Chapter 2

To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna © 2008 Prentice-Hall, Inc.
Power Point slides created by Jeff Heyl © 2009 Prentice-Hall, Inc.
 Chapter Outline
2.1 Introduction
2.2 Fundamental Concepts
2.3 Mutually Exclusive and Collectively
Exhaustive Events
2.4 Statistically Independent Events
2.5 Statistically Dependent Events
2.6 Revising Probabilities with Bayes’
Theorem
2.7 Further Probability Revisions

© 2008 Prentice-Hall, Inc. 2–2

 Chapter Outline
2.8 Random Variables
2.9 Probability Distributions
2.10 The Binomial Distribution
2.11 The Normal Distribution
2.12 The F Distribution
2.13 The Exponential Distribution
2.14 The Poisson Distribution

© 2008 Prentice-Hall, Inc. 2–3

 Introduction

 Life is uncertain, we are not sure

what the future will bring
 Risk and probability is a part of
our daily lives
 Probability is a numerical
statement about the likelihood
that an event will occur

© 2008 Prentice-Hall, Inc. 2–4

 Fundamental Concepts

1. The probability, P, of any event or

state of nature occurring is greater
than or equal to 0 and less than or
equal to 1. That is:

0  P (event)  1

2. The sum of the simple probabilities

for all possible outcomes of an
activity must equal 1
© 2008 Prentice-Hall, Inc. 2–5
 Diversey Paint Example - #50
 Demand for white latex paint at Diversey Paint
and 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
NUMBER OF DAYS PROBABILITY
DEMANDED
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)

© 2008 Prentice-Hall, Inc. 2–6

 Diversey Paint Example
 Demand for white latex paint at Diversey Paint
and Supply
Notice has always been either 0, 1, 2, 3, or 4
the individual
gallons perare
probabilities dayall between 0
and 1 the past 200 days, the owner has observed
 Over
the following
0 ≤ P frequencies
(event) ≤ 1 of demand
And the total of all event
QUANTITY equals 1
probabilities NUMBER OF DAYS PROBABILITY
DEMANDED
0 ∑ P (event) = 1.00
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)

© 2008 Prentice-Hall, Inc. 2–7

 Three Types of Probabilities -#40-45
 Marginal (or simple)
simple probability refers to the
probability of occurrence of a simple event
P (A)
 Joint probability refers to the probability of an
occurrence involving two or more events & is the
product of their 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)

 Or the probability of event A given that event B has

occurred, P (A | B)
© 2008 Prentice-Hall, Inc. 2–8
 Mutually Exclusive Events-#41

Events are said to be mutually

exclusive if only one of the events can
occur on any one trial
 Tossing a coin will result
in either a head or a tail
 Rolling a die will result in
only one of six possible
outcomes

© 2008 Prentice-Hall, Inc. 2–9

 Revising Probabilities with
Bayes’ Theorem
Bayes’ theorem is used to incorporate additional
information and help create posterior probabilities

Prior
Probabilities

Bayes’ Posterior
Process Probabilities

New
Information

Figure 2.4
© 2008 Prentice-Hall, Inc. 2 – 10
 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”

© 2008 Prentice-Hall, Inc. 2 – 11

 Random Variables

A random variable assigns a real number

to every possible outcome or event in an
experiment
X = number of refrigerators sold during the day

Discrete random variables can assume only

a finite or limited set of values
Continuous random variables can assume
any one of an infinite set of values

© 2008 Prentice-Hall, Inc. 2 – 12

 Random Variables – Numbers
RANGE OF
RANDOM
EXPERIMENT OUTCOME RANDOM
VARIABLES
VARIABLES
Stock 50 Number of Christmas X 0, 1, 2,…, 50
Christmas trees trees sold
Inspect 600 Number of acceptable Y 0, 1, 2,…, 600
items items
Send out 5,000 Number of people Z 0, 1, 2,…, 5,000
sales letters responding to the
letters
Build an Percent of building R 0 ≤ R ≤ 100
apartment completed after 4
building months
Test the lifetime Length of time the S 0 ≤ S ≤ 80,000
of a lightbulb bulb lasts up to 80,000
(minutes) minutes
Table 2.4
© 2008 Prentice-Hall, Inc. 2 – 13
 The Binomial Distribution

