Chap07 PPT

Applied Statistics in Business &
Economics
David P. Doane and Lori E. Seward
Vũ Võ
vu.vo@ueh.edu.vn
7-1
Chapter 7
Continuous Probability Distributions
Chapter Contents
7.1 Continuous Probability Distributions
7.2 Uniform Continuous Distribution
7.3 Normal Distribution
7.4 Standard Normal Distribution
7.5 Normal Approximations
7.6 Exponential Distribution
7.7 Triangular Distribution (Optional)
Chapter 7
Chapter Learning Objectives (LOs)
LO7-1: Define a continuous random variable.

LO7-2: Calculate uniform probabilities.
LO7-3: Know the form and parameters of the normal
distribution.
LO7-4: Find the normal probability for given z or x using
tables or Excel.
LO7-5: Solve for z or x for a given normal probability
using tables or Excel.
Chapter 7
Chapter Learning Objectives (LOs) (continued)
LO6: Use the normal approximation to a binomial or a

Poisson.
LO7: Find the exponential probability for a given x.
LO8: Solve for x for a given exponential probability.
LO9: Use the triangular distribution for “what-if” analysis
(optional).
Chapter 7
7.1 Continuous Probability Distributions
LO7-1: Define a continuous random variable.
Events as Intervals
• Probability for a discrete variable is defined at a point such as
P(X = 3) or as a sum over a series of points such as P(X ≤ 2) =
P(0) + P(1) + P(2).
• When X is a continuous variable (e.g., waiting time), it does not
make sense to speak of probability “at” a particular X-value (e.g.,
X = 54 seconds) because the values of X are not a set of discrete
points.
• Probabilities for continuous variables are defined as areas under
a curve called the probability density function (PDF).
• Probabilities for a continuous random variable are also defined
on intervals such as P(53.5 ≤ X ≤ 54.5) or P(X < 54) or P(X ≥ 53).
7-5
Chapter 7
LO7-1: Define a continuous random variable
(continued).
Events as Intervals (continued)

• Figure 7.1 illustrates the differences between discrete
and continuous random variables.
7-6
Chapter 7
(continued, 2).
PDF – Probability Density Function
Continuous PDFs:
• Denoted by f(x)
• Must be nonnegative
• Total area under curve = 1
• Mean, variance, and shape
depend on the PDF
parameters
• Reveals the shape of the
distribution
• An example is the normal
PDF
7-7
Chapter 7
(continued, 3).
CDF – Cumulative Distribution Function
Continuous CDFs:
• Denoted by F(x)
• Shows P(X ≤ x), the
cumulative proportion of
scores
• Useful for finding
probabilities
• An example is the normal
CDF
7-8
7-8
Chapter 7
(continued, 4).
Probabilities as Areas
Continuous probability
functions:
• Unlike discrete
distributions, the
probability at any single
point = 0.
• The entire area under any
PDF, by definition, is set The area under the curve
to 1. between a and b represents P(a
< X < b).
• Mean is the balance point
of the distribution.
7-9
Chapter 7
(continued, 5).
Expected Value and Variance
The mean and variance of a continuous random variable are
analogous to E(X) and Var(X) for a discrete random variable;
here the integral sign replaces the summation sign. Calculus is
required to compute the integrals. But statistics can be learned
without calculus, if you are willing to accept that others have
worked out the details by using calculus.
7-10
Chapter 7
7.2 Uniform Continuous Distribution
LO7-2: Calculate uniform probabilities.
Characteristics of the Uniform

Distribution
If X is a random variable that is

uniformly distributed between a and b,
its PDF has constant height.
• Denoted by U(a, b)
• Area = base × height
7-11
Chapter 7
LO7-2: Calculate uniform probabilities (continued).
Characteristics of the Uniform Distribution (continued)
7-12
Chapter 7
LO7-2: Calculate uniform probabilities (continued, 2).
Example: Anesthesia Effectiveness

