Applied Business Statistics, 7th ed.

by Ken Black

Chapter 4
Probability

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JohnWiley
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Inc. 1
 Learning Objectives

Comprehend the different ways of assigning probability.

Understand and apply marginal, union, joint, and conditional probabilities.
Select the appropriate law of probability to use in solving problems.
Solve problems using the laws of probability including the laws of
addition, multiplication and conditional probability
Revise probabilities using Bayes’ rule.

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 Probability

Probability – probability of occurrences are

assigned to the inferential process under
conditions of uncertainty

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 Methods of Assigning Probabilities

Classical method of assigning probability

(rules and laws)
Relative frequency of occurrence
(cumulated historical data)
Subjective Probability (personal intuition
or reasoning)

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 Classical Probability

Number of outcomes leading to the event divided by the total

number of outcomes possible
P(E) = ne/N
where N = total number of outcomes, and
ne = number of outcomes in event E
Each outcome is equally likely
Applicable to games of chance
Objective -- everyone correctly using the method assigns an
identical probability

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 Subjective Probability

Subjective Probability - Comes from a person’s

intuition or reasoning
Subjective -- different individuals may (correctly or
incorrectly) assign different numeric probabilities to
the same event
Degree of belief in the results of the event
Useful for unique (single-trial) experiments
New product introduction
Site selection decisions
Sporting events

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 Structure of Probability
Experiment – is a process that produces an outcome
Ex: Rolling two six-sided dice and calculating their sum
Event – an outcome of an experiment
Ex: The sum is at least 10
Elementary event – events that cannot be decomposed or broken down into other
events
Ex: The first die is a six
Sample Space – a complete roster/listing of all elementary events for an experiment
Ex: {(1,1), (1,2), (1,3), …, (2,1), (2,2), …., (6,5), (6,6)}
Trial: one repetition of the process
Ex: Roll the dice…

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 Structure of Probability

Mutually Exclusive Events – events such that the occurrence of one

precludes the occurrence of the other
These events have no intersection
Independent Events – the occurrence or nonoccurrence of one has no
affect on the occurrence of the others
Collectively Exhaustive Events – listing of all possible elementary events
for an experiment
Complementary Events – two events, one of which comprises all the
elementary events of an experiment that are not in the other event

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 Sample Space

The set of all elementary events for an experiment

Methods for describing a sample space
roster or listing
tree diagram
set builder notation
Venn diagram

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 Sample Space: Roster Example

Experiment: randomly select, without replacement,

two families from the residents of Tiny Town
Each ordered pair in the sample space is an
elementary event, for example -- (D,C)

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 Sample Space: Set Notation for
Random Sample of Two Families
S = {(x,y) | x is the family selected on the first draw,
and y is the family selected on the second draw}
Concise description of large sample spaces

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 Union of Sets

The union of two sets contains an instance of each

element of the two sets.
X  1,4,7,9 X Y
Y   2,3,4,5,6
X  Y  1,2,3,4,5,6,7,9
C   IBM , DEC , Apple
F   Apple, Grape, Lime
C  F   IBM , DEC , Apple, Grape, Lime

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 Intersection of Sets

The intersection of two sets contains only those

element common to the two sets.
X   1,4,7,9 X Y
Y   2,3,4,5,6
X  Y   4

C  IBM , DEC , Apple  XY

F  Apple , Grape , Lime 
C F  Apple 
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 Mutually Exclusive Events

Events with no common outcomes

Occurrence of one event precludes the occurrence
of the other event

X Y

C   IBM , DEC , Apple X   1,7,9 P( X Y )  0

F   Grape, Lime Y   2,3,4,5,6
CF   X Y   
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 Independent Events

Occurrence of one event does not affect the

occurrence or nonoccurrence of the other event
The conditional probability of X given Y is equal to the
marginal probability of X.
The conditional probability of Y given X is equal to the
marginal probability of Y.

P( X | Y )  P( X ) and P(Y | X )  P(Y )

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 Collectively Exhaustive Events

Contains all elementary events for an experiment

E1 E2 E3

Sample Space with three

collectively exhaustive events

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 Complementary Events

All elementary events not in the event ‘A’ are in its

complementary event.

