Basic Business Statistics

11th Edition

Chapter 4

Basic Probability

Chap 4-1
 Basic Probability Concepts
 What is Probability?
 Probability allows us to measure effectively the
risks in selecting one alternative over the
others. In general, it is a number that describes
the chance that something will happen

 It is a value between zero (0) and one (1),

inclusive, describing the relative possibility
(chance or likelihood) an event will occur

Chap 4-3
 Basic Probability Concepts
 What is Probability?

 It is expressed either as a percent or as a

decimal. The likelihood that any particular event
will happen may assume values between 0 and
1. A value close to 0 indicates the event is
unlikely to occur, whereas a value close to 1
indicates that the event is quite likely to occur

Chap 4-4
 Basic Probability Concepts

 Probability – the chance that an uncertain event

will occur (always between 0 and 1)

 Impossible Event – an event that has no

chance of occurring (probability = 0)

 Certain Event – an event that is sure to occur

(probability = 1)

Chap 4-5
 Basic Probability Concepts

 Approaches To Probability
 Two types or classifications of probability are
discussed: the Objective and Subjective
viewpoints.
 Objective probability is subdivided into
Classical Probability (Priori Probability) and
Empirical Probability.

Chap 4-6
 Assessing Probability
1. a Classical or Priori
Assuming
all X number of ways the event can occur
outcomes probability of occurrence  
are equally
T total number of elementary outcomes
likely

1. b. Empirical probability - -- based on prior knowledge of the process

(based on relative frequencies)

Number of times event occurred in past

Probability of event happening =
Total number of observations

2. Subjective probability
based on a combination of an individual’s past experience,
personal opinion, and analysis of a particular situation

Chap 4-7
 Example of a Classical or Priori
Probability

Find the probability of selecting a face card (Jack,

Queen, or King) from a standard deck of 52 cards.

X number of face cards

Probability of Face Card  
T total number of cards

X 12 face cards 3
 
T 52 total cards 13

Chap 4-8
 Example of Empirical probability

Find the probability of selecting a male taking statistics

from the population described in the following table:

Taking Stats Not Taking Total

Stats
Male 84 145 229
Female 76 134 210
Total 160 279 439

number of males taking stats 84

Probability of male taking stats    0.191
total number of people 439

Chap 4-9
 Example of Empirical probability
Ex. - A person who sells the newspaper wants to find
out the chance that on any day he will be able to sell
more than 100 copies. From his diary where he has
recorded the daily sales of the last year , he finds out
the following data.
SALES NO. OF DAYS RELATIVE
FREQUENCY FREQUENCY

85 73 73/365
95 146 146/365
105 60 60/365
110 86 86/365
Chap 4-10
 Example of Empirical probability
SALES NO. OF DAYS RELATIVE
FREQUENCY FREQUENCY

85 73 73/365
95 146 146/365
105 60 60/365
110 86 86/365

Thus the no. of days when his sales were more than 100 = 60 + 86 = 146
•

Days. Hence reqd. probability = 146 / 365 = 0.4

•

Chap 4-11
 Experiment & Outcome
 In our study of probability we will make extensive use of several key
words.
 Experiment: A process that leads to the occurrence of one and only one
of several possible observations. e.g. -
 You roll a die and observe the number of spots that appear face up.

The experiment is the act of rolling the die.

 Your survey company is hired by Ford to poll consumers to determine

if they plan to buy a new American made car this year. You contact a
sample of 5,000 consumers. The act of counting the consumers who
indicated they would purchase an American made car is the
experiment.

 Outcome: A particular result of an experiment. e.g. -

 One outcome of the die ‑rolling experiment is the appearance of a 6.

 In the experiment of counting the number of consumers who plan to

buy a new American-made car this year, one possibility is that 2,258
plan to buy a car. Another outcome is that 142 plan to buy one.
Chap 4-12
 Events
Each possible outcome of a variable is an event.

 Simple event
 An event described by a single characteristic
 e.g., A red card from a deck of cards
 Joint event
 An event described by two or more characteristics
 e.g., An ace that is also red from a deck of cards
 Complement of an event A (denoted A’)
 All events that are not part of event A
 e.g., All cards that are not diamonds
 P(A) = 1 – P(A’)

Chap 4-13
 Mutually Exclusive Events
 Mutually exclusive events
 Events that cannot occur simultaneously

Example: A computer chip will be defective or

not defective and can not be defective and
not defective at the same time

Chap 4-14
 Collectively Exhaustive Events

 Collectively exhaustive events

 One of the events must occur
 The set of events covers the entire sample space

For example:

In a die-tossing experiment every outcome will be

either an even number or an odd number. Thus the
set is collectively exhaustive.

