Probability Concepts and Applications: To Accompany

Chapter 2
Probability Concepts and

Applications
To accompany
Quantitative Analysis for Management, Eleventh Editio
n, by Render, Stair, and Hanna
Power Point slides created by Brian Peterson
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-1

Introduction
 Life is uncertain; we are not sure

what the future will bring.
 Probability is a numerical stateme
nt about the likelihood that an eve
nt will occur.

Fundamental Concepts
1. The probability, P, of any event or st

ate of nature occurring is greater th
an or equal to 0 and less than or equ
al to 1. That is:
0  P (event)  1
2. The sum of the simple probabilities f

or all possible outcomes of an activi
ty must equal 1.
Diversey Paint Example
 Demand for white latex paint at Diversey Paint a
nd Supply has always been either 0, 1, 2, 3, or 4
gallons per day.
 Over the past 200 days, the owner has observed
the following frequencies of demand:
QUANTITY DEMA
NUMBER OF DAYS PROBABILITY
NDED
0 40 0.20 (= 40/200)
1 80 0.40 (= 80/200)
2 50 0.25 (= 50/200)
3 20 0.10 (= 20/200)
4 10 0.05 (= 10/200)
Total 200 Total 1.00 (= 200/200)
Diversey Paint Example
 Demand for white latex paint at Diversey Paint a
nd Supply
Notice has always
the individual been either 0, 1, 2, 3, or 4
probabilities
aregallons per day
all between 0 and 1
 Over the 0 ≤past 200 days,
P (event) ≤ 1 the owner has observed
the following frequencies of demand
And the total of all event probabil
QUANTITY
ities DEMA1
equals NUMBER OF DAYS PROBABILITY
NDED
0 ∑ P (event) = 1.0040 0.20 (= 40/200)
1 80 0.40 (= 80/200)
2 50 0.25 (= 50/200)
3 20 0.10 (= 20/200)
4 10 0.05 (= 10/200)
Total 200 Total 1.00 (= 200/200)
Types of Probability
Determining objective probability :
 Relative frequency
 Typically based on historical data
Number of occurrences of the event

P (event) =
Total number of trials or outcomes
 Classical or logical method

 Logically determine probabilities without trial
s
1 Number of ways of getting a head
P (head) =
2 Number of possible outcomes (head or tail)
Drawing a Card
Draw one card from a deck of 52 playing cards
P (drawing a 7) = 4/52 = 1/13

P (drawing a heart) = 13/52 = 1/4
 These two events are not mutually exclusive

since a 7 of hearts can be drawn
 These two events are not collectively exhaus
tive since there are other cards in the deck b
esides 7s and hearts

Adding Mutually Exclusive Events
We often want to know whether one or a se

cond event will occur.
 When two events are mutually exclusi
ve, the law of addition is:
P (event A or event B) = P (event A) + P (event B)
P (spade or club) = P (spade) + P (club)

= 13/52 + 13/52
= 26/52 = 1/2 = 0.50

Adding Not Mutually Exclusive Events
The equation must be modified to account f

or double counting.
 The probability is reduced by subtracti
ng the chance of both events occurring
together.
P (event A or event B) = P (event A) + P (event B)
– P (event A and event B both occurring)
P (A or B) = P (A) + P (B) – P (A and B)
P(five or diamond) = P(five) + P(diamond) – P(five and diamond)
= 4/52 + 13/52 – 1/52
= 16/52 = 4/13

Venn Diagrams
P (A and B)
P (A) P (B) P (A) P (B)
Events that are mutually Events that are not mutu

exclusive. ally exclusive.
P (A or B) = P (A) + P (B) P (A or B) = P (A) + P (B)

– P (A and B)
Figure 2.1 Figure 2.2
Three Types of Probabilities
 Marginal (or simple) probability is just the probabil
ity of a single event occurring.
P (A)
 Joint probability is the probability of two or more
events occurring and is equal to the product of th
eir marginal probabilities for independent events.
P (AB) = P (A) x P (B)
 Conditional probability is the probability of event

