CODE: MANSCI
models, algorithms, and statistics are implemented.
SUBJECT: MANAGEMENT SCIENCE
COURSE DESCRIPTION:
Management Science is a problem-solving process
used by interdisciplinary groups/classes to develop
mathematical models to represent simple to complex
functional relationships and provide management
with a basis for decision making and a means of
uncovering new problems for quantitative analysis.
CHAPTER I. INTRODUCTION TO MANAGEMENT
SCIENCE
1. What is Management Science?
II. Historical Development of Management Science
III. Major Characteristics of Management Science
IV. Other Characteristics of Management Science
LEARNING OBJECTIVES
At the end of the lesson, the students would be able
to:
- Discuss the importance and role of management
science to business managers and practitioners.
- Understand that business managers can make
informed decisions when they have access to
scientifically acquired knowledge in a global
economy.
- Appreciate the role of management science in
businesses and in the economy.
I. What is Management Science?
Management science generally refers to
mathematical or quantitative methods for business
decision-making. The term "operations research"
may be used interchangeably with management
science.
Management science is a broad, interdisciplinary
study of decision making and problem solution
within an organization. The interdisciplinary study
has strong ties to economics, engineering.
management, business administration and other
fields.
Various scientific principles such as mathematical
The objective is to increase and better a company's
capital and to take more precise and rational
decisions. Management science helps organizations
reach their goals using scientific principles and
methods.
Definition of Management Science
Management science can be defined as a problem-
solving process used by an interdisciplinary team to
develop models that represent simple and complex
functional relationships and provide management
guidance for decision-making.
II. Historical Development of Management Science
HISTORY
Frederick Winslow Taylor: Hero of Scientific
Management
Frederick Winslow Taylor is known as the Father of
Scientific Management, which also came to be
known as "Taylorism." Taylor believed that it was the
role and responsibility of manufacturing plant
managers to determine the best way for the worker
to do a job, and to provide the proper tools and
training. He also believed in providing incentives for
performance.
Frederick Winslow Taylor is credited with the initial
development of scientific management techniques in
the early 1900s. In addition, several management
science techniques were further developed during
World War II. Some even consider the World War II
period as the beginning of management science.
World War II posed many military, strategic, logistic,
and tactical problems. Operations research teams of
engineers, mathematicians, and statisticians were
developed to use the scientific method to find
solutions for many of these problems
Nonmilitary management science applications
developed rapidly after World War 11. Based on
quantitative methods developed during World War
II, several new applications emerged.
The development of the simplex method by George
Dantzig in 1947 made the application of linear
programming practical C. West Churchman
Russell Ackoff, and Leonard Amott made
management science even more accessible by
publishing the first operations research textbook in
1957.
Computer technology continues to play an integral
role in management science. Practitioners and
researchers are able to use ever-increasing
computing power in conjunction with management
science methods to solve larger and more complex
problems.
In addition, management scientists are constantly
developing new algorithms and improving existing
algorithms; these efforts also enable management
scientists to solve larger and more complex
problems.
III. Major Characteristics of Management Science
The scope of management science is wider than the
main disciplines put together because it
encompasses much more than solving problems and
developing models.
Management science is known to make a much
greater contribution to a broader area that is the
application of management science models for the
purpose of decision making at all levels of
management may it be top, middle or lower
management levels
Primarily there are five characteristics of
management science. These five characteristics are
as follows:
1. Functional relationships examination from an
overview of systems
It is a well-known fact that the activity of one
department will have some of the other effects on
the activity of another department. This is why it is
necessary to identify all the interactions which are
important and find out their impact on your
organization as a whole.
In the initial phases, the functional relationship of
management science project deliberately expanded
in order to have significant interaction between their
parts and also between their related components
and it is ensured that all of them are combined in a
single statement of the problem.
The entire area which is under the control of the
manager is examined by systems overview. These are
the process which provides the basis for starting
inquiries into the problems which are affecting the
performance at multiple levels.
2. Interdisciplinary approach
The primary principle of management science is that
it looks at a problem from multiple angles and
approaches it from multiple directions. With this
simple principle, it is able to solve multiple problems.
For example, a chemical scientist might solve a
problem with the help of different theories while an
engineer might look at the manufacturing process, or
a mathematician might approach the problem with
different mathematical relationships between
consumer demand and manufacturing department
A chartered accountant may see the problem in
inventory management relationship between cost
component and the balance sheet of the
organization by considering different costs such as
the cost of overheads, expenses, direct labor costs,
etc.
This is why it is emphasized that management is an
interdisciplinary approach because of the individual
aspects that a problem can have are understood and
solved by different experts in different fields like
biological, accounting, economics, mathematics.
engineering, statistical. psychological, etc.
3. Understand and uncover different problems for
studies:
This is the third characteristic of management
science which says that because there are multiple
disciplines involved in management science it may be
possible that while solving one problem on your
problem may be surfaced.
