Anderson

Sweeney
Williams

QUANTITATIVE
METHODS FOR
BUSINESS 8e

Slides Prepared by JOHN LOUCKS

2001 South-Western College Publishing/Thomson Learning

Chapter 3, Part I
Discrete Probability Distributions

Random Variables
Discrete Random Variables
Expected Value and Variance
Binomial Probability Distribution
Poisson Probability Distribution

Random Variables

A random variable is a numerical description

of the outcome of an experiment.
A random variable can be classified as being
either discrete or continuous depending on the
numerical values it assumes.
A discrete random variable may assume either
a finite number of values or an infinite
sequence of values.
A continuous random variable may assume
any numerical value in an interval or collection
of intervals.

Example: JSL Appliances

Discrete random variable with a finite number of

values:
Let x = number of TV sets sold at the store in one
day
where x can take on 5 values (0, 1, 2, 3, 4)

Discrete random variable with an infinite sequence

of values:
Let x = number of customers arriving in one day
where x can take on the values 0, 1, 2, . . .
We can count the customers arriving, but there is no
finite upper limit on the number that might arrive.

Discrete Probability Distributions

The probability distribution for a random variable

describes how probabilities are distributed over the
values of the random variable.
The probability distribution is defined by a probability
function, denoted by f(x), which provides the
probability for each value of the random variable.
The required conditions for a discrete probability
function are:
f(x) > 0
f(x) = 1
We can describe a discrete probability distribution
with a table, graph, or equation.

Example: JSL Appliances

Using past data on TV sales (below left), a tabular

representation of the probability distribution for TV
sales (below right) was developed.
Number
Units Sold
of Days
x
f(x)
0
80
0
.40
1
50
1
.25
2
40
2
.20
3
10
3
.05
4
20
4
.10
200
1.00

Example: JSL Appliances

A graphical representation of the probability
distribution for TV sales in one day
.50
Probability

.40
.30
.20
.10
0
1
2
3
4
Values of Random Variable x (TV sales)
7

Expected Value and Variance

The expected value, or mean, of a random

variable is a measure of its central location.
Expected value of a discrete random
variable:
E(x) = = xf(x)
The variance summarizes the variability in the
values of a random variable.
Variance of a discrete random variable:
Var(x) = 2 = (x - )2f(x)
The standard deviation, , is defined as the
positive square root of the variance.

Example: JSL Appliances

Expected Value of a Discrete Random Variable

x
0
1
2
3
4

f(x)
.40
.25
.20
.05
.10

xf(x)
.00
.25
.40
.15
.40
1.20 = E(x)

The expected number of TV sets sold in a day

is 1.2
9

Example: JSL Appliances

Variance and Standard Deviation

of a Discrete Random Variable
x x - ( x - )2
f (x ) ( x - )2 f ( x )
_____

_________

___________

_______

_______________

0
1
2
3
4

-1.2
1.44
.40
.576
-0.2
0.04
.25
.010
0.8
0.64
.20
.128
1.8
3.24
.05
.162
2.8
7.84
.10
.784
1.660 =
The variance of daily sales is 1.66 TV sets squared.
The standard deviation of sales is 1.29 TV sets.

10

Example: JSL Appliances

Formula Spreadsheet for Computing Expected

Value and Variance
1
2
3
4
5
6
7
8

A
x
0
1
2
3
4

B
f(x)
-1.2
-0.2
0.8
1.8
2.8

C
xf(x)
=A2*B2
=A3*B3
=A4*B4
=A5*B5
=A6*B6
=SUM(C2:C6)
Expected Value

D
(x- ) 2 f(x)
=(A2-C$7)^2*B2
=(A3-C$7)^2*B3
=(A4-C$7)^2*B4
=(A5-C$7)^2*B5
=(A6-C$7)^2*B6
=SUM(D2:D6)
Variance

11

Binomial Probability Distribution

Properties of a Binomial Experiment

The experiment consists of a sequence of n
identical trials.
Two outcomes, success and failure, are
possible on each trial.
The probability of a success, denoted by p,
does not change from trial to trial.
The trials are independent.

12

Example: Evans Electronics

Binomial Probability Distribution

Evans is concerned about a low retention rate
for employees. On the basis of past experience,
management has seen a turnover of 10% of the
hourly employees annually. Thus, for any hourly
employees chosen at random, management
estimates a probability of 0.1 that the person will
not be with the company next year.
Choosing 3 hourly employees a random, what
is the probability that 1 of them will leave the
company this year?
Let:
p = .10, n = 3, x = 1

13

Binomial Probability Distribution

Binomial Probability Function

n!
f ( x)
p x (1 p ) (n x )
x !( n x )!
where
f(x) = the probability of x successes in n
trials
n = the number of trials
p = the probability of success on any one
trial

14

Example: Evans Electronics

Using the Binomial Probability Function

n!
f ( x)
p x (1 p ) ( n x )
x !( n x )!
f (1)