B given that event A has occurred.
P (B | A) = P (B)
 Or the probability of event A given that event B ha
s occurred
P (A | B) = P (A)
Joint Probability Example
The probability of tossing a 6 on the first

roll of the die and a 2 on the second roll:
P (6 on first and 2 on second)
= P (tossing a 6) x P (tossing a 2)
= 1/6 x 1/6 = 1/36 = 0.028

Independent Events
A bucket contains 3 black balls and 7 green balls.
 Draw a ball from the bucket, replace it, and dra
w a second ball.
1. The probability of a black ball drawn on first dra

w is:
P (B) = 0.30 (a marginal probability)
2. The probability of two green balls drawn is:
P (GG) = P (G) x P (G) = 0.7 x 0.7 = 0.49
(a joint probability for two independent events)

Independent Events
A bucket contains 3 black balls and 7 green balls.
 Draw a ball from the bucket, replace it, and dra
w a second ball.
3. The probability of a black ball drawn on the seco
nd draw if the first draw is green is:
P (B | G) = P (B) = 0.30
(a conditional probability but equal to the marginal
because the two draws are independent events)
4. The probability of a green ball drawn on the seco
nd draw if the first draw is green is:
P (G | G) = P (G) = 0.70
(a conditional probability as in event 3)

Statistically Dependent Events
The marginal probability of an event occurring is co
mputed in the same way:
P (A)
Calculating conditional probabilities is slightly more

complicated. The probability of event A given that e
vent B has occurred is:
P (AB)
P (A | B) =
P (B)
The formula for the joint probability of two events is:

P (AB) = P (B | A) P (A)

When Events Are Dependent
Assume that we have an urn containing 10 balls of t

he following descriptions:
 4 are white (W) and lettered (L)
 2 are white (W) and numbered (N)
 3 are yellow (Y) and lettered (L)
 1 is yellow (Y) and numbered (N)
P (WL) = 4/10 = 0.4 P (YL) = 3/10 = 0.3

P (WN) = 2/10 = 0.2 P (YN) = 1/10 = 0.1
P (W) = 6/10 = 0.6 P (L) = 7/10 = 0.7
P (Y) = 4/10 = 0.4 P (N) = 3/10 = 0.3

4 balls
White (W) 4
and Probability (WL) =
10
Lettered (L)
2 balls
The urn cont White (W) 2
ains 10 balls Probability (WN) =
and 10
: Numbered (N)
3 balls
Yellow (Y) 3
Probability (YL) =
and 10
Lettered (L)
Figure 2.3
1 ball Yellow (Y) 1
and Numbered (N) Probability (YN) =
10
The conditional probability that the ball drawn

is lettered, given that it is yellow, is:
P (YL) 0.3
P (L | Y) = = = 0.75
P (Y) 0.4
We can verify P (YL) using the joint probability formula
P (YL) = P (L | Y) x P (Y) = (0.75)(0.4) = 0.3

Joint Probabilities
for Dependent Events
If the stock market reaches 12,500 point by January,
there is a 70% probability that Tubeless Electronics
will go up.
 You believe that there is only a 40% chance th
e stock market will reach 12,500.
 Let M represent the event of the stock market r
eaching 12,500 and let T be the event that Tube
less goes up in value.
P (MT) = P (T | M) x P (M) = (0.70)(0.40) = 0.28

Posterior Probabilities
A cup contains two dice identical in appearance but
one is fair (unbiased), the other is loaded (biased).
 The probability of rolling a 3 on the fair die is 1/6 or 0.166.
 The probability of tossing the same number on the loaded
die is 0.60.
 We select one by chance,
toss it, and get a 3.
 What is the probability that
the die rolled was fair?
 What is the probability that
the loaded die was rolled?

