1

200052 INTRODUCTION TO ECONOMIC METHODS

SUMMARY NOTES - WEEK 5

Required Reading:
Ref. File 6: Introduction and Sections 6.1 to 6.4

6. CONTINUOUS PROBABILITY DISTRIBUTIONS

6.1 Introduction

From now on we shall be mainly concerned with studying

the distributions of continuous random variables. As we
have noted, a continuous random variable can assume any
value in a given interval (of the real number line).

The probability distribution for a continuous random

variable X will have a smooth curve or line as its graphical
representation. The heights of the points on this curve will
be given by a function of ‘x’, denoted f ( x) , which is
variously called the probability density function, the
probability distribution or simply the density function of
the random variable X.

Areas under a density function f ( x) represent

probabilities of X taking on values in the corresponding
intervals.
 2

For example, consider the following continuous

probability distribution:

Area  P (a  X  b)

y y = f(x)

a b X
b
We have P (a  X  b )  P (a  X  b )   f ( x) dx
a

Properties of Density Functions

If f ( x) is a valid density function, it satisfies the following
two properties:

(i) f ( x)  0 for all x


(ii)  f ( x) d x  1

 3

This does not mean the random variable necessarily can

take on any real value. If X can only take on values in the
range a  X  b , then f ( x)  0 for x  a and x  b and the
above integral is still valid.

Note: For a continuous random variable the probability

associated with any particular value of the variable is 0.

The mean and variance of a continuous random variable

are normally determined using calculus.

The main family of continuous distributions we will

encounter is represented by the normal distribution. We
will find that several other important distributions are
derived from it. Firstly, however, we will consider the
simplest continuous probability distribution.

6.2 The Uniform Distribution

“If a random variable X can take on any value in a given

finite interval a  x  b and the probability of the variable
taking a value in a given finite sub-interval is the same as
the probability the variable takes a value in any other
finite sub-interval of the same width, we say the variable X
is uniformly distributed.” We have the following formal
definition.
 4

Definition (Uniform Random Variable)

A continuous random variable X is said to be uniformly
distributed over the finite interval a  X  b if and only if
its density function is given by

 1
 b  a , if a  x  b

f ( x)  
0 , if x  a or x  b


We can calculate probabilities with respect to the random

variable X in the above definition from

dc
P (c  X  d )  for c  a , d  b
ba

This probability simply equals the proportion of the area

under the density function between x  c and x  d .

f(x)

Total Area = 1
1/(b-a)

a c d b X
 5

Theorem (Expected Value and Variance of a Uniform

Random Variable)
Suppose the random variable X is uniformly distributed
over the finite interval a  x  b . The expected value and
variance of X are, respectively

(a  b )
E( X ) 
2
(b  a ) 2
Var ( X ) 
12

Example 6.1:
The amount of petrol sold daily by a service station (say X)
is known to be uniformly distributed between 4,000 and
6,000 litres inclusive. What is the probability of sales on
any one day being between 5,500 and 6,000 litres? (0.25)

a  4,000 b  6,000 c  5,500 d  6,000

d  c 6,000  5,500 500

P(5,500  X  6,000)     0.25
b  a 6,000  4,000 2,000
 6

6.3 The Normal (Gaussian) Distribution

The normal distribution represents a family of “bell-

shaped” distributions that are distinguished according to
their mean and variance.

Definition (Normally Distributed Random Variable)

A random variable X is normally distributed if and only if
it has a density function of the following form:

 1 
1  ( x )2 
f ( x)  e  2 2 
for all real ‘x’
2 2

Where:
  and  2 are parameters of the distribution of X.
They are used to represent E ( X ) and Var ( X ) ,
respectively.
 ‘e’ is the irrational number ‘e’ that serves as the base
for natural logarithms (e  2.7182..)
  is the irrational number representing the ratio of
the circumference of a circle to its diameter
(   3.1415..)

A normal distribution with mean  and variance  2 is

usually denoted N (,  2 ) .