• An oral surgeon injects a painkiller prior to extracting a tooth.
Given the varying characteristics of patients, the dentist views the
time (X) for anesthesia effectiveness as a uniform random
variable that takes between 15 minutes and 30 minutes.
• X is U(15, 30)
• a = 15, b = 30. Find the mean and standard deviation.
7-13
Chapter 7
LO7-2: Calculate uniform probabilities (continued, 3).
Example: Anesthesia Effectiveness (continued)

• The probability that the anesthetic takes between 20 and 25
minutes is:
P(20 < X < 25) = (25 – 20)/(30 – 15) = 5/15 = 0.3333 = 33.33%
7-14
Chapter 7
7.3 Normal Distribution
distribution.
Characteristics of the Normal Distribution
• Normal or Gaussian (or bell shaped) distribution was named
for German mathematician Karl Gauss (1777 – 1855).
• Defined by two parameters, µ and .
• Denoted by N(µ, ).
• Domain is –  < X < +  (continuous scale).
• Almost all (99.7%) of the area under the normal curve is
included in the range µ – 3 < X < µ + 3.
• The distribution is symmetric and unimodal about the mean.
7-15
Chapter 7
distribution (continued).
Characteristics of the Normal Distribution (continued)
7-16
Chapter 7
distribution (continued, 2).

• Normal PDF f(x) reaches a maximum at µ and has
points of inflection at µ ± .
Bell-
shaped NOTE: All normal
curve
distributions have the
same shape but differ in
the axis scales.
7-17
Chapter 7

• Normal CDF has a “lazy-S” shape. It approaches, but
never reaches, 1.
7-18
Chapter 7
What Is Normal?
• Many physical measurements in the real world resemble
normal distributions.
• To be regarded as a candidate for normality, a random
variable should:
• Be measured on a continuous scale.
• Possess a clear center.
• Have only one peak (unimodal).
• Exhibit tapering tails.
• Be symmetric about the mean (equal tails).
7-19
Chapter 7
What Is Normal? (continued)
• When the range is large, we often treat a discrete
variable as continuous. For example, exam scores are
discrete (range from 0 to 100) but are often treated as
continuous data.
• Here are some examples of random variables that might
be expected to be approximately normally distributed.
• X = quantity of beverage in a 2-liter bottle of Diet
Pepsi.
• X = cockpit noise level in a Boeing 777.
• X = diameter (in mm) of a manufactured steel ball
bearing.
7-20
Chapter 7
7.4 Standard Normal Distribution
LO7-4: Find the normal probability for a given z or x
using Tables or Excel.
Characteristics of the Standard Normal Distribution
• Since for every value of µ and , there is a different

normal distribution, we can transform a normal
random variable to a standard normal distribution
with µ = 0 and  = 1 using the formula.
7-21
Chapter 7
using Tables or Excel (continued).

(continued)
7-22
Chapter 7
using Tables or Excel (continued, 2).
(continued)
• Standard normal PDF f(x) reaches a maximum at z = 0 and has
points of inflection at +1.
• Shape is unaffected by the transformation. It is still a bell-shaped
curve.
Figure 7.11
7-23
Chapter 7

(continued)
• A common scale from
-3 to +3 is used.
• Entire area under the
curve is unity.
• The probability of an
event P(z1 < Z < z2) is a
definite integral of f(z).
• However, standard
normal tables or Excel
functions can be used to
find the desired
probabilities.
7-24
Chapter 7
Normal Areas from Appendix C-1
• Appendix C-1 allows you to find the area under the curve from 0 to z.
• For example, find P(0 < Z < 1.96): (see the table on the next slide)
7-25
Chapter 7
Normal Areas from Appendix C-1 (continued)