We know the probability of the die being fair or
loaded is:
P (fair) = 0.50 P (loaded) = 0.50
And that
P (3 | fair) = 0.166 P (3 | loaded) = 0.60
We compute the probabilities of P (3 and fair)

and P (3 and loaded):
P (3 and fair) = P (3 | fair) x P (fair)

= (0.166)(0.50) = 0.083
P (3 and loaded) = P (3 | loaded) x P (loaded)
= (0.60)(0.50) = 0.300
We know the probability
The sumof the die being
of these fair or
probabilities
loaded is gives us the unconditional pro
bability
P (fair) = 0.50 of tossing
P (loaded) a 3:
= 0.50
And that
P (3 | fair) = 0.166P (3)P=(30.083 + 0.300
| loaded) = 0.383
= 0.60
We compute the probabilities of P (3 and fair)

and P (3 and loaded)
P (3 and fair) = P (3 | fair) x P (fair)

= (0.166)(0.50) = 0.083
P (3 and loaded) = P (3 | loaded) x P (loaded)
= (0.60)(0.50) = 0.300
If a 3 does occur, the probability that the die rolled
was the fair one is:
P (fair and 3) 0.083
P (fair | 3) = = = 0.22
P (3) 0.383
The probability that the die was loaded is:
P (loaded and 3) 0.300

P (loaded | 3) = = = 0.78
P (3) 0.383
 These are the revised or posterior probabilities for the

next roll of the die.
 We use these to revise our prior probability estimates.
Bayes’ Calculations
Given event B has occurred:
STATE OF N P (B | STATE O PRIOR PROBABIL JOINT PROBABIL POSTERIOR
ATURE F NATURE) ITY ITY PROBABILITY
A P(B | A) x P(A) = P(B and A) P(B and A)/P(B) = P(A|B)

A’ P(B | A’) x P(A’) = P(B and A’) P(B and A’)/P(B) = P(A’|B)
P(B)
Table 2.2
Given a 3 was rolled:
STATE OF NAT P (B | STATE O PRIOR PROBABIL JOINT PROBABILI POSTERIOR
URE F NATURE) ITY TY PROBABILITY
Fair die 0.166 x 0.5 = 0.083 0.083 / 0.383 = 0.22

Loaded die 0.600 x 0.5 = 0.300 0.300 / 0.383 = 0.78
P(3) = 0.383
Table 2.3
General Form of Bayes’ Theorem
We can compute revised probabilities more

directly by using:
P
(
B|
A)P
(
A)
P
(
A|
B)
P(
B|
A)P
(
A
)P(
B|
A)
P(
A
)
where
A  the complement of the event A ;
for example, if A is the event “fair die”,
then A is “loaded die”.

General Form of Bayes’ Theorem
This is basically what we did in the previous example:

Replace A with “fair die” Rep
lace A “loaded die Repl
with
ace with
B “3 rolled”
We get
fair
P
( die
|3
rolled
)
P3
(
|fair
)
Pfair
()

P
(3
fair
| )
P
( 
fair
)P3
(
|loade
)
P
(loa
)
0
(166
. 050
)(
.) 0
.083
0
22
.
0
(
.166
050
)(
.)
(0
60
. 050
)(
.)0
.383
Further Probability Revisions
We can obtain additional information by performing
the experiment a second time
 If you can afford it, perform experiments sever
al times.
We roll the die again and again get a 3.
P
( )
fair0
50
.and
P(load
)
050
.
3
P
(3
,| 
fair
)0
(166
. 0
)(. 
166
)0027
.
3
P
(3
,| )
loaded
(06
. 0
)(
.6
)
036
.

We can obtain
P3,3
( and fair)
additional P 3
(,3|fai)
information by
Pfa
( performing
)
the experiment a second (0time
.027 0
)(5
. ) 0013
.
P
al(3,3and
times loa ) P (33
, lo
| ) Plo
( )
 (0.36 0
)(5
.) 0 18
.
We roll the die again and again get a 3
P
( )
fair0
50
.and
P(load
)
050
.
3
P
(3
,| 
fair
)0
(166
. 0
)(. 
166
)0027
.
3
P
(3
,| )
loaded
(06
. 0
)(
.6
)
036
.

