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Statistics For Business and Economics: Probability
Statistics For Business and Economics: Probability
Chapter 4
Probability
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-1
Chapter Goals
After completing this chapter, you should be
able to:
Explain basic probability concepts and definitions
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-2
Important Terms
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-3
Important Terms
(continued)
A AB B
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-4
Important Terms
(continued)
A B
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-5
Important Terms
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-6
Important Terms
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-7
Examples
Let the Sample Space be the collection of all
possible outcomes of rolling one die:
S = [1, 2, 3, 4, 5, 6]
Complements:
A [1, 3, 5] B [1, 2, 3]
Intersections:
A B [4, 6] A B [5]
Unions:
A B [2, 4, 5, 6]
A A [1, 2, 3, 4, 5, 6] S
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-9
Examples
(continued)
Mutually exclusive:
A and B are not mutually exclusive
The outcomes 4 and 6 are common to both
Collectively exhaustive:
A and B are not collectively exhaustive
A U B does not contain 1 or 3
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-10
Probability
0 Impossible
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-11
Assessing Probability
There are three approaches to assessing the
probability of an uncertain event:
1. classical probability
NA number of outcomes that satisfy the event
probability of event A
N total number of outcomes in the sample space
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-12
Counting the Possible Outcomes
n!
C n
k! (n k)!
k
where
n! = n(n-1)(n-2)…(1)
0! = 1 by definition
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-13
Assessing Probability
Three approaches (continued)
2. relative frequency probability
nA number of events in the population that satisfy event A
probability of event A
n total number of events in the population
3. subjective probability
an individual opinion or belief about the probability of occurrence
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-14
Probability Postulates
(the notation means that the summation is over all the basic outcomes in A)
3. P(S) = 1
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-15
Probability Rules
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-16
A Probability Table
B B
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-17
Addition Rule Example
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-18
Addition Rule Example
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-19
Conditional Probability
A conditional probability is the probability of one
event, given that another event has occurred:
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-20
Conditional Probability Example
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-21
Conditional Probability Example
(continued)
Of the cars on a used car lot, 70% have air conditioning
(AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(CD AC) .2
P(CD | AC) .2857
P(AC) .7
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-22
Conditional Probability Example
(continued)
Given AC, we only consider the top row (70% of the cars). Of these,
20% have a CD player. 20% of 70% is 28.57%.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(CD AC) .2
P(CD | AC) .2857
P(AC) .7
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-23
Multiplication Rule
also
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-24
Multiplication Rule Example
P(Red ∩ Ace) = P(Red| Ace)P(Ace)
2 4 2
4 52 52
number of cards that are red and ace 2
total number of cards 52
Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-25
Statistical Independence
Two events are statistically independent if
and only if:
P(A B) P(A)P(B)
Events A and B are independent when the probability of one
event is not affected by the other event
If A and B are independent, then
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-26
Statistical Independence Example
Of the cars on a used car lot, 70% have air conditioning
(AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-27
Statistical Independence Example
(continued)
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(AC ∩ CD) = 0.2
P(AC) = 0.7
P(AC)P(CD) = (0.7)(0.4) = 0.28
P(CD) = 0.4
B1 B2 ... Bk
. . . . .
. . . . .
. . . . .
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-29
Joint and
Marginal Probabilities
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-30
Marginal Probability Example
P(Ace)
2 2 4
P(Ace Red) P(Ace Black)
52 52 52
Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-31
Using a Tree Diagram
.2
.7 P(AC ∩ CD) = .2
Given AC or
no AC:
P(AC ∩ CD) = .5
.5
.7
All
Cars
.2
.3 P(AC ∩ CD) = .2
.1 P(AC ∩ CD) = .1
.3
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-32
Odds
P(A) P(A)
odds
1- P(A) P(A)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-33
Odds: Example
Calculate the probability of winning if the odds
of winning are 3 to 1:
3 P(A)
odds
1 1- P(A)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-35
Bayes’ Theorem
P(A | E i )P(E i )
P(E i | A)
P(A)
P(A | E i )P(E i )
P(A | E 1 )P(E 1 ) P(A | E 2 )P(E 2 ) P(A | E k )P(E k )
where:
Ei = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Ei)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-36
Bayes’ Theorem Example
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-37
Bayes’ Theorem Example
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-38
Bayes’ Theorem Example
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-39
Chapter Summary
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-40