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Chapter 4
Probability
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-1
Chapter Goals
After completing this chapter, you should be
able to:
Explain basic probability concepts and definitions
simple probabilities
Apply common rules of probability
independent
Use Bayes’ Theorem for conditional probabilities
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-2
Important Terms
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-3
Important Terms
(continued)
A A∩ B B
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-4
Important Terms
(continued)
A B
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-5
Important Terms
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-6
Important Terms
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-7
Examples
Let the Sample Space be the collection of all
possible outcomes of rolling one die:
S = [1, 2, 3, 4, 5, 6]
Complements:
A = [1, 3, 5] B = [1, 2, 3]
Intersections:
A ∩ B = [4, 6] A ∩ B = [5]
Unions:
A ∪ B = [2, 4, 5, 6]
A ∪ A = [1, 2, 3, 4, 5, 6] = S
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-9
Examples
(continued)
Mutually exclusive:
A and B are not mutually exclusive
The outcomes 4 and 6 are common to both
Collectively exhaustive:
A and B are not collectively exhaustive
A U B does not contain 1 or 3
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-10
Probability
0 Impossible
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-11
Assessing Probability
There are three approaches to assessing the
probability of an uncertain event:
1. classical probability
NA number of outcomes that satisfy the event
probabilit y of event A = =
N total number of outcomes in the sample space
Assumes all outcomes in the sample space are equally likely to
occur
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-12
Counting the Possible Outcomes
n!
C = n
k
k! (n − k)!
where
n! = n(n-1)(n-2)…(1)
0! = 1 by definition
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-13
Assessing Probability
Three approaches (continued)
2. relative frequency probability
nA number of events in the population that satisfy event A
probabilit y of event A = =
n total number of events in the population
the limit of the proportion of times that an event A occurs in a large number of
trials, n
3. subjective probability
an individual opinion or belief about the probability of occurrence
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-14
Probability Postulates
1. If A is any event in the sample space S, then
0 ≤ P(A) ≤ 1
2. Let A be an event in S, and let Oi denote the basic outcomes.
Then
P(A) = ∑ P(Oi )
A
(the notation means that the summation is over all the basic outcomes in A)
3. P(S) = 1
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-15
Probability Rules
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-16
A Probability Table
B
B
A
P(A ∩ B) P(A ∩ B ) P(A)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-17
Addition Rule Example
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-18
Addition Rule Example
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-19
Conditional Probability
A conditional probability is the probability of one
event, given that another event has occurred:
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-20
Conditional Probability Example
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-21
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 .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(CD ∩ AC) .2
P(CD | AC) = = = .2857
P(AC) .7
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-22
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 28.57%.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(CD ∩ AC) .2
P(CD | AC) = = = .2857
P(AC) .7
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-23
Multiplication Rule
also
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-24
Multiplication Rule Example
P(Red ∩ Ace) = P(Red| Ace)P(Ace)
2 4 2
= =
4 52 52
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
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-25
Statistical Independence
Two events are statistically independent
if and only if:
P(A ∩ B) = P(A) P(B)
Events A and B are independent when the probability of one
event is not affected by the other event
If A and B are independent, then
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-26
Statistical Independence 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.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-27
Statistical Independence Example
(continued)
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(AC ∩ CD) = 0.2
P(AC) = 0.7
P(AC)P(CD) = (0.7)(0.4) = 0.28
P(CD) = 0.4
. . . . .
. . . . .
. . . . .
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-29
Joint and
Marginal Probabilities
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-30
Marginal Probability Example
P(Ace)
2 2 4
= P(Ace ∩ Red) + P(Ace ∩ Black) = + =
52 52 52
Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-31
Using a Tree Diagram
.2
D .7 P(AC ∩ CD) = .2
Given AC or Has
C
no AC: . 7
C ) = D oe
P(A have
s no
t .5 P(AC ∩ CD) = .5
s AC CD
H a .7
All
Cars
Do .2
e
hav s not .3
eA P(A C D P(AC ∩ CD) = .2
C Has
C )=
.3
D oe
s no
have t .1 P(AC ∩ CD) = .1
CD
.3 Chap 4-32
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc.
Odds
P(A) P(A)
odds = =
1- P(A) P(A)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-33
Odds: Example
Calculate the probability of winning if the odds
of winning are 3 to 1:
3 P(A)
odds = =
1 1- P(A)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-35
Bayes’ Theorem
P(A | E i )P(Ei )
P(E i | A) =
P(A)
P(A | E i )P(Ei )
=
P(A | E 1 )P(E1 ) + P(A | E 2 )P(E2 ) + + P(A | E k )P(Ek )
where:
Ei = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Ei)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-36
Bayes’ Theorem Example
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-37
Bayes’ Theorem Example
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-38
Bayes’ Theorem Example
(continued)
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-39
Chapter Summary
Defined basic probability concepts
Sample spaces and events, intersection and union of events,
mutually exclusive and collectively exhaustive events,
complements
Examined basic probability rules
Complement rule, addition rule, multiplication rule
Defined conditional, joint, and marginal probabilities
Reviewed odds and the overinvolvement ratio
Defined statistical independence
Discussed Bayes’ theorem
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-40