P( Sample Space)  1
Sample
Space
A A P ( A  )  1  P ( A)

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 Counting the Possibilities

mn Rule
Sampling from a Population with Replacement
Combinations: Sampling from a Population without
Replacement

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 mn Rule

If an operation can be done m ways and a second

operation can be done n ways, then there are mn
ways for the two operations to occur in order.
A cafeteria offers 5 salads, 4 meats, 8 vegetables, 3
breads, 4 desserts, and 3 drinks. A meal is two
servings of vegetables, which may be identical.
How many meals are available?
5 * 4 * 8 * 3 * 4 * 3 = 5760

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 Combinations: Sampling from a
Population without Replacement
This counting method uses combinations
Selecting n items from a population of N
without replacement

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 Combinations

Combinations – sampling “n” items from a

population size N without replacement provides the
formula shown below
A tray contains 1,000 individual tax returns. If 3
returns are randomly selected without replacement
from the tray, how many possible samples are there?

N N! 1000!
n Cr  
 n   n!( N  n)!  3!(1000  3)!  166,167,000
 

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 Combinations: Sampling from a
Population without Replacement
For example, suppose a small law firm has 16
employees and three are to be selected randomly to
represent the company at the annual meeting of the
American Bar Association.
How many different combinations of lawyers could
be sent to the meeting?
Answer: NCn = 16C3 = 16!/(3!13!) = 560.

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 Four Types of Probability

Marginal Union Joint Conditional

P( X ) P( X  Y ) P( X  Y ) P( X | Y )
The probability The probability The probability The probability
of X occurring of X or Y of X and Y of X occurring
occurring occurring given that Y
has occurred

X X Y X Y
Y

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 General Law of Addition

P( X  Y )  P( X )  P(Y )  P( X  Y )

X Y

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 General Law of Addition -- Example

P( N  S )  P( N )  P( S )  P( N  S )

S
P ( N )  .70
N
P ( S )  .67
.70 .56
.67 P ( N  S )  .56
P ( N  S )  .70  .67  .56
 0.81
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 Office Design Problem Probability Matrix

Increase
Storage Space
Yes No Total
Noise Yes .56 .14 .70
Reduction No .11 .19 .30
Total .67 .33 1.00

P( N  S )  P( N )  P( S )  P( N  S )
 .70  .67  .56
 .81

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 Demonstration Problem 4.3

If a worker is randomly selected from the company

described in Demonstration Problem 4.1 (below),
what is the probability that the worker is either
technical or clerical? What is the probability that the
worker is either a professional or a clerical?
Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155
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 Demonstration Problem 4.3

Examine the raw value matrix of the company’s human

resources data shown in Demonstration Problem 4.1. In
many raw value and probability matrices like this one, the
rows are non-overlapping or mutually exclusive, as are
the columns. In this matrix, a worker can be classified as
being in only one type of position and as either male or
female but not both. Thus, the categories of type of
position are mutually exclusive, as are the categories of
sex, and the special law of addition can be applied to the
human resource data to determine the union
probabilities.

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 Demonstration Problem 4.3

Let T denote technical, C denote clerical, and P denote

professional. The probability that a worker is either
technical or clerical is

P(T U C) = P (T) + P (C) = 69/155 + 31/155 = 100/155 = .645

The probability that a worker is either professional or

clerical is

P (P U C) = P (P) + P (C) = 44/155 + 31/155 = 75/155 = .484

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 Demonstration Problem 4.3

Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155

P(T  C )  P(T )  P(C )

69 31
 
155 155
.645
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 Demonstration Problem 4.3

Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155

P( P  C )  P( P)  P(C )
44 31
 
155 155
.484
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 Law of Multiplication
Demonstration Problem 4.5

P( X  Y )  P ( X )  P(Y | X )  P(Y )  P( X | Y )