• Appendix C-1 allows you to find the area under the curve from 0 to z.
7-26
Chapter 7
• Now find P(-1.96 < Z < 1.96).
• Due to symmetry, P(-1.96 < Z) is the same as P(Z < 1.96).
• So, P(-1.96 < Z < 1.96) = .4750 + .4750 = .9500 or 95% of the
area under the curve.
7-27
Chapter 7
Basis for the Empirical Rule
• Approximately 68% of the area under the curve is
between + 1
• Approximately 95% of the area under the curve is
between + 2
• Approximately 99.7% of the area under the curve
is between + 3
7-28
Chapter 7
Basis for the Empirical Rule (continued)
• Areas for the Empirical Rule
7-29
Chapter 7
Normal Areas from Appendix C-2
• Appendix C-2 allows you to find the area under the curve from the
left of z (similar to Excel).
• For example, (see next slide for the table).
P(Z < 1.96) P(Z < -1.96) P(-1.96 < Z < 1.96)
7-30
Chapter 7
• Appendices C-1 and C-2

yield identical results.
• Use whichever table is
easiest.
7-31
Chapter 7
LO7-5: Solve for z or x for a normal probability using
tables or Excel.
Finding z for a Given Area
• Appendices C-1 and C-2 can be used to find the

z-value corresponding to a given probability.
• For example, what z-value defines the top 1% of a
normal distribution?
• This implies that 49% of the area lies between 0 and
z which gives z = 2.33 by looking for an area of
0.4900 in Appendix C-1.
7-32
Chapter 7
tables or Excel (continued).
Finding Areas by using Standardized Variables
• Suppose John took an economics exam and scored 86

points. The class mean was 75 with a standard
deviation of 7. What percentile is John in? That is, what
is P(X < 86), where X represents the exam scores?
• zJohn = (xJohn – µ)/ = (86 – 75)/7 = 11/7 = 1.57.
• P(X < 86) = P(Z < 1.57) = .9418 (from Appendix C-2).
• So, John is approximately in the 94th percentile.
Chapter 7
tables or Excel (continued, 2).
Finding Areas by using Standardized Variables (continued)

NOTE: You can use Excel, Minitab, TI83/84 etc., to compute these
probabilities directly. Refer to the text for Excel explanation.
7-34
Chapter 7
Inverse Normal
• How can we find the various normal percentiles (5th,

10th, 25th, 75th, 90th, 95th, etc.) known as the
inverse normal? That is, how can we find X for a
given area?
• We simply turn the standardizing transformation
around:
• Solving for x in z = (x − μ)/ gives x = μ + zσ
7-35
Chapter 7
Inverse Normal (continued)
• Using Table 7.7 (or looking up the areas in Excel) we
obtain the results shown in Table 7.9. Note that to find a
lower tail area (such as the lowest 5 percent), we must
use negative Z-values.
7-36
Chapter 7
• For example, suppose that John’s economics

professor has decided that any student who scores
below the 10th percentile must retake the exam.
• The exam scores are normal with μ = 75 and σ = 7.
• What is the score that would require a student to
retake the exam?
• We need to find the value of x that satisfies
P(X < x) = .10.
• The z-score for with the 10th percentile is z = −1.28.
7-37
Chapter 7
• The steps to solve the problem are:

• Use Appendix C or Excel to find z = −1.28 to
satisfy P(Z < −1.28) = .10.
• Substitute the given information into z = (x − μ)/σ
to get −1.28 = (x − 75)/7.
• Solve for x to get x = 75 − (1.28)(7) = 66.03 (or 66
after rounding).
• Students who score below 66 points on the
economics exam will be required to retake the
exam.
7-38
Chapter 7
7-39
Chapter 7
7.5 Normal Approximations
LO7-6: Use the normal approximation to a binomial or
a Poisson.
Normal Approximation to the Binomial
• Binomial probabilities are difficult to calculate when n
is large.
• Use a normal approximation to the binomial
distribution.
• The logic of this approximation is that as n becomes
large, the discrete binomial bars become more like a
smooth, continuous, normal curve. (View the next
slide for an illustration).
7-40
Chapter 7
LO7-6: Use the normal approximation to a binomial or a
Poisson (continued).
Normal Approximation to the Binomial (continued)
• Figure 7.20 illustrates this idea for 4, 16, and 64 flips of a fair coin
with X defined as the number of heads in n tries.
• As sample size increases, it becomes easier to visualize a smooth,
bell-shaped curve overlaid on the bars.
7-41
Chapter 7
Poisson (continued, 2).
• Rule of thumb: when n ≥ 10 and n(1 − ) ≥ 10, it is