Because many problems are interrelated with each
other all of them must be approached with different
perspectives and the first thing is to realize that a
problem exists. However, it should be noted that all
the interrelated problems cannot be solved in one
way and different ways should be used.
This is to ensure that maximum benefits are
obtained
4. Using the modeling process approach for solving
problems
Management science makes the use of a systematic
approach in order to solve a problem. It also uses a
modeling process approach which is a type of
mathematical model in order to solve a problem.
5. Application of science to decision making
As stated earlier, management science uses science
and combines it with the decision making process.
There are many decisions taken the day in and day
out in a business. These decisions are complex and
based on different departments as well as different
models and situations in business.
Most of the times because of the complexity of the
problem, the company requires the use of
management science to solve the problem. This
decision-making process are important to the
company and should be applied carefully because
they affect the organization at multiple levels.
IV. Other Characteristics of Management Science
Other Characteristics of Management Science are:
- A primary focus on managerial decision-making.
The application of science to decision-making.
- A dependence on electronic computers.
- An appraisal resting on criteria of economic
effectiveness. Effectiveness may be defined as the
extent to which goals are achieved. Effectiveness is
evaluated by measures of effectiveness (also known
as measures of performance)
CHAPTER II. Lecture in Quantitative Techniques,
Concepts and Applications of Probabilities in
Decision Making
I. Types of Probabilities
II. Mutually Exclusive and Not-Mutually Exclusive
Events
III. Statistically Independent and Statistically
Dependent Events
IV. Random Variables and Probability distribution
V. Binomial and Normal Distributions
LEARNING OBJECTIVES
At the end of the lesson, the students would be able
to:
- Understand the concepts and applications of
probabilities used in the various Decision Models in
Management Science
- Appreciate the role of probabilities in decision
making.
1. Types of Probabilities
Life would be simpler if we knew without doubt what
was going to happen in the future The outcome of
any decision would depend only on how logical or
rational the decision was. If you lost money in the
stock market, it would be because you failed to
consider all of the information or to make a logical
decision. If you got caught in the rain, it would be
because you forgot your umbrella. You could always
avoid building a plant that was too large, investing in
a company that would lose money, running out of
suppliers, or losing crops because of bad weather.
There would be no such thing as raky investment Life
would be simpler, but boring
Today, the idea of risk or probability is a part of our
lives. A probability is a numerical statement about
the likelihood that an event will occur. In this
discussion, we will examine the basic concepts,
terms and relationships of probability and probability
distributions that are useful in solving many
quantitative analysis problems. The study of
management science would be quite difficult
without the probability theory
Probability is the chance that something will happen.
Probabilities are expressed as fractions or as
decimals between 0 and 1. When you assign a
probability of 0, you mean that something can never
happen; when you assign a probability of 1, you
mean that something will always happen
EVENTS AND EXPERIMENTS
In probability theory, an event is one or more of the
possible outcomes of doing something. If we toss a
coin, getting a tall would be an event, getting a head
would still be another event. The activity that
produces an event is referred to in probability theory
on an experiment. Using this language, we could as:
In a coin toss experiment, what in the probability of
the event heads? In this case, we would answer % or
5
SAMPLE SPACE
The set of possible outcomes of an experiment is
called the sample space for the experiment. In a toss-
coin experiment, for example, the sample space is
S-head, tail
If we assume the coin does not land on its edge. If
we were drawing cards from a deck, the sample
space would have 52 members, one for each card in
a standard deck (ace of hearts, king of hearts and so
on)
Fundamental Concept
A probability is a numerical statement about the
likelihood that an event will occur.
There are two basic rules regarding the mathematics
of probability
1. The probability, P, of any event or state of nature
occurring is greater than or equal to O and less than
or equal to 1.
That is,
0 = P(event) ≤ 1
A probability of 0 indicates that an event is never
expected to occur. A probability of 1 means that an
event is always expected to occur
2. The sum of the simple probabilities for all possible
outcomes of an activity must equal
EXAMPLE 1: TWO RULES OF PROBABILITY
Demand for white latex paint at Diversely Paint and
Supply has always been 0, 1, 2, 3, or 4 gallons per
day. (There are no other possible outcomes and
when one occurs, no other can.) Over the past 200
working days, the owner notes the following
frequencies of demand
Quantity demanded (Gallons) Number of Days
0 40
1 80
2 50
3 20
4 10
Total 200
If this past distribution is a good indicator of future
sales, we can find the probability of each possible
outcome occurring in the future by converting the
data into percentages of the total
Quantity demanded Probability
0 40/200 0.2
1 80/200 0.4
2 50/200 0.25
3 20/200 0.1
4 10/200 0.05
Total 1
Thus, the probability that sales are 2 gallons of paint
on any given day is P (2galons)-0.25-25%
The probability of any level of sales must be greater
than or equal to 0 and less than or equal to 1.
Since 0, 1, 2, 3, and 4 gallons exhaust all possible
events or outcomes, the sum of their probability
values must equal 1
Types of Probability
There are two different ways to determine
probability: the OBJECTIVE APPROACH and the
SUBJECTIVE APPROACH
Objective Probability
-Consider a referee's flipping a coin before a football
game to determine which team will kick off and
which team will receive.
-Before the referee tosses the coin, both team
captains know that they have a 50 (or 50%) %)
chance (or probability) of winning the toss.
-None of the onlookers in the stands or anywhere
else would argue that the probability of a head or a
tall was not 50
- In this example, the probability of 50 that either a
head or a tall will occur when a coin is tossed is
called an objective probability.