Chap 4-15
 Sample Space
The Sample Space is the collection of all
possible events
e.g. All 6 faces of a die:

e.g. All 52 cards of a bridge deck:

S ={Head, Tail}
S = { 1, 2, 3, 4, 5, 6 }
S = { Defective, Non Defective}

Chap 4-16
 Sample Space
Experiment All Possible Outcomes
( Sample Space)
1 Toss a coin Head, Tail

2 Select a part for Defective, Non Defective

inspection
3 Conduct a Sales Call Purchase, No purchase

4 Roll a Die 1, 2, 3, 4, 5, 6

5 Play a Football Game Win, Lose, Tie

6 Choose one Ace Card Diamond, Heart, Spade,

( on the table 4 Ace Club
cards are kept) Chap 4-17
 Visualizing Events
 Contingency Tables
Ace Not Ace Total

Black 2 24 26
Red 2 24 26

Total 4 48 52

 Decision Trees Sample

Ac e 2 Space
Sample
k C a rd
Blac
Space
Full Deck Not an Ace 24
of 52 Cards Ac e
Red C 2
ard
Not an
A ce 24
Chap 4-18
 Visualizing Events
 Venn Diagram
 Venn diagrams, developed by English logician J. Venn, are
useful for portraying events and their relationship to one
another. They are constructed by enclosing a space, usually in
a form of a rectangle, which represents the possible events.
Two mutually exclusive events such as A and B can then be
portrayed (as in the following diagram by enclosing regions that
do not overlap i.e. that have no common area).

Event
A
Event
B
Chap 4-19
 Visualizing Events
 Venn Diagrams
 Let A = aces
 Let B = red cards A ∩ B = ace and red

A U B = ace or red B

Chap 4-20
 Definitions
Simple vs. Joint Probability

 Simple Probability refers to the probability of a

simple event.
 ex. P(King)
 ex. P(Spade)

 Joint Probability refers to the probability of an

occurrence of two or more events (joint event).
 ex. P(King and Spade)

Chap 4-21
 Computing Joint and
Marginal Probabilities

 The probability of a joint event, A and B:

number of outcomes satisfying A and B
P( A and B) 
total number of elementary outcomes

 Computing a marginal (or simple) probability:

P(A)  P(A and B1 )  P(A and B 2 )    P(A and Bk )


Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

Chap 4-22
Joint Probability Example

P(Red and Ace)

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

Chap 4-23
Marginal Probability Example

P(Ace)
2 2 4
 P( Ace and Re d)  P( Ace and Black )   
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Chap 4-24
 Marginal & Joint Probabilities In A
Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)
A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

Chap 4-25
 Probability Summary So Far
 Probability is the numerical measure
of the likelihood that an event will 1 Certain

occur
 The probability of any event must be
between 0 and 1, inclusively
0 ≤ P(A) ≤ 1 For any event A 0.5
 The sum of the probabilities of all
mutually exclusive and collectively
exhaustive events is 1
P(A)  P(B)  P(C)  1
0 Impossible
If A, B, and C are mutually exclusive and
collectively exhaustive
Chap 4-26
 Addition Rules

General Addition Rule:

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

If A and B are mutually exclusive, then

P(A and B) = 0, so the rule can be simplified:

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

For mutually exclusive events A and B

Chap 4-27
 Addition Rules

General Addition Rule:

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

If A and B are mutually exclusive, then
P(A and B) = 0, so the rule can be simplified:
P(A or B) = P(A) + P(B)
For mutually exclusive events A and B
Chap 4-28
 General Addition Rule Example

P(Red or Ace) = P(Red) +P(Ace) - P(Red and Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Chap 4-29
 Computing Conditional
Probabilities
 A conditional probability is the probability of one
event, given that another event has occurred:
P(A and B) The conditional
P(A | B)  probability of A given
P(B) that B has occurred

P(A and B) The conditional

P(B | A)  probability of B given
P(A) that A has occurred

Where P(A and B) = joint probability of A and B

P(A) = marginal or simple probability of A
P(B) = marginal or simple probability of B
Chap 4-30
 Conditional Probability 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.