We can obtain
P3,3
( and fair)
additional P 3
(,3|fai)
information by
Pfa
( performing
)
the experiment a second (0time
.027 0
)(5
. ) 0013
.
P
al(3,3and
times loa ) P (33
, lo
| ) Plo
( )
 (0.36 0
)(5
.) 0 18
.
We roll the die again and again get a 3
P( 
fair
) 0
.50
and
P
(P(load
3,3 )
and0
.
50
fair
)0013
.
P
Pfair
(
(
3,
3||3
3
,
)

fair
)(0
.
166
)(
0.
166
)
0
.
027 0
.067
P 3
(
,3) 0 193
.
P(
3,
3| 
loaded
)(0.
6)(
0
.
6)0
.
36
P
(3,3and
load
) 018
.
loaded
P
( |3
3
,
)  
0
.93
P
(33
,
) 0
.193

After the first roll of the die:
probability the die is fair = 0.22

probability the die is loaded = 0.78
After the second roll of the die:
probability the die is fair = 0.067

probability the die is loaded = 0.933

Variance of a
Discrete Probability Distribution
A related measure of dispersion is the

standard deviation.

σ 
σ
Vari 2
where
= square root
σ = standard deviation

Variance of a
Discrete Probability Distribution
A related measure of dispersion is the

standard deviation.

σ 
σ
Vari 2
where
= square
Forroot
Dr. Shannon’s class:
σ = standard deviation

σVaria
1
29
. 
114
.

The Binomial Distribution
The binomial distribution is used to find the pr

obability of a specific number of successes in
n trials.
We need to know:
n = number of trials
p = the probability of success on any sin
gle trial
We let
r = number of successes
q = 1 – p = the probability of a failure

The binomial formula is:
n!r
r  p
Probab
y
of
succe
in
tria
n n
r
q
r!
(
n
r)!
The symbol ! means factorial, and

n! = n(n – 1)(n – 2)…(1)
For example
4! = (4)(3)(2)(1) = 24
By definition
1! = 1 and 0! = 1

Binomial Distribution for n = 5 and p = 0.50.
NUMBER OF 5!
Probability = (0.5)r(0.5)5 – r
HEADS (r) r!(5 – r)!
0 0.03125 = 5! (0.5)0(0.5)5 – 0
0!(5 – 0)!
1 0.15625 = 5! (0.5)1(0.5)5 – 1
1!(5 – 1)!
2 0.31250 = 5! (0.5)2(0.5)5 – 2
2!(5 – 2)!
3 0.31250 = 5! (0.5)3(0.5)5 – 3
3!(5 – 3)!
4 0.15625 = 5! (0.5)4(0.5)5 – 4
4!(5 – 4)!
5 0.03125 = 5! (0.5)5(0.5)5 – 5
Table 2.7
5!(5 – 5)!

Solving Problems with the Binomi
al Formula
We want to find the probability of 4 heads in 5 tosses.
n = 5, r = 4, p = 0.5, and q = 1 – 0.5 = 0.5
Thus
5! 45 

P
(4 5  0
successes
intrials
) .
50.
54
4
!
(
54)!
5
(4
32
)(1
)(
)(
)
 (0
. )(
.
0625
05)0
.1562
4
(3
21
)(1
)(
)(
!
)

Solving Problems with the Binomi
al Formula
Binomial Probability Distribution for n = 5 and p = 0.50.
0.4 –
0.3 –
Probability P (r)
0.2 –
0.1 –
0 –| | | | | | |
Figure 2.7 1 2 3 4 5 6
Values of r (number of successes)
Solving Problems with Bino
mial Tables
MSA Electronics is experimenting with the manufactur
e of a new transistor.
 Every hour a random sample of 5 transistors is ta
ken.
 The probability of one transistor being defective i
s 0.15.
What is the probability of finding 3, 4, or 5 defective?
So n = 5, p = 0.15, and r = 3, 4, or 5
We could use the formula to solve this problem,

but using the table is easier.