-More specifically, it is referred to as a classical or a
priori (prior to the occurrence), probability, one of
the two types of objective probabilities.
Objective probabilities that can be stated prior to the
occurrence of an event are classical, or a prori,
probabilities
A classical, or a priori, probability can be defined as
follows:
- Given a set of outcomes for an activity (such as a
head or a tail when a coin is tossed), the probability
of a specific (desired) outcome (such as a head) is
the ratio of the number of specific outcomes to the
total number of outcomes.
- For example, in our coin- tossing example, the
probability of a head is the ratio of the number of
specific outcomes (a head) to the total number of
outcomes (a head and a tail), or 1/2.
These examples are referred to as a prion
probabilities because we can state the probabilities
prior to the actual occurrence of the activity (.e..
ahead of time).
This is because we know (or assume we know) the
number of specific outcomes and total outcomes
prior to the occurrence of the activity.
- For example, we know that a deck of cards consists
of 4 aces and 52 total cards before we draw a card
from the deck and that a coin contains one head and
one tail before we loss it. These probabilities are also
known as classical probabilities because some of the
earliest references in history to probabilities were
related to games of chance, to which (as the
preceding examples show) these probabilities readly
apply.
Relative Frequency Probability
This type of objective probability indicates the
relative frequency with which a specific outcome has
been observed to occur in the long run. It is based on
the observation of past occurrences.
- For example, suppose that over the past 4 years.
3,000 business students have taken the introductory
management science course at State University, and
300 of them have made an A in the course.
- The relative frequency probability of making an A in
management science would be 300/3,000 or 10.
- Whereas in the case of a classical probability we
indicate a probability before an activity (such as
tossing a coin) takes place, in the case of a relative
frequency we determine the probability after
observing, for example, what 3.000 students have
done in the past.
Objective probabilities that are stated after the
outcomes of an event have been observed are
relative frequency probabilities
The relative frequency definition of probability is
more general and widely accepted than the classical
definition.
Actually, the relative frequency definition can
encompass the classical case.
- For example, if we flip a coin many times, in the
long run the relative frequency of a head's occurring
will be 50. If, however, you tossed a coin 10 times, it
is conceivable that you would get 10 consecutive
heads.
- Thus, the relative frequency (probability) of a head
would be 1.0.
This lustrates one of the key characteristics of a
relative frequency probability.
- The relative frequency probability becomes more
accurate as the total number of observations of the
activity increases. If a coin were tossed about 350
times, the relative frequency would approach 1/2
(assuming a fair coin).
Relative frequency is the more widely used definition
of objective probability.
Subjective Probability
When relative frequencies are not available, a
probability is often determined anyway.
- In these cases, a person must rely on personal
belief, experience, and knowledge of the situation to
develop a probability estimate.
- A probability estimate that is not based on prior or
past evidence is a subjective probability.
- For example, when a meteorologist forecasts a
"60% chance of rain tomorrow," the .60 probability is
usually based on the meteorologist's experience and
expert analysis of the weather conditions.
- In other words, the meteorologist is not saying that
these exact weather conditions have occurred 1,000
times in the past and on 600 occasions it has rained,
thus there is a 60% probability of rain.
- Likewise, when a sportswriter says that a football
team has an 80% chance of winning, it is usually not
because the team has won 8 of its 10 previous
games.
- The prediction is judgmental, based on the
sportswriter's knowledge of the teams involved, the
playing conditions, and so forth. If the sportswriter
had based the probability estimate solely on the
team's relative frequency of winning, then it would
have been an objective probability. However, once
the relative frequency probability becomes colored
by personal belief, it is subjective.
Subjective probability is an estimate based on
personal belief, experience, or knowledge of a
situation.
II. Mutually Exclusive and Not-Mutually Exclusive
Events
MUTUALLY EXCLUSIVE EVENTS
- Events are mutually exclusive if one and only one of
them can take place at a time.
- are events that cannot happen at the same time.
Examples include: right and left hand turns, even and
odd numbers on a die, winning and losing a game, or
running and walking.
- There is no intersection between the two events/no
common elements
NON-MUTUALLY EXCLUSIVE EVENTS
- Events are said to be mutually exclusive if only one
of the events can occur on any one trial
- are events that can happen at the same time.
Examples include: driving and listening to the radio,
even numbers and prime numbers on a die, losing a
game and scoring, or running and sweating.
- Non-mutually exclusive events can make calculating
probability more complex. There is an intersection
between the two events/common elements
Consider again the example of the coin toss. We have
two possible outcomes, heads and tails. On any
single toss, either heads or tails may turn up, but not
both.
Accordingly, the events head and tails on a single
toss are said to be mutually exclusive.
VENN DIAGRAM FOR MUTUALLY EXCLUSIVE AND
NOT MUTUALLY EXCLUSIVE EVENTS
They are called not mutually exclusive if the list of
outcomes includes every possible outcome. (2 or
more possible outcomes)
Many common experiences involve events that have
both of these properties.
In tossing a coin, for example, the possible outcomes
are a head or a tall. Since both of them cannot occur
on any one toss, the outcomes head and tall are
mutually exclusive
Example: Roling A Die. Roling a die is a simple
experiment that has six possible outcomes, each
listed in the following table with the corresponding
probability
Outcome of roll Probability
1 1/6
2 1/6
3 1/6
4 1/6
 5 1/6 Odd 4 (3,5,7,9)
6 1/6
total 1 Face cards:
These events are both mutually exclusive (on any King 4 Queen 4 Jack 4
roll, only one of the six events can occur) and are
also not mutually exclusive (one of them must occur Ace 4 Non face cards 36
and hence they total in probability to 1).