The normal distribution has a positive density for all real

‘x’. Therefore it can strictly speaking never exactly match
the distribution of a variable that only takes on non-
negative values. However, even in such cases it can often
give a very good approximation.
 7

The normal distribution is symmetric about  .

y y = f(x)

For any normal distribution it will be the case that,

approximately:

 68% of its values will fall within one standard

deviation (  ) of  .
 95.5% of its values will fall within two standard
deviations (2  ) of  .
 99.7% of its values will fall within three standard
deviations (3  ) of  .

Thus, as an example, if X is normally distributed,

P (  2  X    2)  0.955 approximately.

Computing areas under a normal density function is

difficult, but we can use a table showing probabilities
associated with the standardised normal random variable
(many calculators and Microsoft Excel are also able to
calculate these probabilities).
 8

The standard normal distribution has a mean of 0 and a

variance (and standard deviation) of 1. A standard
normal variable is often denoted Z . Thus

Z ~ N (0, 1) (Where ‘~’ means ‘distributed as’)

Probabilities relating to X ~ N (,  2 ) can be calculated by

first calculating the standardised Z scores corresponding
to the value(s) of X and then using the standard normal
probability table. This is formalized by the following
theorem.

Theorem 6.2 (The Standardizing Transformation of Non-

Standard Normal Probabilities)
A random variable X is normally distributed with mean 
X 
and variance  2 if and only if Z  is a standard

normal random variable, that is

X 
X ~ N (,  2 ) if and only if Z  ~ N (0,1)


The Z score measures the X variable as standard

deviations from the mean.

Also note that a linear function of a normal variable is also

normally distributed.
 9

(Extract of Appendix 5)
AREAS UNDER THE STANDARD NORMAL DISTRIBUTION
The table below gives areas under the standard
normal distribution between 0 and z.

0 z Z
z 0 1 2 3 4 5 6 7 8 9
0.0 .0000 .0040 .0080 .0120 .0160 .0199 .0239 .0279 .0319 .0359
0.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0714 .0754
0.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026 .1064 .1103 .1141
0.3 .1179 .1217 .1255 .1293 .1331 .1368 .1406 .1443 .1480 .1517
0.4 .1554 .1591 .1628 .1664 .1700 .1736 .1772 .1808 .1844 .1879
0.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123 .2157 .2190 .2224
0.6 .2258 .2291 .2324 .2357 .2389 .2422 .2454 .2486 .2518 .2549
0.7 .2580 .2612 .2642 .2673 .2704 .2734 .2764 .2794 .2823 .2852
0.8 .2881 .2910 .2939 .2967 .2996 .3023 .3051 .3078 .3106 .3133
0.9 .3159 .3186 .3212 .3238 .3264 .3289 .3315 .3340 .3365 .3389
1.0 .3413 .3438 .3461 .3485 .3508 .3531 .3554 .3577 .3599 .3621
1.1 .3643 .3665 .3686 .3708 .3729 .3749 .3770 .3790 .3810 .3830
1.2 .3849 .3869 .3888 .3907 .3925 .3944 .3962 .3980 .3997 .4015
1.3 .4032 .4049 .4066 .4082 .4099 .4115 .4131 .4147 .4162 .4177
1.4 .4192 .4207 .4222 .4236 .4251 .4265 .4279 .4292 .4306 .4319
1.5 .4332 .4345 .4357 .4370 .4382 .4394 .4406 .4418 .4429 .4441
1.6 .4452 .4463 .4474 .4484 .4495 .4505 .4515 .4525 .4535 .4545
1.7 .4554 .4564 .4573 .4582 .4591 .4599 .4608 .4616 .4625 .4633
1.8 .4641 .4649 .4656 .4664 .4671 .4678 .4686 .4693 .4699 .4706
1.9 .4713 .4719 .4726 .4732 .4738 .4744 .4750 .4756 .4761 .4767
.... ..... ..... ..... ..... ..... ..... ..... ..... ..... .....
.... ...... ..... ..... ..... ..... ..... ..... ..... ..... .....
3.8 .4999 .4999 .4999 .4999 .4999 .4999 .4999 .4999 .4999 .4999
3.9 .5000 .5000 .5000 .5000 .5000 .5000 .5000 .5000 .5000 .5000
 10