mial Tables
P
n r 0.05 0.10 0.15
5 0 0.7738 0.5905 0.4437
1 0.2036 0.3281 0.3915
2 0.0214 0.0729 0.1382
3 0.0011 0.0081 0.0244
4 0.0000 0.0005 0.0022
5 0.0000 0.0000 0.0001
Table 2.8 (partial)
We find the three probabilities in the table

for n = 5, p = 0.15, and r = 3, 4, and 5 and ad
d them together.

mial Tables
P
3
or
n mor
P
( r defe
0.05 )

3
P
(
)P ( 4
0.10 )
5
P
(
) 0.15
5 0 0.7738 
0
. 
0.5905
024 0.0.4437 
00
000
. 0
0
.
1 0.2036 0.3281 0.3915
2 0.0214 0.0729 0.1382
3 0.0011 0.0081 0.0244
4 0.0000 0.0005 0.0022
5 0.0000 0.0000 0.0001
Table 2.8 (partial)
We find the three probabilities in the table

for n = 5, p = 0.15, and r = 3, 4, and 5 and ad
d them together

mial Tables
It is easy to find the expected value (or mean) and va
riance of a binomial distribution.
Expected value (mean) = np

Variance = np(1 – p)
For the MSA example:

 
Expected
value
np50
(
. 
15
)0
75
.

1
np
(p
Variance
)5
(0
15
. 0
)(
. 
85
)0
637
.

Using the Standard Normal Table
Step 1
Convert the normal distribution into a standard n
ormal distribution.
 A standard normal distribution has a mean
of 0 and a standard deviation of 1
 The new standard random variable is Z
X
Z

where
X = value of the random variable we want to measure
µ = mean of the distribution
 = standard deviation of the distribution
Z = number of standard deviations from X to the mean, µ
Using the Standard Normal Table
Step 2
Look up the probability from a table of normal cur
ve areas.
 Use Appendix A or Table 2.9 (portion below).
 The column on the left has Z values.
 The row at the top has second decimal place
s for the Z values.
AREA UNDER THE NORMAL CURVE
Z 0.00 0.01 0.02 0.03
1.8 0.96407 0.96485 0.96562 0.96638 P(X < 130)
1.9 0.97128 0.97193 0.97257 0.97320 = P(Z < 2.00)
2.0 0.97725 0.97784 0.97831 0.97882
2.1 0.98214 0.98257 0.98300 0.98341 = 0.97725
2.2 0.98610 0.98645 0.98679 0.98713
Table 2.9 (partial)

Haynes Construction Company
Haynes builds three- and four-unit apartment bui

ldings (called triplexes and quadraplexes, respe
ctively).
 Total construction time follows a normal di
stribution.
 For triplexes, µ = 100 days and  = 20 days.
 Contract calls for completion in 125 days, a
nd late completion will incur a severe penal
ty fee.
 What is the probability of completing in 125
days?


X

125
100
Z
 20the area is 0.89435.
From Appendix A, for Z = 1.25
25  The probability is about 0

 1.25
20 .89 that Haynes will not vi
olate the contract.
µ = 100 days X = 125 days

Figure 2.11
 = 20 days

The probability completin
g in more than 125 days is
1 – 0.89435 = 0.10565.
Going back to the le

ft tail of the distribu
tion:
X = 75 days µ = 100 days
The probability of completing in less than 75 d

ays is 0.10565.
What is the probability of completing a triplex

within 110 and 125 days?
We know the probability of completing in 125 da

ys, P(X < 125) = 0.89435.
We have to complete the probability of completi

ng in 110 days and find the area between those t
wo events.


