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Quantitative Techniques - 1

Prof. Pritam Ranjan

OM & QT, IIM Indore

Email: pritamr@iimidr.ac.in

Oce: A - 102, Phone: 512

Theorem with application

Textbook coverage: Chapter 8

QT - 1 (July 7, 2015)

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Conditional Probability

Theory

Denition: If P(B) > 0,

P(A|B) =

P(A B)

P(B)

Product rule:

P(A B) = P(A|B)P(B)

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Conditional Probability

Theory

Total probability:

P(A) = P(A|B)P(B) + P(A|B )P(B )

If B1 , ..., Bn creates a partition of ,

P(A) = P(A|B1 )P(B1 ) + P(A|B2 )P(B2 ) + + P(A|Bn )P(Bn )

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Conditional Probability

URN model

1. Draw two balls one at-a-time without replacement from an urn

containing 4 red and 6 green balls. Find the probability of

(b) getting a red ball in the second draw.

(c) getting two dierent coloured balls.

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Conditional Probability

URN model

2. Flip a coin (with P(H) = 0.25). If you get a head, draw one ball

from urn-1. If you observe tail, randomly choose a ball from urn-2.

Find the probability of getting a red ball.

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Conditional Probability

Tree diagram

1. Draw two balls one at-a-time without replacement from an urn

containing 4 red and 6 green balls. Find the probability of

(b) getting a red ball in the second draw.

(c) getting two dierent coloured balls.

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Conditional Probability

Tree diagram

2. Flip a coin (with P(H) = 0.25). If you get a head, draw one ball

from urn-1. If you observe tail, randomly choose a ball from urn-2.

If the drawn ball is red, put it in the other urn, otherwise put it

back in the same urn. Choose another ball from the urn you have

just put the ball in. Find the prob. that the second draw is black.

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Conditional Probability

Independent Events

Denition Two events A and B are said to be independent if and only if (any

of the following is true)

(b) P(A|B) = P(A) (assuming P(B) > 0)

(c) P(B|A) = P(B) (assuming P(A) > 0)

Related Concepts:

Conditional independence

Disjoint, mutually exclusive, exhaustive and

independence

Pairwise independent vs. mutually independent

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Conditional Probability

Independent Events

According to USA Today, 65% of Americans are overweight or

obese. If ve Americans are chosen at random, what is the

probability that at least one of them is overweight or obese?

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Conditional Probability

Questionnaire example: The question, Do you smoke? was asked

to 100 people. Results are shown in the table.

Male

Female

Total

Yes

19

12

No

41

28

male who smokes?

(a) What is the probability that a randomly selected male is a smoker?

(b) What is the probability that a randomly selected smoker is male?

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Conditional Probability

(Ex 8.47) The following table gives the percentages of men and women 20 years

and older employed in various occupations (U.S. Survey). There are about

70-million men and 70-million women in the workforce.

Management

Service

Sales

Mining

Production

Total

Men

35

14

17

17

17

100%

Women

42

20

32

1

5

100%

(b) If you pick a person at random from the sales, what is probability you picked a

woman?

(c) If you know someones occupation, can you guess whether they are male or

female? which occupation makes this guess easiest?

(d) What is the probability of picking someone at random from the service

industry?

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Conditional Probability

Let A and B be two factors, and A1 , ..., Am and B1 , ..., Bn denote a

partition (i.e., all possible values of A and B).

A1

A2

B1

B2

..

.

Am

Bn

General rule:

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Conditional Probability

Marketing example

There are three major manufacturing companies that make a

product: Dell, HP and Lenovo. Dell has a 50% market share, and

HP has a 30% market share. 5% of Dells product is defective, 7%

of HPs is defective, and 10% of Lenovos product is defective.

(a) Construct the joint probability table.

(b) Check whether product is defective and product came from

Dell are independent?

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Conditional Probability

Bayes Theorem/Rule

Typically, we talk about

P(1st stage event) or P(2nd stage event|1st stage event),

e.g., Draw two balls one at-a-time without replacement from an urn

containing 4 red and 6 green balls. Find the probability of

(b) getting a red ball in the second draw given 1st is red.

Assume: We dont know what happened in the past, but we know the

present. Can we guess what happened in the past?

Objective: to nd inverse probability: (assumption: know the outcome

of 2nd stage event, but dont know the outcome of the 1st stage event)

P(1st stage event|2nd stage event)

Stage-1: observe the color of the 1st ball,

Stage-2: observe the color of the 2nd ball.

