Course Topic Week Type

Business Statistic 1 Basic Probability 2 Summary

A probability is the numerical value representing the chance, likelihood, or possibility that a
particular event will occur. A probability is always between 0 and 1.
• 0 represent the impossible event, an event that has no chance of occurring
• 1 represent certain event, an event that is sure to occur.
There are three types of probability:
• A priori, the probability of an occurrence is based on prior knowledge of the process
involved.
• Empirical, the probabilities are based on observed data, not on prior knowledge of a process
• Subjective, differs from the other two approaches because subjective probability differs
from person to person.
Events and Sample Spaces
• Event, each possible outcome of a variable is referred to as an event.
• A simple event is described by a single characteristic.
• A joint event is an event that has two or more characteristics.
• The complement of event 𝐴𝐴 (represented by the symbol 𝐴𝐴′ or 𝐴𝐴𝑐𝑐 ) includes all events that
are not part of 𝐴𝐴.
• The collection of all the possible events is called the sample space.
Visualizing events
• Contingency Tables
𝑩𝑩 𝑩𝑩′ TOTAL
𝑨𝑨 𝑛𝑛(𝐴𝐴 ∩ 𝐵𝐵) 𝑛𝑛(𝐴𝐴 ∩ 𝐵𝐵′ ) 𝑛𝑛(𝐴𝐴)
𝑨𝑨′ 𝑛𝑛(𝐴𝐴′ ∩ 𝐵𝐵) 𝑛𝑛(𝐴𝐴′ ∩ 𝐵𝐵′ ) 𝑛𝑛(𝐴𝐴′)
TOTAL 𝑛𝑛(𝐵𝐵) 𝑛𝑛(𝐵𝐵′ ) 𝑛𝑛(𝑆𝑆)

• Diagram Venn

• Decision Trees

Probability
• Simple probability refers to the probability of occurrence of a simple event, 𝑃𝑃(𝐴𝐴).
𝑛𝑛(𝐴𝐴)
𝑃𝑃(𝐴𝐴) =
𝑛𝑛(𝑆𝑆)
• Joint probability refers to the probability of an occurrence involving two or more events.

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Summary

• The marginal probability of an event consists of a set of joint probabilities.

• Two events are mutually exclusive if both the events cannot occur simultaneously.
𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵) = 0
• A set of events is collectively exhaustive if one of the events must occur, the set of events
covers the entire sample space.
𝑃𝑃(𝐴𝐴 ∪ 𝐵𝐵) = 1
Events
Events B B' Total Legend:
A P(A and B) P(A and B') P(A) Joint probability
A' P(A and B) P(A and B') P(A') Marginal(Simple) Probability
Total P(B) P(B') 1

Several probability rules

• General addition rule
𝑃𝑃(𝐴𝐴 ∪ 𝐵𝐵) = 𝑃𝑃(𝐴𝐴) + 𝑃𝑃(𝐵𝐵) − 𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵)
• Conditional probability
𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵)
𝑃𝑃(𝐴𝐴 | 𝐵𝐵) =
𝑃𝑃(𝐵𝐵)
Read: The probability of B given A is equal to the probability of A and B divided by the
probability of A.
• Independence
Two events, A and B, are independent if and only if
𝑃𝑃(𝐴𝐴 | 𝐵𝐵) = 𝑃𝑃(𝐴𝐴)
• General Multiplication Rule
𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵) = 𝑃𝑃(𝐴𝐴 | 𝐵𝐵)𝑃𝑃(𝐵𝐵)
If A and B are independent, the probability of A and B is equal to the probability of A times
the probability of B.
𝑃𝑃(𝐴𝐴 ∩ 𝐵𝐵) = 𝑃𝑃(𝐴𝐴)𝑃𝑃(𝐵𝐵)
• Bayes’ theorem
Bayes’ theorem is used to revise previously calculated probabilities based on new
information. Developed by Thomas Bayes in the eighteenth century, Bayes’ theorem is an
extension of conditional probability.
𝑃𝑃(𝐴𝐴 | 𝐵𝐵𝑖𝑖 )𝑃𝑃(𝐵𝐵𝑖𝑖 )
𝑃𝑃(𝐵𝐵𝑖𝑖 | 𝐴𝐴) =
𝑃𝑃(𝐴𝐴 | 𝐵𝐵1 )𝑃𝑃(𝐵𝐵2 ) + 𝑃𝑃(𝐴𝐴 | 𝐵𝐵2 )𝑃𝑃(𝐵𝐵2 ) + ⋯ + 𝑃𝑃(𝐴𝐴 | 𝐵𝐵𝑛𝑛 )𝑃𝑃(𝐵𝐵𝑛𝑛 )
where 𝐵𝐵𝑖𝑖 is the 𝑖𝑖th event out of 𝑛𝑛 mutually exclusive and collectively exhaustive events.

Several important counting rules

• Factorial
The number of ways that all 𝑛𝑛 items can be arranged in order is
𝑛𝑛! = (𝑛𝑛)(𝑛𝑛 − 1) … (2)(1)
where 𝑛𝑛! is called 𝑛𝑛 factorial, and 0! is defined as 1.
• Permutation
The number of ways of arranging 𝑥𝑥 objects selected from 𝑛𝑛 objects in order is
𝑛𝑛!
𝑃𝑃(𝑛𝑛, 𝑥𝑥) =
(𝑥𝑥 − 𝑛𝑛)!
• Combination
The number of ways of selecting 𝑥𝑥 objects from 𝑛𝑛 objects, irrespective of order, is equal to
𝑛𝑛!
𝐶𝐶(𝑛𝑛, 𝑥𝑥) =
(𝑥𝑥 − 𝑛𝑛)! 𝑥𝑥!