X

110
100
From Appendix A, for Z = 0.5 the
Z
 20 area is 0.69146.
10 P(110 < X < 125) = 0.89435 – 0.69
 0.5 146 = 0.20289.
20
 = 20 days
µ = 100 d 110 d 125 d

Figure 2.13
ays ays ays
The Empirical Rule
For a normally distributed random variable with me

an µ and standard deviation  , then
1. About 68% of values will be within ±1 of the mean.
2. About 95.4% of values will be within ±2 of the mea

n.
3. About 99.7% of values will be within ±3 of the mea

n.

The Empirical Rule
16% 68% 16%
–1 +1
a µ b
2.3% 95.4% 2.3%
–2 +2
a µ b
0.15% 99.7% 0.15%
Figure 2.14 –3 +3

a µ b

The F Distribution
 It is a continuous probability distribution.

 The F statistic is the ratio of two sample variances.
 F distributions have two sets of degrees of freedo
m.
 Degrees of freedom are based on sample size and
used to calculate the numerator and denominator o
f the ratio.
df1 = degrees of freedom for the numerator
df2 = degrees of freedom for the denominator
 The probabilities of large values of F are very small

.
The F Distribution
F
Figure 2.15

The F Distribution
Consider the example: df1 = 5

df2 = 6
 = 0.05
From Appendix D, we get
F, df = F0.05, 5, 6 = 4.39
1, df2
This means
P(F > 4.39) = 0.05
The probability is only 0.05 F will exceed 4.39.

The F Distribution
F value for 0.05 probability

with 5 and 6 degrees of fre
edom
0.05
F = 4.39
Figure 2.16

Poisson Distribution
We can use Appendix C to find Poisson probabilities.

Suppose that λ = 2. Some probability calculations are:
x e  
P( X ) 
X!
2 0 e  2 1(0.1353 )
P ( 0)    0.1353
0! 1
21 e  2 2(0.1353 )
P (1)    0.2706
1! 1
2 2 e  2 4(0.1353 )
P ( 2)    0.2706
2! 2

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Chapter 2

Probability Concepts and

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-1

 Life is uncertain; we are not sure

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-2

1. The probability, P, of any event or st

2. The sum of the simple probabilities f

Number of occurrences of the event

 Classical or logical method

Draw one card from a deck of 52 playing cards

P (drawing a 7) = 4/52 = 1/13

 These two events are not mutually exclusive

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 2-7

We often want to know whether one or a se

P (event A or event B) = P (event A) + P (event B)

P (spade or club) = P (spade) + P (club)

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The equation must be modified to account f

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P (A) P (B) P (A) P (B)

Events that are mutually Events that are not mutu

P (A or B) = P (A) + P (B) P (A or B) = P (A) + P (B)

 Conditional probability is the probability of event

The probability of tossing a 6 on the first

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1. The probability of a black ball drawn on first dra

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Calculating conditional probabilities is slightly more

The formula for the joint probability of two events is:

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Assume that we have an urn containing 10 balls of t

P (WL) = 4/10 = 0.4 P (YL) = 3/10 = 0.3

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The conditional probability that the ball drawn

We can verify P (YL) using the joint probability formula

P (YL) = P (L | Y) x P (Y) = (0.75)(0.4) = 0.3

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P (MT) = P (T | M) x P (M) = (0.70)(0.40) = 0.28

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We compute the probabilities of P (3 and fair)

P (3 and fair) = P (3 | fair) x P (fair)

We compute the probabilities of P (3 and fair)

P (3 and fair) = P (3 | fair) x P (fair)

The probability that the die was loaded is:

P (loaded and 3) 0.300

 These are the revised or posterior probabilities for the

A P(B | A) x P(A) = P(B and A) P(B and A)/P(B) = P(A|B)

Fair die 0.166 x 0.5 = 0.083 0.083 / 0.383 = 0.22

We can compute revised probabilities more

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This is basically what we did in the previous example:

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After the first roll of the die:

probability the die is fair = 0.22

After the second roll of the die:

probability the die is fair = 0.067

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A related measure of dispersion is the

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