 What is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD | AC)

Chap 4-31
 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
No AC
Total 1.0

P(CD and AC)

P(CD | AC)   
P(AC)
Chap 4-32
 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 0.2 0.5 0.7
No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

P(CD and AC) 0.2

P(CD | AC)    0.2857
P(AC) 0.7
Chap 4-33
 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 about 28.57%.

CD No CD Total
AC 0.2 0.5 0.7
No AC 0.2 0.1 0.3
Total 0.4 0.6 1.0

P(CD and AC) 0.2

P(CD | AC)    0.2857
P(AC) 0.7

Chap 4-34
 Independence
 Two events are independent if and only
if:

P(A | B)  P(A)
 Events A and B are independent when the probability
of one event is not affected by the fact that the other
event has occurred

Chap 4-37
 Multiplication Rules

 Multiplication rule for two events A and B:

P(A and B)  P(A | B) P(B)

Note: If A and B are independent, then P(A | B)  P(A)

and the multiplication rule simplifies to

P(A and B)  P(A) P(B)

Chap 4-38
 Examples
Ex. – A scooter company has two plants. Plant 1 produces 80
% & plant 2 produces remaining 20 %.
85 % products produced in plant 1 are considered to be std
quality product & that in plant 2 is 65 %.
 What is the probability that a scooter selected at random

came from plant 1 , if it is known that it is of std. Quality.

 Ans.- let A = the scooter purchased is of std. Quality.

 B = scooter is of std. Quality & came from plant 1.

 C = scooter is of std. Quality & came from plant 2.

 D = scooter came from plant 1.

Chap 4-40
 Examples
Quality Share of
Level Production
Plant 1 Joint Prob. =

Plant 2 Joint Prob. =

Total = Total Quality Level (Irrespective of

Plant) =

 P ( B) =
 P ( C) =
 P (A) =
 P ( D / A) =
Chap 4-41
 Examples
Quality Share of
Level Production
Plant 1 0.85 0.80 Joint Prob. = 0.85* 0.80 = 0.68

Plant 2 0.65 0.20 Joint Prob. = 0.65* 0.20 = 0.13

Total = 1 Total Quality Level (Irrespective of

Plant) = 0.68+ 0.13 = 0.81

 P ( B) = 85 * 80 / 100 = 0.68 (68 %)

 P ( C) = 65 * 20 / 100 = 13 % = 0.13 (13%)
 P (A) = 0.68 + 0.13 = 0.81
 P ( D / A) = 0.68 / 0.81 = 0.8395 = 0.84
Chap 4-42
 Examples
Ex. - A market research firm is interested in surveying
certain attitudes in a small community. There are 125
households broken down accordingly to income,
ownership of telephone & ownership of TV.
Income </= 8000 Income >/ =
INCOME < OR = RS. 8000 INCOME > OR = RS. 8000
8000
TELEPHONE NO TELEPHONE NO
SUBSCRIBER PHONE SUBSCRIBER PHONE

OWN TV SET 27 20 18 10

NO TV SET 18 10 12 10

43
 Examples
1. What is a probability of obtaining a TV owner in
drawing at random ?
2. If household has income over Rs. 8000 & is a
telephone subscriber, what is a probability that he
has a TV?
3. What is the conditional probability of drawing a
household that owns a TV given that household is a
telephone subscriber ?
4. Are the events ‘ ownership of TV’ & ‘ ownership of
telephone ‘ statistically independent?
44
 Examples
Income </= 8000 Income >/= 8000 Total
Own No Phone Own No
Telephone Telephone Phone

Own TV 27 20 18 10
No TV 18 10 12 10
Total

Ans.1 - , Ans. 2 -
Ans. 3 –
• Ans. 4 - When Events are independent, the special rule of
Probability can be applied . Special Rule : P(A&B) = P(A) * P(B)
• P(A) = , P(B) =
• P(A) * P(B) =
• P( A & B) = 45
 Examples
Income </= 8000 Income >/= 8000 Total
Own No Phone Own No
Telephone Telephone Phone