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

1. Consider the following contingency table:

𝐵𝐵 𝐵𝐵′
𝐴𝐴 10 20
𝐴𝐴′ 20 40

What is the probability of event

a. 𝐴𝐴?
b. 𝐴𝐴’?
c. 𝐴𝐴 and 𝐵𝐵?
d. 𝐴𝐴 or 𝐵𝐵?
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

1. Do people of different age groups differ in their response to email messages? A survey by the
Center for the Digital Future of the University of Southern California (data extracted from A.
Mindlin, “Older E-mail Users Favor Fast Replies,” The New York Times, July 14, 2008, p. B3)
reported that 70.7% of users over 70 years of age believe that email messages should be
answered quickly, as compared to 53.6% of users 12 to 50 years old. Suppose that the survey
was based on 1,000 users over 70 years of age and 1 ,000 users 12 to 50 years old. The following
table summarizes the results:

AGE OF RESPONDENTS
ANSWER QUICKLY 12-50 Over 70 Total
Yes 536 707 1,243
No 464 293 757
Total 1,000 1,000 2,000

a. Give an example of a simple event.

b. Give an example of a joint event.

Referring to the contingency table above, if a respondent is selected at random. What is the
probability that
c. He or she answers quickly?
d. He or she is over 70 years old?
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

2. Which meal are people most likely to order at a drive-through? A survey was conducted in 2009,
but the sample size was not reported. Suppose the results, based on a sample of 100 males and
100 females, were as follow:

GENDER
MEAL Male Female Total
Breakfast 18 10 28
Lunch 47 52 99
Dinner 29 29 58
Snack/beverage 6 9 15
Total 100 100 200

If a respondent is selected at random, what is the probability that he or she

a. Prefers ordering lunch at the drive-through?
b. Prefers ordering breakfast or lunch at the drive-through?
c. Is a male or prefers ordering dinner at the drive-through?
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

3. A survey of ,085 adults asked “Do you enjoy shopping for clothing for yourself.” The results (data
extracted from “Split decision on clothes shopping.” USA Today, January 28, 2011, p. 1B)
indicated that 51% of the females enjoyed shopping for clothing for themselves as compared to
44% of the males. The sample sizes of males and females were not provided. Suppose the results
were as shown in the following table:

ENJOYS SHOPPING GENDER

FOR CLOTHING Male Female Total
Yes 238 276 514
No 304 267 571
Total 542 543 1,085

a. Suppose that the respondent chosen is a female. What is the probability that she does not
enjoy shopping for clothing?
b. Suppose that the respondent chosen enjoys shopping for clothing. What is the probability
that the individual is a male?
c. Are enjoying shopping for clothing and the gender of the individual independent? Explain.
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

4. An advertising executive is studying television viewing habits of married men and women during
prime-time hours. Based on pas viewing records, the executive has determined that during
prime time, husbands are watching television 60% of the time. When the husband is watching
television, 40% of the time the wife is also watching. When the husband is not watching
television, 30% of the time the wife is watching television.
a. Find the probability that if the wife is watching television, the husband is also watching
television.
b. Find the probability that the wife is watching television during prime time.
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

5. “Pasti Bayar” insurance company has been dealing with claim fraud in the last few years. From a
large number of claims submitted, 2% are categorized as fraud claims. To increase the
company’s efficiency, they developed automatic fraud detection mechanism. Historically, this
mechanism could detect fraud claims with accuracy 85%. In a similar way, normal (non-fraud)
claims could be detected with accuracy 96%. If the mechanism detects accurately, what is the
probability that the claim is categorized as fraud?
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

6. During 2017,"Ayo Mandi" shower gel sales has decreased. Therefore, in the beginning of 2018,
the product manager started promotion coupon initiative to boost product sales. From his
observation in a convenience store in Bandung, he recorded that 7 out of 10 customers of the
store bought "Ayo Mandi" shower gel. He also recorded that among the customers who bought
"Ayo Mandi" shower gel, 30% of them had promotion coupon. Furthermore, among the
customers who did not buy "Ayo Mandi" shower gel, 20% of them had promotion coupon. Based
on this information, if selected at random, determine
a. What is the probability that the customer has coupon?
b. Given that the customer has coupon what is the probability that he/she will buy the
product?
SOLUTION:

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 Course Topic Week Type
Business Statistic 1 Basic Probability 2 Exercises

7. In 2018, Ausy, an SBM student agreed to record his travels from his house to campus. He has
three alternative routes to reach campus from his house, namely route A, B, and C. Ausy was
asked to record the congestion level he experienced each day he traveled to campus in three
levels: light traffic, moderate traffic and heavy traffic.

At the end of the year, it was recorded that he had made 200 travels to campus throughout the
year.

Among those, he chose route A for 50 times, route B for 80 times, and route C for 70 times.
Among his experiences in using route a, 40% of the times he had light traffic, 48% of the times
he had moderate traffic, and 12% of the times he had heavy traffic. Among his experiences in
using route B, 40% of the times he had light traffic, 48% of the times he had moderate traffic,
and 12% of the times he had heavy traffic. Finally, among his experiences in using route c, 40%
of the times he had light traffic, 48% of the time he had moderate traffic, and 12% of the time he
had heavy traffic.
a. What is the probability that Ausy chose route A and had heavy traffic?
b. What is the probability that he experiences heavy traffic?
c. Can we say that the Ausy’s choice of route is independent from the congestion level?
d. If now in February 2017, Ausy reported that he had light traffic today, what is the probability
that he had used route A?
SOLUTION:

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