits is
completed late.
◼ Determine the event that neither audit is late.
◼ Determine the event that both audits are finished at the same
time.
 Mutually Exclusive Events
Two events are mutually exclusive if two or more events
cannot occur simultaneously.

It is used to describe a situation where the occurrence of one

event is not influenced or caused by another event.

For example, it is impossible to roll a five and a three on a

single die at the same time.
If A occurs, then B cannot occur, A and B have no common elements
 Independent vs. Dependent Events

◼ Independent: Occurrence of one does not influence the

probability of occurrence of the other.
E1 = heads on one flip of fair coin
E2 = heads on second flip of same coin
Result of second flip does not depend on the result of the first flip.

◼ Dependent: Occurrence of one affects the probability of the

other event occurring
E1 = rain forecasted on the news
E2 = take umbrella to work
Probability of the second event is affected by the occurrence of the first event.
 Methods of Assigning Probability

◼
 Example

The managers at Galaxy Furniture plan to hold a special

promotion over Labor Day Weekend. Each customer making a
purchase exceeding $100 will qualify to select an envelope
from a large drum.
Inside the envelope there are coupons for percentage
discounts off the purchase total. At the beginning of the
weekend, there were 500 coupons. Four hundred of these were
for 10% discount, 50 where for 20% discount, 45 where for
30%, and 5 for 50% discount. Customers were interested in
determining the probability of getting a particular discount
amount.
 Methods of Assigning Probability

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 Example
The sales manager at Hathaway heating & Air Conditioning has recently developed
the customer profile shown in the following table.

The profile based on a random sample of 500 customers.

As a promotion for the company, the sales manager plans to randomly select a
customer once a month and perform a free service on the customer’s system.
◼ What is the probability that the first customer selected is a residential customer?
◼ What is the probability the at he first customer has a Hathaway heating system?
 Rules of Probability

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 Rules of Probability (cont.)
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 Example

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 Complement rule

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 Probability types

◼ Simple (Marginal) probability

◼ Involves only a single random variable, the outcome of which is
uncertain
◼ Joint probability
◼ Involves two or more random variables, in which the outcome of all is
uncertain
◼ Conditional probability (will be discussed soon!)
 Example
Suppose the people who conducted the survey for Edward’s cinema
also asked questions about the respondent’s ages. The company’s
managers consider age important in deciding on location because its
theaters do better in areas with a younger population base.
The following table shows the breakdown of the sample by age group
and by number of times a respondent goes to a movie per month.
Example (cont.)
 Addition Rule for Two Events

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 Addition Rule for Mutually Exclusive Events

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 Conditional Probability

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 Example

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 Conditional probability for Independent Events

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 Multiplication Rules

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 Bayes’ Theorem
As decision makers, you will often encounter situations that require you to
assess probabilities for events of interest. Your assessment may be based
on relative frequency.
However, you may then come across new information that causes you to
revise the probability assessment.
For example, a human resources manager who has interviewed a person
for a sales job might assess a low probability that the person will succeed
in sales. However, after seeing the person’s very high score on the
company’s sales aptitude test, the manager might revise his assessment
upward.
A medical doctor might assign an 80% chance that a patient has a
particular disease. However, after seeing positive results from a lab test,
he might increase his assessment to 95%.
 Bayes’ Theorem (cont.)
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 Example 1
An insurance company issues life insurance policies in three separate categories:
standard, preferred, and ultra-preferred. Of the company’s policyholders, 50% are
standard, 40% are preferred, and 10% are ultra-preferred. Each standard
policyholder has probability 0.010 of dying in the next year, each preferred policy
holder has probability 0.005 of dying in the next year, and each ultra-preferred
policyholder has probability 0.001 of dying in the next year. If a policyholder dies
in the next year, what is the probability that the deceased policyholder was ultra-
preferred?
 Example 2
A company produces machine components which pass through an automatic
testing machine. 5% of the components entering the testing machine are defective.
However, the machine is not entirely reliable. If a component is defective there is
4% probability that it will not be rejected. If a component is not defective there is
7% probability that it will be rejected.
• What fraction of all the components is rejected?
• If the component is rejected, what is the chance that it is not defective?