Example:
Drawing A Card. You are asked to draw one card from
a deck of 52 playing cards Using a logical probability
assessment, it is easy to set some of the
relationships, such as:
P (drawing a 7) = 4/52 = 1/13 or 07 or 7%
P (drawing a heart) = 13/52 = % or 25%
We also see that these events (drawing a 7 and
drawing a heart) are not mutually exclusive since a 7
of hearts can be drawn. They are also not collectively
exhaustive since there are other cards in the deck
besides 7s and hearts.
ADDING MUTUALLY EXCLUSIVE EVENTS
Often we are interested in whether one event or a
second event will occur. This is often called the union
of two events. When these two events are mutually
exclusive, the low of addition is simply as follows:
P(event A or event 8) = P(event A) + P(event B)
or, more briefly,
P(A or B) P(A) P(B)
Ex. Phead or Tail) P(head)+P(tall)
For example, we know that the events of drawing a
spade or drawing a club out of a deck of cards are
mutually exclusive.

The table below is especially useful in helping to Since P(spade) = 13/52 and P (club) = 13/52, the
understand the difference between mutually probability of drawing either a spade or a club is
exclusive and not mutually exclusive events.
P(spade or club)
draws Mutually exclusive
= P(space) + P(club)
1. draw a spade & a yes
club = 13/52+ 13/52
2. draw a face card & a yes
number card = 26/52= ½ =0.50 -50%
3. draw an ace & a 3 yes
Another example: Drawing a King or a Queen
4. draw a club & a non- yes
club P (King or Queen)
5. draw a 5 and a no
diamond =P (King) + P(Queen)
6. draw a red card & a no
diamond =4/52 + 4/52
Standard Deck of Cards (52 cards)
=8/52 = .15 or 15%
Spades 13 black cards
LAW OF ADDITION FOR EVENTS THAT ARE NOT
Hearts 13 red cards MUTUALLY EXCLUSIVE