appropriate to use the normal approximation to the
binomial distribution.
• In this case, the mean and standard deviation for the
binomial distribution will be equal to the normal µ and ,
respectively.
7-42
Chapter 7
Example: Coin Flips
• If we were to flip a coin n = 32 times and  = .50, are

the requirements for a normal approximation to the
binomial distribution met?
• n = 32 x .50 = 16
n(1 − ) = 32 × (1 − .50) = 16
• A normal approximation can be used since both n
and n(1 − ) are both greater than 10.
7-43
Chapter 7
Example: Coin Flips (continued)
• When translating a discrete scale into a continuous

scale, care must be taken about individual points.
• For example, find the probability of more than 17
heads in 32 flips of a fair coin.
• This can be written as P(X  18).
• However, “more than 17” actually falls between 17
and 18 on a discrete scale.
7-44
Chapter 7
• Since the cutoff point for “more than 17” is halfway

between 17 and 18, we add 0.5 to the lower limit and
find P(X > 17.5) instead of P(X ≥ 18).
• This is illustrated in Figure 7.21 on the next slide.
• This addition of 0.5 to X is called the Continuity
Correction.
• At this point, the problem can be completed as any
normal distribution problem.
7-45
Chapter 7
a Poisson (continued, 6).
7-46
Chapter 7
• Note: You don’t need to draw the entire distribution as given in
Figure 7.21.
• All you need is a little diagram (ignoring the low and high ends of the
scale because they are not relevant) to show the event “more than 17”
visually. (See below).
• If you make a diagram like this, you can see the correct cutoff
point. Because the cutoff point for “more than 17” is halfway
between 17 and 18, the normal approximation is P(X > 17.5).
7-47
Chapter 7
The normal parameters are:
7-48
Chapter 7
We then perform the usual standardizing transformation with the
continuity-corrected X-value: z = (x – µ)/ = (17.5 – 16)/2.82843 = 0.53.
P(X > 17) = P(X ≥ 18) 

P(X ≥ 17.5) = P(Z > 0.53)
= 0.2981.
7-49
Chapter 7
Normal Approximation to the Poisson
• The normal approximation to the Poisson distribution

works best when  is large (e.g., when  exceeds the
values in Appendix B).
• Set the normal µ and  equal to the mean and standard
deviation for the Poisson distribution.
7-50
Chapter 7
Normal Approximation to the Poisson (continued)
Example: Utility Bills
• On Wednesday between 10 a.m. and noon, customer

billing inquiries arrive at a mean rate of 42 inquiries
per hour at Consumers Energy. What is the
probability of receiving more than 50 calls in an hour?
•  = 42 which is too big to use the Poisson table.
• Use the normal approximation with  = 42 and  =
6.48074
7-51
Chapter 7
Example: Utility Bills (continued)
• To find P(X > 50) calls, use the continuity-corrected

cutoff point halfway between 50 and 51 (i.e., X = 50.5).
• At this point, the problem can be completed as any
normal distribution problem.
7-52
Chapter 7
Example: Utility Bills (continued)

• The standardized Z-value for the event “more than 50” is P(X > 50.5)
= P(Z > 1.31) because z = (x – µ)/ = (50.5 – 42)/6.48074 = 1.31.
• Using Appendix C-2 we look up P(Z < −1.31) = .0951, which is the same
as P(Z > 1.31) because the normal distribution is symmetric.
• We can check the actual Poisson probability by using Excel’s cumulative
function =POISSON.DIST(50, 42, 1) and subtracting from 1 which yields
0.0975.
• In this case, the normal approximation (.0951) comes fairly close to
the Poisson result (.0975). If you have access to Excel, you don’t
need the approximation at all.
7-53
Chapter 7
7.6 Exponential Distribution
LO7-7: Find the exponential probability for a given x.
Characteristics of the Exponential Distribution
• If events per unit of time follow a Poisson distribution,

the time until the next event follows the exponential
distribution.
• The time until the next event is a continuous variable.
7-54
Chapter 7
LO7-7: Find the exponential probability for a given x
(continued).
Characteristics of the Exponential Distribution (continued)
7-55
Chapter 7
(continued, 2).
• The exponential distribution has one parameter, the mean

arrival rate λ.
• Each value of λ gives a different PDF, as illustrated in Figure
7.24. View the next slide.
• However, all curves in the exponential PDF family have the
same shape.
• The vertical axis intercept is always λ because inserting x = 0
in the PDF formula gives f(0) = λ.
Chapter 7
(continued, 3).