3!
( 0.1)1 ( 0. 9 ) 2
1!( 3 1)!
= (3)(0.1)(0.81)
= .243

15

Example: Evans Electronics

n
3

Using the Tables of Binomial Probabilities

x
0
1
2
3

.10
.7290
.2430
.0270
.0010

.15
.6141
.3251
.0574
.0034

.20
.5120
.3840
.0960
.0080

.25
.4219
.4219
.1406
.0156

p
.30
.3430
.4410
.1890
.0270

.35
.2746
.4436
.2389
.0429

.40
.2160
.4320
.2880
.0640

.45
.1664
.4084
.3341
.0911

.50
.1250
.3750
.3750
.1250

16

Example: Evans Electronics

Using a Tree Diagram

First
Worke
r

Secon
d
Worke
Leavesr(.1)

Third
Worke
L (.1) r
S (.9)

Leaves (.1)

L (.1)
S (.9)

2
1

L (.1)

S (.9)

Leaves (.1)

Stays (.9)

3
2

Stays (.9)

Stays (.9)

Value
of x

L (.1)
S (.9)

Probab
.
.
001
.
0
009
.0
009
.
0
081
.0
009
.0810
0

.0810

.7290
17

Example: Evans Electronics

Using an Excel Spreadsheet

Step 1: Select a cell in the worksheet where you
want the binomial probabilities to appear.
Step 2: Select the Insert pull-down menu.
Step 3: Choose the Function option.
Step 4: When the Paste Function dialog box
appears:
Choose Statistical from the Function
Category box.
Choose BINOMDIST from the Function
Name box.
Select OK.
continued
18

Example: Evans Electronics

Using an Excel Spreadsheet (continued)

Step 5: When the BINOMDIST dialog box appears:
Enter 1 in the Number_s box (value of x).
Enter 3 in the Trials box (value of n).
Enter .1 in the Probability_s box (value of
p).
Enter false in the Cumulative box.
[Note: At this point the desired binomial
probability of .243 is automatically computed
and appears in the right center of the dialog
box.]
Select OK (and .243 will appear in the
worksheet cell requested in Step 1).
19

The Binomial Probability Distribution

Expected Value
E(x) = = np

Variance

Var(x) = 2 = np(1 - p)
Standard Deviation
SD( x ) np(1 p )

Example: Evans Electronics

E(x) = = 3(.1) = .3 employees out of 3
Var(x) = 2 = 3(.1)(.9) = .27

SD( x )

3(.1)(.9) .52 employees

20

Poisson Probability Distribution

Properties of a Poisson Experiment

The probability of an occurrence is the same
for any two intervals of equal length.
The occurrence or nonoccurrence in any
interval is independent of the occurrence or
nonoccurrence in any other interval.

21

Poisson Probability Distribution

Poisson Probability Function

x e
f ( x)
x!
where
f(x) = probability of x occurrences in an
interval
= mean number of occurrences in an
interval
e = 2.71828

22

Example: Mercy Hospital

Patients arrive at the emergency room of
Mercy
Hospital at the average rate of 6 per hour on
weekend
evenings. What is the probability of 4 arrivals in
30
minutes on a weekend evening?

34 ( 2. 71828) 3
Using the Poisson
f ( 4 ) Probability Function
.1680
4!
= 6/hour = 3/half-hour, x = 4

23

Example: Mercy Hospital

x
0
1
2
3
4
5
6
7
8
9
10
11
12

Using the Tables of Poisson Probabilities

2.1
.1225
.2572
.2700
.1890
.0992
.0417
.0146
.0044
.0011
.0003
.0001
.0000
.0000

2.2
.1108
.2438
.2681
.1966
.1082
.0476
.0174
.0055
.0015
.0004
.0001
.0000
.0000

2.3
.1003
.2306
.2652
.2033
.1169
.0538
.0206
.0068
.0019
.0005
.0001
.0000
.0000

2.4
2.5
.0907 .0821
.2177 .2052
.2613 .2565
.2090 .2138
.1254 .1336
.0602 ..0668
.0241 .0278
.0083 .0099
.0025 .0031
.0007 .0009
.0002 .0002
.0000 .0000
.0000 .0000

2.6
.0743
.1931
.2510
.2176
.1414
.0735
.0319
.0118
.0038
.0011
.0003
.0001
.0000

2.7
.0672
.1815
.2450
.2205
.1488
.0804
.0362
.0139
.0047
.0014
.0004
.0001
.0000

2.8
.0608
.1703
.2384
.2225
.1557
.0872
.0407
.0163
.0057
.0018
.0005
.0001
.0000

2.9
.0550
.1596
.2314
.2237
.1622
.0940
.0455
.0188
.0068
.0022
.0006
.0002
.0000

3.0
.0498
.1494
.2240
.2240
.1680
.1008
.0504
.0216
.0081
.0027
.0008
.0002
.0001
24

Poisson Probability Distribution

The Poisson probability distribution can be
used as
an approximation of the binomial probability
distribution when p, the probability of success, is
small
and n, the number of trials, is large.
Approximation is good when p < .05 and n
> 20
Set = np and use the Poisson tables.

25

The End of Chapter 3, Part I

26