Diamonds 13 red cards When two events are not mutually exclusive, the
equation should be:
Clubs 13 black cards
P (event A or event 8) = P(event A) P (event B)- P
According to number: (event a and event B both occurring) In shorter form:
Even 5 (2,4,6,7,8,10) P(A & B) = P(A) + P(B)-P(A and B)
When events are not mutually exclusive, the area of together because we could draw the ace of spades;
overlap, called the intersection, is 0. thus ace and spade are not mutually exclusive. The
correct equation to use for the probability of one or
Let us consider the events drawing a 5 and drawing a
more of two events that are not mutually exclusive
diamond out of a deck of cards. These events are not
is:
mutually exclusive, to compute for the probability of
P(A or B) P(A) + P(B)-P(A and B)
either a 5 or a diamond will be drawn, the following
is the solution: In the example:
P (Ace or Spade) = P(Ace) + P (Spade)-P( Ace and
P (five or diamond) = P(live) + P(diamond) P (five and
Spade)
diamond)
EXAMPLE: The city Council of San Fernando is
= 4/52+13/52-1/52
composed of the following:
= 16/52
= 4/13 or 31% Person Sex Age
*There is 31% probability of drawing a five or a
diamond from a deck of cards. 1 MALE 31

Another example: Drawing a Jack and drawing a Club 2 MALE 33

P (Jack or Club) 3 FEMALE 46

=P(Jack) + P(Club)-P (Jack and Club)
4 FEMALE 29
= 4/52+13/52-1/52
=16/52 or 31% 5 MALE 41
*There is 31% probability of drawing a Jack or a Club
from a deck of cards. If the members of the council decide to elect a
chairperson by random draw (say, by drawing the
EXAMPLE: These are the experiences data of 50 names from a hat), what is the probability that the
welders in fabrication shop. chairperson will be either a female or over 35?

Years of Number Probability What is the probability that the chairperson will be
experience either a female or over 35?
0-2 5 5/50=.1 =10%
3-5 10 10/50=.2 =20% Series of possible probabilities:
6-8 15 15/50=.3 =30%
P(Male) = 3/5 P (Female) = 2/5
More than 8 20 20/50=.4 =40%
total 50 50/50=1.00 =100% P (below 35)= 3/5 P(over 35)=2/5
What is the probability that welder selected at
random will have 6 or more years of experience? P (F & over 35) = 1/5 P (F &below 35)=1/5