Example 6.2:
If Z ~ N (0, 1) determine the following probabilities:

 P ( Z  0) (0.5)
 P ( Z  0.5) (0.3085)
 P ( 0.1  Z  0.9) (0.3557)
 P ( Z  1.64) (0.0505)

Often a standard normal distribution table only gives

areas between Z  0 and Z  z  0 , but the symmetry of
the distribution allows us to work out any probability.

It is always a good idea to actually graph the area that is

required.

(See video for solution)

 11

Example 6.3:
If X ~ N (12, 4) , calculate P ( X  6.26) , P (7  X  13) and
P ( X  15.5) . (0.0021, 0.6853, 0.0401)

(See video for solution)

 12

Example 6.4:
From several years’ records, a fish market manager has
determined that the weight of deep sea bream sold in the
market ( X ) is approximately normally distributed with a
mean of 420 grams and a standard deviation of 80 grams.
Assuming this distribution will remain unchanged in the
future, calculate the expected proportions of deep sea
bream sold over the next year weighing

(a) Between 300 and 400 grams. (0.3345)

(b) Between 300 and 500 grams. (0.7745)

(c) More than 600 grams. (0.0122)

(See video for solution)

 13

6.4 The Normal Approximation to the Binomial

The normal distribution can be used to approximate

binomial probabilities if

np  5 and n(1  p)  5

If these conditions are satisfied the particular binomial

distribution considered will indeed have the normal bell-
shape approximately.

The approximation sets   np and  2  np(1  p) .

A continuity correction is required since we are

approximating probabilities associated with a discrete
(binomial) random variable by probabilities associated
with a continuous (normal) random variable. The
correction is performed as follows:

Let Y ~ N (np, np(1  p)

Approximate:

 P ( X  x) on the binomial by P (x  0.5  Y  x  0.5)

on the normal distribution.
 P ( X  x) on the binomial by P (Y  x  0.5) on the
normal distribution.
 P ( X  x) on the binomial by P (Y  x  0.5) on the
normal distribution.
 14

Rationale for the Continuity Correction:

The continuity correction can be understood easily by

considering the superimposition of a relative frequency
histogram for a binomial distribution on a normal
distribution with the same mean and variance.

 = np x X, Y
x - 0.5 x + 0.5

P(X  x )  area of histogram rectangle with midpoint ‘x’

 P(x  0.5  Y  x  0.5) on normal

 = np x X, Y
x + 0.5

P( X  x)  P(Y  x  0.5) etc.

 15

Example 6.5:
It is known that 60% of cars registered in a given town use
unleaded petrol. A random sample of 200 cars is selected.
Determine the probability that, of the cars in the sample:

 130 use unleaded petrol. (0.021)

 more than 130 use unleaded petrol. (0.0643)
 less than 130 use unleaded petrol. (0.9147)

(See video for solution)

 16

MAIN POINTS

 The graphical representation of a continuous random

variable is the graph of its density function – This is the
counterpart of the probability histogram for a discrete
random variable.

 The probability that a continuous random variable

takes on a value in some range is given by an area under
the density function.

 The uniform distribution has a constant density

function.

 If X is normally distributed with a mean  and

variance  2 , we can write this information as

X ~ N ( ,  2 )

 The standard normal random variable Z is such that

Z ~ N (0, 1)

 Areas under a normal density function can be

calculated with reference to the ‘standard normal
table’, and making use of the symmetry of the
distribution as needed.

 The normal distribution can be used to approximate

binomial probabilities provided np  5 and n(1  p)  5
(with   np and  2  np(1  p) ); the approximation
can be improved by using continuity correction.