Own TV 27 20 18 10 75
No TV 18 10 12 10 50
Total 45 30 30 20 125

Ans.1 - 75 / 125 = 0.6, Ans. 2 - 18 / 30 = 0.6, Ans. 3 – 45 / 75 = 0.6

• Ans. 4 - P(A) = 75 / 125 , P(B) = 75/125 ,
• P(A) * P(B) = 9/25
• P( A & B) = 45 / 125 = 9/25
• If events are statistically independent, P(A) * P(B) = P (A&B)
• In the case above P(A&B) = P(A)*P(B), and hence we can
46
conclude that events are independent.
 PROBABILITY – Assignment
 In the survey of MBA students, the following data was
gathered wrt the reason for choosing a particular college.
Reason for Choosing a particular College

Quality Cost / Other

Convenience
Full 421 393 76
Enrolment Time
Status Part 400 593 46
Time

1. Develop a joint probability table for this data

2. Use Marginal Probability to comment on most important
47
reasons
 PROBABILITY – Assignment

3.If student chooses full time course, what is

probability that ‘Quality’ is the first reason for
choosing a college?
4.If student chooses part time course, what is
probability that ‘Quality’ is the first reason for
choosing a college?
5. If A = Event that Student is full time, B = Event that
Quality is first reason for applying. Are the events
A & B are Statistically Independent? Justify your
answer.
48
 PROBABILITY – Soln. -Assignment
Reason for Choosing a particular College

Quality Cost / Other Total

Convenience
Full Time 421 393 76 890
Enrolment
Status Part Time 400 593 46 1039

Total 821 986 122 1929

Reason for Choosing a particular College
Quality Cost / Other Total
Convenience
Full Time 0.218 0.204 0.039 0.461
Enrolment
Status Part Time 0.208 0.307 0.024 0.539
49
Total 0.426 0.511 0.063 1.000
 PROBABILITY – Assignment

 2. a) First Reason – Cost / Convenience – 0.511

 b) Second Reason – Quality – 0.426
 3. P ( Quality / Full Time) = 0.218 / 0.461 = 0.473
 4. P ( Quality / Part Time) = 0.208 / 0.539 = 0.386
 5. For Independence: P (A) * P (B) = P ( A&B)
 P(A) = 0.461, P(B) = 0.426 ---- From Table
 P(A) * P(B) = 0.461* 0.426 = 0.196
 P(A And B) = 0.218 ----- From Table
 Since it is not qualifying the requirement, events
are not statistically independent 50
 Bayes’ Theorem

 Bayes’ Theorem is used to revise previously

calculated probabilities based on new
information.

 Developed by Thomas Bayes in the 18th

Century.

 It is an extension of conditional probability.

Chap 4-51
 Bayes Theorem

 The revision of probability with added information is

formalized in probability theory in terms of a theorem
known as Bayes theorem.
 It states that if A & B are two mutually exclusive &
collectively exhaustive events & C is another event
defined in the context of same experiment , then given
values of P(A), P(B),P(C/A)& P(C/B), the probability
 P (A/C) = [P(C/A) * P(A)] / [P(C/A) * P(A) + P(C/B) * P(B)]
 P (B/C) = [P(C/B) * P(B)] / [P(C/B) * P(B) + P(C/A) * P(A)]

Chap 4-52
 Bayes Theorem
Ex – Consider a Manufacturing firm that receives
shipment of parts from two different suppliers.(A1 –
Part from supplier 1 & A2 – Part from Supplier 2).
Currently 65% Parts are supplied by Supplier 1 & 35 %
from Supplier 2. Percentage of Rejects from Supplier 1
& 2 are 2% and 5% respectively. Suppose a machine
breaks down while processing a reject part, what is a
probability that it comes from Supplier 1 or 2?

Chap 4-53
 Bayes Theorem

Tabular Approach to Bayes Theorem Calculations

Event Prior Conditional Joint Posterior
Probabilities Probability Probability Probability
(1) (2) (3) (4) = (2) * (3)

A1 P( A1) = P(B/A1) = P(A1) * P (A1/B) =

P(B/A1) =
A2 P (A2) = P ( B / A2) = P(A2) * P(B / P (A2/B) =
A2) =
Total = Total = Total =

Chap 4-54
 Bayes Theorem

Event Prior Conditional Joint Posterior

Probabilities Probability Probability Probability
(1) (2) (3) (4) = (2) * (3)