P(6 or more) = P(6-8) P(more than 8) P (M & over 35)=1/5 P (M& below 35)=2/5
=.3+.4
P(female or over 35)= P(female) + P(over 35)-
= 7 or 70%
P(female and over 35)
- The Addition Rule for Events That Are Not Mutually
= 2/5 2/5 1/5
Exclusive: If two events are not mutually exclusive, it
is possible for both events to occur together. In such = 3/5 6 or 60%
cases, the addition rule must be modified.
SUMMARY: KEY EQUATIONS
- Let us use the example of a deck of cards to
1. A basic statement of probability
introduce the idea. What is the probability of
0≤ P (event) ≤ 1
drawing either an ace or a spade from a deck of
cards? Obviously the events ace and spade can occur
 2. Law of addition for mutually exclusive events
P(A or B) = P(A) + P(B)
3. Law of addition for events that are not mutually
exclusive
P(A or B) = P(A) + P(B)-P(A and B)
III. Statistically Independent and Statistically Dependent
Events
What is an Independent Event?
-An independent event is an event that has no connection
to another event’s chances of happening (or not
happening). In other words, the event has no effect on the
probability of another event occurring.
Independent events in probability are no different from
independent events in real life.
Where you work has no effect on what color car you drive.
Buying a lottery ticket has no effect on having a child with
blue eyes.
When two events are independent, one event does not
influence the probability of another event.
Simple examples of independent events:
 Owning a dog and growing your own herb
garden.
 Paying off your mortgage early and owning a
Chevy Cavalier.
 Winning the lottery and running out of milk.
 Buying a lottery ticket and finding a penny on the
floor (your odds of finding a penny does not
depend on you buying a lottery ticket).
 Taking a cab home and finding your favorite
movie on cable.
 Getting a parking ticket and playing craps at the
casino
What is a Dependent Event?
 When two events are dependent events, one
event influences the probability of another
event.
 A dependent event is an event that relies on
another event to happen first. Dependent events
in probability are no different from dependent
events in real life:
 If you want to attend a concert, it might depend
on whether you get overtime at work; if you
want to visit family out of the country next
month, it depends on whether or not you can get
a passport in time.
 More formally, we say that when two events are
dependent, the occurrence of one event
influences the probability of another event
Simple examples of dependent events:
 Robbing a bank and going to jail.
 Not paying your power bill on time and having
your power cut off.
 Boarding a plane first and finding a good seat.
 Parking illegally and getting a parking ticket.
Parking illegally increases your odds of getting a
ticket.
 Buying ten lottery tickets and winning the lottery.
The more tickets you buy, the greater your odds
of winning.
 Driving a car and getting in a traffic accident
Illustration: Problem 1. A bag consists of 8 red marbles, 7
blue marbles, 6 green marbles, and 4 yellow marbles.
What is the probability of selecting;
 a red marble?
 a blue marble on the first try and then a green
marble on the second try with replacement?
 A yellow marble on the first try and then a red
marble on the second try without replacement?
 Two blue marbles with replacements?
 Two green marbles without replacements?
A. a red marble
A. P(R)
P(R) = 8/25 = 32%
there is a 32% chance of selecting red marbles on the 1st
try
B. P (BG) when we say replacement, that means that once
we select the blue marble on the 1st try, we are going to
put back that blue marble back in the bag, so we still have
a total of 25 in selecting the green marbles
P(BG)= 7/25 * 6/25=42/625=6.72% there is a 6.72% chance
of getting blue marble on the 1st try and then a green
marble on the 2nd try with replacement
C. P(YR) when we say without replacement, that means
once we take out that yellow marble, we are not going to
put it back to the bag. So for the 2nd try we no longer have
a total of 25 marbles but a 24 instead
(PY)= 4/25 * 8/24= 5.33% there is a 5.33% chance of
occurrence
Which situation represents an independent event and
which one would you say are dependent events?
Part B= INDEPENDENT
Part C= the probability changed from 8/25 to 8/24 –
DEPENDENT
 Anytime you have a situation where its without
replacement, you are dealing with DEPENDENT EVENTS,
and when it’s with replacement, you are dealing with
INDEPENDENT EVENTS.
D. P(BB)
P(BB)= 7/25 * 7/25 = 7.84% chance of selecting 2 marbles
with replacement - The probability that X is equal to 2 or 3 is the sum of the
INDEPENDENT VARIABLE
E. P(GG)
P(GG)= 6/25 * 5/24 = 5% chance of selecting two marbles
without replacement - a cumulative distribution function. It is a function giving
DEPENDENT
IV Random Variables and Probability distribution
A random variable is a numerical description of the
outcome of a statistical experiment. A random variable
that may assume only a finite number or an infinite
sequence of values is said to be discrete; one that may
assume any value in some interval on the real number line
is said to be continuous.
For instance, a random variable representing the number
of automobiles sold at a particular dealership on one day
would be discrete, while a random variable representing
the weight of a person in kilograms (or pounds) would be
continuous
There are two types of random variables: DISCRETE
RANDOM VARIABLES AND CONTINUOUS RANDOM
VARIABLES. Developing probability distributions and
making computations based on these distributions
depends on the type of random variable
DISCRETE RANDOM VARIABLE
A random variable is a DISCRETE RANDOM VARIABLE if it
can assume only a finite or limited set of values.
A discrete random variable is one which may take on only a
countable number of distinct values such as 0,1,2,3,4,..
Discrete random variables are usually (but not necessarily)
counts. If a random variable can take only a finite number
of distinct values, then it must be discrete.
Examples of discrete random variables include the number
of children in a family, the Friday night attendance at a