 Many business experiments can be

characterized by the Bernoulli process
 The Bernoulli process is described by the
binomial probability distribution
1. Each trial has only two possible outcomes
2. The probability stays the same from one trial
to the next
3. The trials are statistically independent
4. The number of trials is a positive integer

© 2008 Prentice-Hall, Inc. 2 – 14

 The Binomial Distribution
The binomial distribution is used to find the
probability of a specific number of successes
out of n trials
We need to know
n = number of trials
p = the probability of success on any
single trial

We let
r = number of successes
q = 1 – p = the probability of a failure

© 2008 Prentice-Hall, Inc. 2 – 15

 The Binomial Distribution
The binomial formula is

n!
Probability of r successes in n trials  p r q n r
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

© 2008 Prentice-Hall, Inc. 2 – 16

 The Binomial Distribution

NUMBER OF 5!
HEADS (r) Probability = (0.5)r(0.5)5 – r
r!(5 – r)!
5!
0 0.03125 = 0!(5 – 0)! (0.5)0(0.5)5 – 0
5!
1 0.15625 = 1!(5 – 1)! (0.5)1(0.5)5 – 1
5!
2 0.31250 = 2!(5 – 2)! (0.5)2(0.5)5 – 2
5!
3 0.31250 = 3!(5 – 3)! (0.5)3(0.5)5 – 3
5!
4 0.15625 = 4!(5 – 4)! (0.5)4(0.5)5 – 4
5!
5 0.03125 = 5!(5 – 5)! (0.5)5(0.5)5 – 5

Table 2.7
© 2008 Prentice-Hall, Inc. 2 – 17
 Solving Problems with the
Binomial 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!
P  ( 4 successes in 5 trials)  0.5 4 0.5 5  4
4! (5  4 )!
5( 4 )(3)(2)(1)
 (0.0625 )(0.5 )  0.15625
4(3)(2)(1)(1! )

Or about 16%

© 2008 Prentice-Hall, Inc. 2 – 18

 Solving Problems with
Binomial Tables
MSA Electronics is experimenting with the
manufacture of a new transistor
 Every hour a sample of 5 transistors is taken
 The probability of one transistor being
defective is 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

© 2008 Prentice-Hall, Inc. 2 – 19

 Solving Problems with
Binomial 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
add them together

© 2008 Prentice-Hall, Inc. 2 – 20

 Solving Problems with
Binomial Tables
P
P (3 or
n more
r 0.05 )  P (3)  P
defects ( 4 )  P (5 )
0.10 0.15
5 0 0.7738  0.0244  0.0022  0.0001
0.5905 0.4437  0.0267
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
add them together

© 2008 Prentice-Hall, Inc. 2 – 21

 Solving Problems with
Binomial Tables
It is easy to find the expected value (or mean) and
variance of a binomial distribution

Expected value (mean) = np

Variance = np(1 – p)

For the MSA example

Expected value  np  5(0.15 )  0.75
Variance  np(1  p)  5(0.15 )(0.85 )  0.6375

© 2008 Prentice-Hall, Inc. 2 – 22

 The Normal Distribution
The normal distribution is the most popular
and useful continuous probability
distribution
 The formula for the probability density
function is rather complex
 ( x   )2
1
f (X )  e 2 2
 2

 The normal distribution is specified

completely when we know the mean, µ,
and the standard deviation, 

© 2008 Prentice-Hall, Inc. 2 – 23

 The Normal Distribution
 The normal distribution is symmetrical,
with the midpoint representing the mean
 Shifting the mean does not change the
shape of the distribution
 Values on the X axis are measured in the
number of standard deviations away from
the mean
 As the standard deviation becomes larger,
the curve flattens
 As the standard deviation becomes
smaller, the curve becomes steeper
© 2008 Prentice-Hall, Inc. 2 – 24
 The Normal Distribution

| | |

40 µ = 50 60

Smaller µ, same 

| | |

µ = 40 50 60

Larger µ, same 

| | |

40 50 µ = 60
Figure 2.8
© 2008 Prentice-Hall, Inc. 2 – 25
 The Normal Distribution

