Business Statistics

PGDM(2017-19)
Term-II (Sep-Dec,2017)

Kakali Kanjilal
Associate Professor, Operations
IMI, Delhi
 RECAP:
Properties of Binomial Experiment
Four Properties of a Binomial Experiment
1. The experiment consists of a sequence of n
identical trials.
2. Two outcomes, success and failure, are possible
on each trial.
3. The probability of a success, denoted by p, does
not change from trial to trial. Prop 3 is called
4. The trials are independent. stationarity
assumption
If Property 2, 3, & 4 are present, then the underlying process is
called Bernoulli Process. If in addition, property 1 is present,
then it becomes a binomial experiment
 RECAP:
Binomial Probability Distribution
Binomial Probability Function
n!
f (x) p x (1 p )( n x )
x !(n x )!
where:
x = the number of successes
p = the probability of a success on one trial
n = the number of trials
f(x) = the probability of x successes in n trials
Discrete Probability
Distributions:
Poisson Distribution
 A Machine Producing Pins
Imagine an automatic machine that mass produces
pins. On a very rare occasions, the machine produces
a gem of a pin which is so perfect that it can be used
for a very special purpose. To make the case specific,
assume that the machine produces 20,000 pins in a
day and has 1/10,000 (or 0.01%) chance of producing
a perfect pin.

Suppose we want to calculate the probability of x

number of perfect pins produced .

Can we calculate the number by Binomial Probability

Function?
 A Machine Producing Pins contd

Probably not.
Though the experiment seems to satisfy properties
of a Binomial distribution.but
N =20000 ; VERY LARGE
P = Probability of Success = 1/10000 is VERY SMALL
N being very large and P being so small, it is hard to
calculate the Probability of Success with Binomial
Probability Function.
What is the alternative?
 A Machine Producing Pins contd
Expected number of perfect pins produced is
np = 20000 * (1/10000) = 2; which is neither too large nor too
small/Finite
So, the Binomial Probability Function can be approximated by
Poisson Probability Function under the following conditions:
n, the number of trials is indefinitely large
p, the constant probability of success for each trial is very small,
that is p is close to zero.
np = (say); is finite.
xx
ee
PP((XX xx))
xx!!
 Poisson Probability Distribution
Poisson Probability Function
xx
ee
PP((XX xx))
xx!!
where:
x = 0,1,2,3,.
= the number of occurrences in an interval
P(x) = the probability of x occurrences in an interval
= mean number of occurrences in an interval
e = 2.71828 ~2.72
So, if one counts the number of times a rare event occurs
during a fixed interval, then the number follows Poisson
Distribution.
 Poisson Probability Distribution
-> A Poisson distributed random variable is often
useful in estimating the number of occurrences
over a specified interval of time or space
-> It is a discrete random variable that may assume
an infinite sequence of values (x = 0, 1, 2, . . . ).

Examples of a Poisson distributed random variable:

- the number of knotholes in 14 linear feet of pine board -

- the arrival of a dispute phone calls in a call centre in an
hour
 Properties of Poisson Distribution

The probability of an occurrence is the same

for any two intervals of equal length.

The occurrence or non-occurrence in any interval is

independent of the occurrence or non-occurrence in
any other interval.
 Properties of Poisson Distribution

Since there is no stated upper limit for the number

of occurrences, the probability function P(x) is
applicable for values x = 0, 1, 2, without limit.

In practical applications, x will eventually become

large enough so that P(x) is approximately zero and
the probability of any larger values of x becomes
negligible.
 Mean and Variance of Poisson
Distribution
A property of the Poisson distribution is that
the mean and variance are equal.

np = np(1-p);
The RHS of above expression is Binomial Variance. In case
of Poisson distribution, p is very small, so, 1-p is close to 1.
So, variance of a Poisson distribution becomes np, same as
mean.
= 2
In this case, we will write, if X ~ P();
where is the expected value of the distribution.
So, for Poisson Distribution, all one needs to know is the expected
value of the distribution.
 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?

Expected Value = = 6/hour = 3/half-hour, x = 4

xxee 34 (2.71828)3
PP((XX xx)) f (4) .1680
4!
xx!! probability function.
using Poisson
Mercy Hospital Using Excel
 Problems

Poisson Distribution as an approximation of Binomial Distribution

Case Solution: RIMs Greatest Success