Chapter 7
(continued, 4).
• The exponential probability density function approaches zero

as x increases and is right-skewed.
• We usually are not interested in the height of the function f(x) but rather
in areas under the curve, as illustrated in Figure 7.25. (Refer to the next
slide.)
• Fortunately, the CDF is simple. No tables are needed, just a calculator that
has the ex function key.
• The probability of waiting more than x units of time until the next arrival
is e−λx, while the probability of waiting x units of time or less is 1 − e−λx.
Chapter 7
(continued, 5).
Chapter 7
(continued, 6).
Example: Customer Waiting Time
• Between 2 p.m. and 4 p.m. on Wednesday, patient

insurance inquiries arrive at Blue Choice insurance at a
mean rate of 2.2 calls per minute.
• What is the probability of waiting more than 30 seconds
(i.e., 0.50 minutes) for the next call?
• Set  = 2.2 events/min. and x = 0.50 min.
• P(X > 0.50) = e–x = e–(2.2)(0.5) = .3329 or 33.29% chance
of waiting more than 30 seconds for the next call.
• The calculations are illustrated on the next slide.
7-60
Chapter 7
(continued, 7).
Example: Customer Waiting Time (continued)
7-61
Chapter 7
LO7-8: Solve for x for given exponential probability.
Inverse Exponential
• We can use the exponential area formula in reverse.
• If the mean arrival rate is 2.2 calls per minute and we want the
90th percentile for waiting time (the top 10% of waiting time).
• We need to find the x-value that defines the upper 10%.
7-62
Chapter 7
LO7-8: Solve for x for given exponential probability
(continued, 2).
Inverse Exponential (continued)
• Call the unknown time x. Since P(X ≤ x) = .90 implies P(X > x) = .10,
we set the right-tail area to .10, take the natural logarithm of both
ides, and solve for x:
• So 90 percent of the calls will arrive within 1.0466 minutes (or 62.8
seconds).
7-63
Chapter 7
(continued, 3).
Mean Time Between Events
• Exponential waiting times are often described in terms of the mean time
between events (MTBE) rather than in terms of Poisson arrivals per unit of
time.
• In other words, we might be given 1/λ instead of λ.
• MTBE = 1/ = mean time between events (units of time per event).
• 1/MTBE =  = mean events per unit of time (events per unit of time).
• For example, if the mean time between patient arrivals in an emergency
room is 20 minutes, then λ = 1/20 = 0.05 arrival per minute (or λ =
3.0 arrivals per hour).
• We could work a problem using either hours or minutes, as long as we
are careful to make sure that x and λ are expressed in the same units
when we calculate e−λx. For example, P(X > 12 minutes)
= e−(0.05)(12) = e−0.60 is the same as P(X > 0.20 hour) = e−(3)(0.20) = e−0.60.
7-64
Chapter 7
(continued, 4).
Mean Time Between Events (continued)
Example: Flat Panel Displays