Same µ, smaller 

Same µ, larger 

Figure 2.9
µ
© 2008 Prentice-Hall, Inc. 2 – 26
 The Normal Distribution

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%

–3 +3
a µ b
Figure 2.10
© 2008 Prentice-Hall, Inc. 2 – 27
Using the Standard Normal Table
Step 1
Convert the normal distribution into a standard
normal 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
© 2008 Prentice-Hall, Inc. 2 – 28
 Using the Standard Normal Table
For example, µ = 100,  = 15, and we want to find
the probability that X is less than 130
X   130  100
Z 
 15
30
  2 std dev µ = 100
15 P(X < 130)  = 15

| | | | | | |
X = IQ
55 70 85 100 115 130 145

X 
| | | | | | | Z
–3 –2 –1 0 1 2 3 
Figure 2.11
© 2008 Prentice-Hall, Inc. 2 – 29
 Using the Standard Normal Table
Step 2
Look up the probability from a table of normal
curve 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
places for the Z values
P(X < 130)
AREA UNDER THE NORMAL CURVE
Z 0.00 0.01 0.02 0.03
= (Z < 2.00)
1.8 0.96407 0.96485 0.96562 0.96638 = 97.7%
1.9 0.97128 0.97193 0.97257 0.97320
The probability that a
2.0 0.97725 0.97784 0.97831 0.97882
randomly selected
2.1 0.98214 0.98257 0.98300 0.98341
person’s IQ is less
2.2 0.98610 0.98645 0.98679 0.98713
than 130 is 97.7%
Table 2.9
© 2008 Prentice-Hall, Inc. 2 – 30
Haynes Construction Company

Haynes builds apartment buildings

 Total construction time follows a normal
distribution
 For triplexes, µ = 100 days and  = 20 days
 Contract calls for completion in 125 days
 Late completion will incur a severe penalty
fee
 What is the probability of completing in 125
days?

© 2008 Prentice-Hall, Inc. 2 – 31

 Haynes Construction Company

X   125  100
Z 
 20
25
  1.25
20

µ = 100 days X = 125 days

 = 20 days
Figure 2.12

From Appendix A, for Z = 1.25 the area is 0.89435

 There is about an 89% probability Haynes
will not violate the contract
© 2008 Prentice-Hall, Inc. 2 – 32
Haynes Construction Company

Haynes builds apartment buildings

 Total construction time follows a normal
distribution
 For triplexes, µ = 100 days and  = 20 days
 Completion in 75 days or less will earn a
bonus of $5,000
 What is the probability of getting the
bonus?

© 2008 Prentice-Hall, Inc. 2 – 33

 Haynes Construction Company

X   75  100
Z 
 20
 25
  1.25 P(X < 75 days)
20
Area of
Interest

X = 75 days µ = 100 days

Figure 2.12

 But Appendix A has only positive Z values, the

probability we are looking for is in the negative
tail
© 2008 Prentice-Hall, Inc. 2 – 34
 Haynes Construction Company

X   75  100
Z 
 20
 25
  1.25 P(X > 125 days)
20 Area of
Interest

µ = 100 days X = 125 days

 Because the curve is symmetrical, we can look

at the probability in the positive tail for the
same distance away from the mean
© 2008 Prentice-Hall, Inc. 2 – 35
 Haynes Construction Company
 We know the probability
completing in
125 days is 0.89435
 So the probability
completing in more
than 125 days is
1 – 0.89435 = 0.10565

µ = 100 days X = 125 days

© 2008 Prentice-Hall, Inc. 2 – 36

 Haynes Construction Company
 The probability
completing in more
than 125 days is
1 – 0.89435 = 0.10565
 Going back to
the left tail of the
distribution

X = 75 days µ = 100 days

 The probability of completing in less than

75 days is 0.10565 or about 11%
© 2008 Prentice-Hall, Inc. 2 – 37
Haynes Construction Company

Haynes builds apartment buildings

 Total construction time follows a normal
distribution
 For triplexes, µ = 100 days and  = 20 days
 What is the probability of completing
between 110 and 125 days?

 We know the probability of completing in 125

days, P(X < 125) = 0.89435
 We have to complete the probability of
completing in 110 days and find the area
between those two events
© 2008 Prentice-Hall, Inc. 2 – 38
 Haynes Construction Company

X   110  100
Z   = 20 days
 20
10
  0.5
20

µ = 100 110 125

days days days
Figure 2.14

 From Appendix A, for Z = 0.5 the area is 0.69146

 P(110 < X < 125) = 0.89435 – 0.69146 = 0.20289
or about 20%
Assignment // © 2008 Prentice-Hall, Inc. 2 – 39