Objective: nd P( 1st ball was red | 2nd ball is red)

Prof. Pritam Ranjan

QT - 1 (July 7, 2015)

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Conditional Probability

Bayes Theorem/Rule

NOT motivating enough !!

e.g., [businessinsider.com] Suppose you are living with a partner and

come home from a business trip to discover a strange pair of

under**** in your dresser.

What is the probability that your partner is cheating on you?

Stage-1: partner cheated,

Stage-2: found a strange under****.

Objective: nd P(partner cheated | found a strange under****)

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Conditional Probability

Bayes Theorem/Rule

Stage-1 event: B, Stage-2 event: A

Simple case

P(B|A) =

P(A|B)P(B)

P(A|B)P(B)

=

P(A)

P(A|B)P(B) + P(A|B )P(B )

P(Ai |Bj )P(Bj )

P(Bj |Ai ) =

k P(Ai |Bk )P(Bk )

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Conditional Probability

URN model

1. Draw two balls one at-a-time without replacement from an urn

containing 4 red, 6 green and 13 black balls. Find the probability of

(a) getting a red ball in the rst draw given you observed a

red ball in the second draw.

(b) getting a non-red ball in the rst draw given you

observed a red ball in the second draw.

QT - 1 (July 7, 2015)

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Conditional Probability

Marketing application

(Ex 8.40) Some of the managers at a company have an MBA

degree. Of managers at the level of director or higher, 60% have an

MBA. Among other managers of lower rank, 35% have an MBA.

For this company, 15% of managers have a position at the level of

director or higher. If you meet an MBA from this rm, what are the

chances that this person is a director (or higher)?

QT - 1 (July 7, 2015)

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Conditional Probability

An HIV test gives a positive result with probability 98% when the

patient is indeed aected by HIV, while it gives a negative result

with 99% probability when the patient is not aected by HIV. If a

patient is drawn at random from a population in which 0.1% of

individuals are aected by HIV and he is found positive, what is the

probability that he is indeed aected by HIV?

QT - 1 (July 7, 2015)

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Conditional Probability

Quality control

There are three major manufacturing companies that make a

product: Dell, HP and Lenovo. Dell has a 50% market share, and

HP has a 30% market share. 5% of Dells product is defective, 7%

of HPs is defective, and 10% of Lenovos product is defective.

(a) If a product is found defective, what is the probability that it

came from Dell?

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Conditional Probability

Quality control

Consider a rm that manufactures integrated circuits (chips).

Based on extensive (and expensive) testing of a sample of 1000

chips, it nds that the defect rate s 10%. It found that the

inspector typically had a 5% error rate on both defective and

non-defective chips. Find the probability a randomly chosen chip is

defective in the lot that has passed the inspection.

QT - 1 (July 7, 2015)

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Conditional Probability

A realtor is trying to sell a large piece of property. She believes

there is a 0.90 probability that the property will be sold in the next

6 months if the local economy continues to improve throughout the

period, and a 0.50 probability the property will be sold if the local

economy does not continue its improvement during the period. A

state economist consulted by the realtor believes there is a 0.70

chance the economy will continue its improvement during the next

6 months. What is the probability that the piece of property will be

sold during the period?

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Conditional Probability

Stock market

Two stocks A and B are known to be related in that both are in the

same industry. The probability that stock A will go up in price

tomorrow is 0.20, and the probability that both stocks A and B will

go up tomorrow is 0.12. Suppose that tomorrow you nd that stock

A did go up in price. What is the probability that stock B went up

as well?

QT - 1 (July 7, 2015)

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Conditional Probability

A business graduate wants to get a job in any one of the top 10

accounting rms. Applying to any of these rms requires a lot of eort

and paperwork and is therefore costly. She estimates the cost of applying

to each of the 10 rms and the probability of getting a job oer there.

Firm

Cost

Prob

1

870

0.38

2

600

0.35

3

540

0.28

4

500

0.20

5

400

0.18

6

320

0.18

7

300

0.17

8

230

0.14

9

200

0.14

that she will get at least one oer?

If she can apply to only one rm, based on cost and success

probability criteria alone, should she apply to rm 5? Why?

What is the probability that she will get at least one oer?

QT - 1 (July 7, 2015)

10

170

0.08

24/25

Conditional Probability

Homework

Practice questions:

Chapter 8

Next topic: (discrete) Random Variables

Finish unsolved examples from todays lecture

QT - 1 (July 7, 2015)

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