cinema, the number of patients in a doctor's surgery, the
number of defective light bulbs in a box of ten
The probability distribution of a discrete random variable is
a list of probabilities associated with each of its possible
values. It is also sometimes called the probability function
or the probability mass function.
Example: Suppose a variable X can take the values 1, 2, 3,
or 4. The probabilities associated with each outcome are
described by the following table:
Outcome 1 2 3 4
Probability 0.1 0.3 0.4 0.2
two probabilities: P(X = 2 or X = 3) = P(X = 2) + P(X = 3) =
0.3 + 0.4 = 0.7.
All random variables (discrete and continuous) have
the probability that the random variable X is less than or
equal to x, for every value x. For a discrete random
variable, the cumulative distribution function is found by
summing up the probabilities.
Example: Suppose a variable X can take the values 1, 2, 3,
or 4. The probabilities associated with each outcome are
described by the following table:
Outcome 1 2 3 4
Probability 0.1 0.3 0.4 0.2
Example
The cumulative distribution function for the above
probability distribution is calculated as follows:
The probability that X is less than or equal to 1 is 0.1,
the probability that X is less than or equal to 2 is 0.1+0.3 =
0.4,
the probability that X is less than or equal to 3 is
0.1+0.3+0.4 = 0.8, and
the probability that X is less than or equal to 4 is
0.1+0.3+0.4+0.2 = 1.
CONTINUOUS RANDOM VARIABLE
A continuous random variable is a random variable that
has an infinite or an unlimited set of values.
A continuous random variable is one which takes an
infinite number of possible values. Continuous random
variables are usually measurements.
Examples include:
 Height
 Weight
 the amount of sugar in an orange
 the time required to run a mile.
Normal or Cumulative Probability Distribution
In this distribution, the set of possible outcomes can take
on values on a continuous range. For example, a set of real
numbers, is a continuous or normal distribution, as it gives
all the possible outcomes of real numbers. Similarly, set of
complex numbers, set of prime numbers, set of whole
numbers etc. are the examples of Normal Probability
distribution. Also, in real-life scenarios, the temperature of
the day is an example of continuous probability.
Probability distribution yields the possible outcomes for
any random event. It is also defined based on the
underlying sample space as a set of possible outcomes of
any random experiment. These settings could be a set of
real numbers or a set of vectors or set of any entities.
V Binomial and Normal Distribution
In probability theory and statistics, the binomial
distribution is the discrete probability distribution that
gives only two possible results in an experiment,
either Success or Failure. For example, if we toss a coin,
there could be only two possible outcomes: heads or tails,
and if any test is taken, then there could be only two
results: pass or fail. This distribution is also called a
binomial probability distribution.
There are two parameters n and p used here in a binomial
distribution. The variable ‘n’ states the number of times
the experiment runs and the variable ‘p’ tells the
probability of any one outcome. Suppose a die is thrown
randomly 10 times, then the probability of getting 2 for
anyone throw is 1/6. When you throw the dice 10 times,
you have a binomial distribution of n = 10 and p = 1/6
Binomial Distribution Examples
As we already know, binomial distribution gives the
possibility of a different set of outcomes. In real life, the
concept is used for:
 Finding the quantity of raw and used materials
while making a product.
 Taking a survey of positive and negative reviews
from the public for any specific product or place.
 By using the YES/ NO survey, we can check
whether the number of persons views the
particular channel.
 To find the number of male and female
employees in an organization.
 The number of votes collected by a candidate in
an election is counted based on 0 or 1
probability.
Binomial Distribution Vs Normal Distribution
The main difference between the binomial distribution and
the normal distribution is that binomial distribution is
discrete, whereas the normal distribution is continuous. It
means that the binomial distribution has a finite amount of
events, whereas the normal distribution has an infinite
number of events.
In case, if the sample size for the binomial distribution is
very large, then the distribution curve for the binomial
distribution is similar to the normal distribution curve.
Properties of Binomial Distribution
The properties of the binomial distribution are:
 There are two possible outcomes: true or false,
success or failure, yes or no.
 There is ‘n’ number of independent trials or a
fixed number of n times repeated trials.
 The probability of success or failure remains the
same for each trial.
 Only the number of success is calculated out of n
independent trials.
 Every trial is an independent trial, which means
the outcome of one trial does not affect the
outcome of another trial.
CHAPTER III Decision Analysis
Six Steps in Decision Making
1. Clearly define the problem at hand.
2. List the possible alternatives.
3. Identify the possible outcomes or states of
nature
4. List the payoff (typically profit) of each
combination of alternatives and outcomes.
5. Select one of the mathematical decision theory
models.
6. Apply the model and make your decision
Types of Decision-Making Environments
The types of decisions people make depend on how much
knowledge or information they have
about the situation. There are three decision-making
environments:
1. Decision making under certainty
2. Decision making under uncertainty
3. Decision making under risk
TYPE 1: Decision Making Under Certainty
In the environment of decision making under certainty,
decision makers know with certainty the consequence of
every alternative or decision choice. Naturally, they will
choose the alternative that will maximize their well-being
or will result in the best outcome.
TYPE 2: Decision Making Under Uncertainty
In decision making under uncertainty, there are several
