EC2:Quantitative Methods for Business Decisions

CONDITIONAL PROBABILITY
Example:
Of 200 people interviewed regarding intention to buy your product and whether are not they are financially able to do so, the
following results were obtained:
To Buy (B) Not to Buy (B)
Able to Finance (A)
40
20
60
Unable to Finance (A)
80
60
140
120
80
200
Which may be expressed as
To Buy (B) Not to Buy (B)
Able to Finance (A)
.2
.1
.3
Unable to Finance (A)
.4
.3
.7
.6
.4
What is the probability that
1. a customer is financially able and has a desire to buy?
(P (A B))
2. a customer has a desire to buy? (P (B))
3. a customer will buy given that she has the financial ability
to pay? (conditional probability P (B|A) )

Conditional Probability
DEFN: The conditional probability of B given A is
P (B|A) =

P (A B)
P (A)

Terminology:
Joint Probability:
Marginal Probability:

P (A B)
P (A), P(B)

Conditional Probability: P (A|B) or P (B|A)

A rearrangement of the above definition yields the following:
Multiplication Law of Probability:
Two events
P (A)P (B|A)
P (A B) =
P (B)P (A|B)
More than two events:
P (E1 E2 E3 Ek ) =
P (E1 )P (E2 |E1 )P (E3 |E1 E2 ) P (Ek |E1 E2 Ek )

Examples:
1. Consider four firms A, B, C, D bidding for a certain contract. A survey of past bidding success of these firms show
the following probabilities of winning:
P (A) = 0.35, P (B) = 0.15, P (C) = 0.3, P (D) = 0.2
Before the decision is made to award the contract, firm B
withdraws the bid. Find the new probabilities of winning
the bid for A, C and D.
2. Pull three cards from a deck without replacement. What is
the probability that all are black?
3. A firm submits tenders for two different contracts. The
probability that the first and second tenders will be successful is 50% and 30% respectively. Calculate the probability
that:
(a) both will be successful;
(b) neither will be successful;
(c) only the first will be successful;
(d) at least one will be successful.

Independent Events
DEFN: Independent Events
A and B are said to be independent if
P (A|B) = P (A)

Multiplication Law
Two Independent Events
P (A B) = P (A)P (B)

More than Two Independent Events

P (E1 E2 E3 Ek ) = P (E1 )P (E2 ) P (Ek )

Law of Total Probability

Examples:
1. In a certain company
50% of documents are written in WORD;
30% in WORDSTAR;
20% in WORDPERFECT.
From past experience it is know that:
40% of the WORD documents exceed 10 pages
20% of the WORDSTAR exceed 10 pages
20% of the WORDPERFECT documents exceed 10 pages
(a) What is the overall proportion of documents containing
more than 10 pages?
2. An insurance company runs three different offices, A, B and
C. 30% of the companys employees work in Office A, 20%
work in Office B and 50% work in Office C. 10% of the staff
in Office A are managers, 20% of the staff in Office B are
managers and 5% from Office C are managers.
Offices
A B C
Proportion Employees .3 .2 .5
Proportion Managers .1 .2 .5
(a) What is the total proportion of managers in the company?

Law of Total Probability

If a sample space can be partitioned into k mutually exclusive and exhaustive events:
A1 , A2 , A3 , Ak
i.e.
S = A1 A2 A3 Ak
Then for any event E:
P (E) = P (A1 )P (E|A1 )+P (A2 )P (E|A2 ) P (Ak )P (E|AK )
Proof:
E = ES
= E (A1 A2 Ak )
= (E A1 ) (E A2 ) (E Ak )
Since these are mutually exclusive
P (E) = P (E A1 ) + P (E A2 ) + P (E Ak )
= P (A1 )P (E|A1 ) + P (A2 )P (E|A2 ) + P (Ak )P (E|Ak )

Example 1
1. In a certain company
50% of documents are written in WORD;
30% in WORDSTAR;
20% in WORDPERFECT.
From past experience it is know that:
40% of the WORD documents exceed 10 pages
20% of the WORDSTAR exceed 10 pages
20% of the WORDPERFECT documents exceed 10 pages
(a) What is the overall proportion of documents containing
more than 10 pages?
.5 .4 + .3 .2 + .2 .2 = .3

Tree Diagram
d

.4

- d

.2

s d
Q

.2

3


.5









.3


Q
Q
Q
Q

Q.2
Q
Q
Q
Q