• The NexGenCo color flat-panel display in an aircraft cockpit has a mean
time between failures (MTBF) of 22,500 flight hours. What is the
probability of a failure within the next 10,000 flight hours? Because 22,500
hours per failure implies λ = 1/22,500 failure per hour, we calculate:
P(X < 10,000) = 1 – e-x = 1 – e–(1/22500)(10,000) = 1 – e-0.4444 = 0.3588.
• Thus, there is a 35.88 percent chance of failure within the next 10,000
hours of flight. This assumes that failures follow the Poisson model.
7-65
Chapter 7
7.7 Triangular Distribution
LO7-9: Use the triangular distribution for “what-if”
analysis (optional).
Characteristics of the Triangular Distribution
7-66
Chapter 7
LO7-9: Use the triangular distribution for “what-if” analysis
(optional) (continued).
Characteristics of the Triangular Distribution (continued)
• The triangular distribution is a way of thinking about variation that

corresponds rather well to what-if analysis in business.
• It is not surprising that business analysts are attracted to the
triangular model.
• Its finite range and simple form are more understandable than a
normal distribution.
7-67
Chapter 7
LO7-9: Use the triangular distribution for “what-if”
analysis (optional) (continued, 2).
Characteristics of the Triangular Distribution (continued)
• It is more versatile than a normal, because it can be skewed in either

direction.
• Yet it has some of the nice properties of a normal, such as a distinct
mode.
• The triangular model is especially handy for what-if analysis when
the business case depends on predicting a stochastic variable (e.g.,
the price of a raw material, an interest rate, a sales volume).
• If the analyst can anticipate the range (a to c) and most likely value
(b), it will be possible to calculate probabilities of various outcomes.
• Many times, such distributions will be skewed, so a normal wouldn't
be much help.
• Check the text for an example (Example 7.8).
7-68

Chap07 PPT

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap07 PPT

Uploaded by

Copyright:

Available Formats

Applied Statistics in Business &

David P. Doane and Lori E. Seward

LO7-1: Define a continuous random variable.

LO6: Use the normal approximation to a binomial or a

Events as Intervals (continued)

LO7-2: Calculate uniform probabilities.

Characteristics of the Uniform

If X is a random variable that is

Characteristics of the Uniform Distribution (continued)

Example: Anesthesia Effectiveness

Example: Anesthesia Effectiveness (continued)

Characteristics of the Normal Distribution (continued)

Characteristics of the Normal Distribution (continued)

Characteristics of the Normal Distribution (continued)

Characteristics of the Standard Normal Distribution

• Since for every value of µ and , there is a different

Characteristics of the Standard Normal Distribution

Characteristics of the Standard Normal Distribution

Normal Areas from Appendix C-1 (continued)

• Appendices C-1 and C-2

Finding z for a Given Area

• Appendices C-1 and C-2 can be used to find the

Finding Areas by using Standardized Variables

• Suppose John took an economics exam and scored 86

Finding Areas by using Standardized Variables (continued)

• How can we find the various normal percentiles (5th,

Inverse Normal (continued)

• For example, suppose that John’s economics

Inverse Normal (continued)

• The steps to solve the problem are:

Inverse Normal (continued)

Normal Approximation to the Binomial (continued)

• Rule of thumb: when n ≥ 10 and n(1 − ) ≥ 10, it is

Example: Coin Flips

• If we were to flip a coin n = 32 times and  = .50, are

Example: Coin Flips (continued)

• When translating a discrete scale into a continuous

• Since the cutoff point for “more than 17” is halfway

Example: Coin Flips (continued)

The normal parameters are:

P(X > 17) = P(X ≥ 18) 

• The normal approximation to the Poisson distribution

Example: Utility Bills

• On Wednesday between 10 a.m. and noon, customer

Normal Approximation to the Poisson (continued)

Example: Utility Bills (continued)

• To find P(X > 50) calls, use the continuity-corrected

Example: Utility Bills (continued)

Characteristics of the Exponential Distribution

• If events per unit of time follow a Poisson distribution,

Characteristics of the Exponential Distribution (continued)

Characteristics of the Exponential Distribution (continued)

• The exponential distribution has one parameter, the mean

Characteristics of the Exponential Distribution (continued)

Characteristics of the Exponential Distribution (continued)

• The exponential probability density function approaches zero

Example: Customer Waiting Time

• Between 2 p.m. and 4 p.m. on Wednesday, patient

Example: Customer Waiting Time (continued)

Mean Time Between Events (continued)

Example: Flat Panel Displays

• The triangular distribution is a way of thinking about variation that

• It is more versatile than a normal, because it can be skewed in either