possible outcomes for each alternative, and the decision
maker does not know the probabilities of the various
outcomes.
TYPE 3: Decision Making Under Risk
In decision making under risk, there are several possible
outcomes for each alternative, and the decision maker
knows the probability of occurrence of each outcome.
Decision Analysis
Managers are generally met with uncertainties about the
consequences of their decisions and actions. Usually, a
manager will face multiple options for decision making –
the distinct choices they will make in certain situations.
The difficulty exists since to some degree, the
consequences of these alternative decisions may be
unpredictable.
We can decide to introduce a new product but future sales
will be unpredictable or uncertain. We can decide to
investment in the latest machineries and equipment to
boost productivity but the financial benefits would be
unclear.
New medical scanning facilities could be introduced by a
hospital but the exact effects on patients would be
unknown. In such situations, a good analysis will include
risk assessment where the risk associated with a decision is
the direct output of the uncertainty surrounding the result
from that decision
Decision analysis is a formal approach to decision making
and can be used to determine optimal strategies in
situations where there are several decision alternatives
and where the outcomes or consequences of these
decisions are uncertain. In decision analysis, models are
used to test the favorability of different outcomes.
One of the most common models being used is the
decision trees because they are simple to understand and
provide valuable insight into a problem by giving the
outcomes, alternatives and probabilities of various
decisions. A decision tree provides a graphical
representation of the decision-making process.
Problem Formulation
The first step in the decision analysis process is problem
formulation. We begin with a verbal statement of the
problem. We then identify the decision alternatives, the
uncertain future events, referred to as chance events and
the consequences associated with each decision
alternative and each chance event outcome
Let’s assume that a Variety Clothing Store (VCS) is opening
a second location and wants to decide whether to open in
Manila or Cebu. The main purpose of the new store is for
expansion, increase market share and maximize the
financial return through the income generated from sales.
Opening a location in either city will involve
different capital expenditures and demonstrate different
rates of success. However, Variety Clothing Store is facing
some uncertainties. A wide range of possibilities are
acknowledged, but Variety Clothing Store decided that it
would be adequate to consider two possible chance event
outcomes: probability of success and probability of failure.
In decision analysis, the possible outcomes for a chance
event are referred to as the states of nature. The states of
nature are defined so that one and only one of the
possible states of nature will occur. The two states of
nature on our real-world example are:
P1 = Probability of success
P2 = Probability of failure
commissioned two alternative plans for the expansion:
d1 = to open in Manila, the store will need to invest ₱2
million
d2 = to open in Cebu, the store will need to invest ₱5
million
These are the decision alternatives for VCS and the
situation facing VCS is typical. It must first choose between
the two decision alternatives (new store location), then it
must wait to see which state of nature occurs (probability
of success and probability of failure) and then it will see
the consequence occurring (the financial return made from
the decision given the state of nature).
Payoff Tables
A table showing payoffs for all combinations of decision
alternatives and states of nature is a payoff table. Given
the two decision alternatives and two states of nature,
which store location should VCS choose? To answer this
question, VCS will need to know the consequences
associated with each decision alternative and each state of
nature. In decision analysis, we refer to the consequence
resulting from a specific combination of a decision
alternative and a state of nature as a payoff.
Decision Trees
A decision tree provides a graphical representation of the
decision-making process. Note that the decision tree
shows the natural or logical progression that will occur
over time. The decision tree is built from left to right. First,
VCS must make a decision regarding the new store location
(Manila, Cebu). Then, after the decision is implemented,
either the state of nature P1 or P2 will occur. The number
at each end point of the tree indicates the payoff
associated with a particular sequence.
For each decision, the decision tree also includes
numerical data to calculate the expected value. Squares
are used to depict decisions, and circles are used to depict
chances or outcomes. The lines branching from squares
are possible choices, while the lines branching from circles
are expected outcomes. The payoffs are shown at the end
of the states of nature branches.

The model also includes the costs associated with opening

each location. To open in Manila, the store will need to
invest $2 million, while a Cebu location will require an
investment of $5 million.
The expected payoff amounts represent the potential
revenue if the store succeeds, or the potential loss if the
store fails

To evaluate which decision is more favorable, we will

calculate the expected value for each decision.

EV = (Probability A * Expected Payoff A) + (Probability B *

Expected Payoff B)

EV (Manila) = (0.4 * 15,000,000) + (0.6 * - 4,000,000) =

3,600,000

EV (Cebu) = (0.3 * 30,000,000) + (0.7 * - 10,000,000) =

2,000,000

Then, we must deduct the initial capital expenditure to

find the net gain/loss:

Manila: 3,600,000 – 2,000,000 = 1,600,000

Cebu: 2,000,000 – 5,000,000 = -3,000,000

After calculating the expected value of each outcome, we

can compare them to see which outcome is preferable. In
this case, opening a store in Manila seems to result in a
higher net gain than a store in Cebu.