80
P( M )   0. 5714
140
P( S| M )  0. 20
P ( M  S )  P ( M )  P ( S| M )
 ( 0. 5714 )( 0. 20 )  0.1143

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 Law of Multiplication

The intersection of two events is called the joint

probability
General law of multiplication is used to find the joint
probability
General law of multiplication gives the probability
that both events x and y will occur at the same time
P(x|y) is a conditional probability that can be stated
as the probability of x given y

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 Law of Multiplication

If a probability matrix is constructed for a problem,

the easiest way to solve for the joint probability is to
find the appropriate cell in the matrix and select the
answer

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 Law of Multiplication
Demonstration Problem 4.5
Probability Matrix
of Employees

Married
Supervisor Yes No Total
Yes .1143 .1000 .2143
No .4571 .3286 .7857
Total .5714 .4286 1.00

30
P( S )   0.2143
140 P ( M  S )  P ( M )  P ( S| M )
80  ( 0. 5714 )( 0. 20 )  0.1143
P( M )   0.5714
140
P ( S | M )  0.20
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 Law of Conditional Probability

If X and Y are two events, the conditional probability

of X occurring given that Y is known or has occurred
is expressed as P(X|Y)
The conditional probability of X given Y is the joint
probability of X and Y divided by the marginal
probability of Y.

P( X  Y ) P(Y | X )  P( X )
P( X | Y )  
P(Y ) P(Y )

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 Law of Conditional Probability - Example

70% of respondents believe noise reduction would

improve productivity.
56% of respondents believed both noise reduction
and increased storage space would improve
productivity
A worker is selected randomly and asked about
changes in the office design
What is the probability that a randomly selected
person believes storage space would improve
productivity given that the person believes noise
reduction improves productivity?

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 Law of Conditional Probability

P ( N ) .70
S N P ( N  S ) .56
P( N  S )
P( S | N ) 
.56
P( N )
.70
.56

.70
.80

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 Independent Events

Recall: Two events are independent when the occurrence of one does not affect the
probability of occurrence of the other one
When X and Y are independent, the conditional probability is equal to the marginal probability

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 Independent Events
Demonstration Problem 4.10
Geographic Location
Northeast Southeast Midwest West
D E F G
Finance A .12 .05 .04 .07 .28

Manufacturing B .15 .03 .11 .06 .35

Communications C .14 .09 .06 .08 .37

.41 .17 .21 .21 1.00

P ( A  G ) 0.07
P( A| G )    0.33 P( A)  0.28
P(G ) 0.21
P( A| G )  0.33  P( A)  0.28

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 Revision of Probabilities: Bayes’ Rule

Allows for reversing the order of conditioning (i.e.

P(A|B) can be calculated if you know P(B|A) & P(A))
An extension to the conditional law of probabilities

P(Y | Xi ) P( Xi )
P( Xi | Y ) 
P(Y | X 1) P( X 1)  P(Y | X 2) P( X 2)    P(Y | Xn) P( Xn)

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 Bayes’ Rule

Note, the numerator of Bayes’ Rule and the law of

conditional probability are the same
The denominator is a collective exhaustive listing of
mutually exclusive outcomes of Y
The denominator is a weighted average of the conditional
probabilities with the weights being the prior probabilities
of the corresponding event

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 Bayes’ Rule: Ribbon Problem

P ( A)  0.65
P ( SJ )  0.35
P ( d | A)  0.08
P ( d | SJ )  0.12
P ( d | A)  P ( A)
P( A | d ) 
P ( d | A)  P ( A)  P ( d | SJ )  P ( SJ )
(0.08)(0.65)
  0.553
(0.08)(0.65)  (0.12)(0.35)
P ( d | SJ )  P ( SJ )
P ( SJ | d ) 
P ( d | A)  P ( A)  P ( d | SJ )  P ( SJ )
(0.12)(0.35)
  0.447
(0.08)(0.65)  (0.12)(0.35)
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 Bayes’ Rule: Ribbon Problem
Alternative Approach using Tree Diagram

Defective (d)
0.08 0.052
Alamo (A)
0.65
Acceptable + 0.094=P(d)
0.92
Defective (d) 0.042
0.12
South 0.042
P ( SJ | d )   0.447
Jersey (SJ) 0.094
0.35 Acceptable
0.88

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