Professional Documents
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Quantitative Techniques - 1
Prof. Pritam Ranjan
OM & QT, IIM Indore
Email: pritamr@iimidr.ac.in
Oce: A - 102, Phone: 512
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
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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
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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)
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
Male
Female
Total
Yes
19
12
No
41
28
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Conditional Probability
Men
35
14
17
17
17
100%
Women
42
20
32
1
5
100%
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Conditional Probability
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
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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 )
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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)?
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Conditional Probability
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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.
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Conditional Probability
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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?
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Conditional Probability
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
If she can apply to only one rm, based on cost and success
probability criteria alone, should she apply to rm 5? Why?
QT - 1 (July 7, 2015)
10
170
0.08
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Conditional Probability
Homework
Practice questions:
Chapter 8
Next topic: (discrete) Random Variables
Finish unsolved examples from todays lecture
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