A1 P( A1) = 0.65 P(B/A1) = P(A1) * P(B/A1) = P (A1/B) =

0.02 0.65 * 0.02 = 0.013 /
0.013 0.0305 =
0.4262
A2 P (A2) = 0.35 P (B / A2) = P(A2) * P(B / A2) P (A2/B) =
0.05 = 0.35 * 0.05 = 0.0175 /
0.0175 0.0305 =
0.5738
Total = 1.0 Total = 0.0305 Total = 1.0

Chap 4-55
 Bayes’ Theorem Example

 A drilling company has estimated a 40%

chance of striking oil for their new well.
 A detailed test has been scheduled for more
information. Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
 Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

Chap 4-57
 Bayes’ Theorem Example
(continued)

 Let S = successful well

U = unsuccessful well
 P(S) = 0.4 , P(U) = 0.6 (prior probabilities)
 Define the detailed test event as D
 Conditional probabilities:
P(D|S) = 0.6 P(D|U) = 0.2
 Goal is to find P(S|D)

Chap 4-58
 Bayes’ Theorem Example
(continued)

 Given the detailed test, the revised probability

of a successful well has risen to from
the original estimate of 0.4

Prior Conditional Joint Revised

Event Prob.
Prob. Prob. Prob.
S (successful)
U (unsuccessful)

Sum =

Chap 4-59
 Bayes’ Theorem Example
(continued)

 Given the detailed test, the revised probability

of a successful well has risen to 0.667 from
the original estimate of 0.4

Prior Conditional Joint Revised

Event Prob.
Prob. Prob. Prob.
S (successful) 0.4 0.6 (0.4)(0.6) = 0.24 0.24/0.36 = 0.667
U (unsuccessful) 0.6 0.2 (0.6)(0.2) = 0.12 0.12/0.36 = 0.333

Sum = 0.36

Chap 4-60
 Bayes’ Theorem Example
(continued)

Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) 
P(D | S)P(S)  P(D | U)P(U)
(0.6)(0.4)

(0.6)(0.4)  (0.2)(0.6)
0.24
  0.667
0.24  0.12

So the revised probability of success, given that this well

has been scheduled for a detailed test, is 0.667
Chap 4-61
 Counting Rules
 Rules for counting the number of possible
outcomes
 Counting Rule 1:
 If any one of k different mutually exclusive and
collectively exhaustive events can occur on each of
n trials, the number of possible outcomes is equal to

kn
 Example
 If you roll a fair die 3 times then there are 63 = 216 possible
outcomes

Chap 4-62
 Counting Rules
(continued)

 Counting Rule 2:
 If there are k1 events on the first trial, k2 events on the
second trial, … and kn events on the nth trial, the
number of possible outcomes is
(k1)(k2)…(kn)
 Example:
 You want to go to a park, eat at a restaurant, and see a
movie. There are 3 parks, 4 restaurants, and 6 movie
choices. How many different possible combinations are
there?
 Answer: (3)(4)(6) = 72 different possibilities
Chap 4-63
 Counting Rules
(continued)

 Counting Rule 3:

n! = (n)(n – 1)…(1)

 e.g.: 5! = (5)(4)(3)(2)(1) = 120

Chap 4-64
 Combination & Permutation
 Example for Combination & Permutations –
 Consider a Quality Control Procedure wherein Two samples are
selected out of Five for testing purpose.
 The Question is
 How many Combinations?
 How Many Permutations?
 Let us name the 5 Parts as A, B, C, D & E.
 We have to choose any 2 out of this.
 Using Combination Formula (Order is not important) –
 nCr = n! / r! ( n-r)! = 5! / 2! (5-2)! = 5! / 2! * 3!
 = 5*4*3*2*1 / (2*1) * ( 3*2*1) =120 / 12 = 10
 AB,AC, AD, AE, BC, BD, BE, CD, CE, DE

Chap 4-68
 Combination & Permutation
 Example for Combination & Permutations –
 Consider a Quality Control Procedure wherein Two samples are
selected out of Five for testing purpose.
 The Question is
 How many Combinations?
 How Many Permutations?
 Let us name the 5 Parts as A, B, C, D & E.
 We have to choose any 2 out of this.
 Using Permutation Formula (Order is important) –
 nPr = n! / ( n-r)! = 5! / (5-2)! = 5! / 3!
 = 5*4*3*2*1 / ( 3*2*1) =120 / 6 = 20
 AB & BA, AC & CA, AD & DA, AE & EA, BC & CB, BD & DB,
BE & EB, CD & DC, CE & EC, DE & ED
Chap 4-69