Probability Methods

Statistics for
Business and Economics

8th Global Edition
Chapter 3
Elements of Chance: Probability Methods
Copyright © 2013 Pearson Education Ch. 3-1

Chapter Goals
After completing this chapter, you should be
able to:
 Explain basic probability concepts and definitions
 Use a Venn diagram or tree diagram to illustrate

simple probabilities
 Apply common rules of probability
 Compute conditional probabilities
 Determine whether events are statistically

independent
 Use Bayes’ Theorem for conditional probabilities

3.1
Important Terms
 Random Experiment – a process leading to an

uncertain outcome
 Basic Outcome – a possible outcome of a
random experiment
 Sample Space (S) – the collection of all
possible outcomes of a random experiment
 Event (E) – any subset of basic outcomes from
the sample space

Important Terms
(continued)
 Intersection of Events – If A and B are two

events in a sample space S, then the
intersection, A ∩ B, is the set of all outcomes in
S that belong to both A and B
A AB B

Important Terms
(continued)
 A and B are Mutually Exclusive Events if they

have no basic outcomes in common
 i.e., the set A ∩ B is empty
A B

Important Terms
(continued)
 Union of Events – If A and B are two events in a

sample space S, then the union, A U B, is the
set of all outcomes in S that belong to either
A or B
S The entire shaded
area represents
A B AUB

Important Terms
(continued)
 Events E1, E2, …,Ek are Collectively Exhaustive

events if E1 U E2 U . . . U Ek = S
 i.e., the events completely cover the sample space
 The Complement of an event A is the set of all

basic outcomes in the sample space that do not
belong to A. The complement is denoted A
S
A
A

Examples
Let the Sample Space be the collection of
all possible outcomes of rolling one die:
S = [1, 2, 3, 4, 5, 6]
Let A be the event “Number rolled is even”

Let B be the event “Number rolled is at least 4”
Then
A = [2, 4, 6] and B = [4, 5, 6]
Examples
(continued)
S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [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
Examples
(continued)
S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]
 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

For Exercises 3.1–3.4 use the sample space S defined as
follows:
S  E1 , E2 , E3 , E4 , E5 , E6 , E7 , E8 , E9 , E10 
3.1) Given A  E1 , E3 , E6 , E9 , define A.

3.2 Given A  E1 , E3 , E7 , E9  and B  E2 , E3 , E8 , E9 .
a. What is A intersection B?
b. What is the union of A and B?
c. Is the union of A and B collectively exhaustive?

3.2
Probability and Its Postulates
 Probability – the chance that 1 Certain

an uncertain event will occur
(always between 0 and 1)
0 ≤ P(A) ≤ 1 For any event A .5
0 Impossible

Assessing Probability
 There are three approaches to assessing the
probability of an uncertain event:
1. classical probability
2. relative frequency probability
3. subjective probability

Classical Probability
 Assumes all outcomes in the sample space are
equally likely to occur
Classical probability of event A:

NA number of outcomes that satisfy the event A
P(A)  
N total number of outcomes in the sample space
 Requires a count of the outcomes in the sample space

Example 3.5 Computer Purchase Selection
(Classical Probability)
Karlyn Akimoto operates a small computer store. On a

particular day she has three Hewlett-Packard and two Dell
computers in stock. Suppose that Susan Spencer comes
into the store to purchase two computers. Susan is not
concerned about which brand she purchases—they all have
the same operating specifications—so Susan selects the
computers purely by chance: Any computer on the shelf is
equally likely to be selected. What is the probability that
Susan will purchase one Hewlett-Packard and one Dell
computer?

To begin, the sample space is defined as all possible pairs of two
computers that can be selected from the store. The number of pairs is
then counted
—one Hewlett-Packard and one Dell.
Define the three Hewlett-Packard computers as H1, H2, and H3 and the
two Dell computers as D1 and D2.
The sample space, S, contains the following pairs of computers:
S = (H D , H D , H D , H D , H D , H D , H H , H H , H H , D D )
1 1 1 2 2 1 2 2 3 1 3 2 1 2 1 3 2 3 1 2
The number of outcomes in the sample space is 10.
The required probability of event A—one Hewlett-Packard and one Dell—

is : P(A) = NA / N = 6 / 10 =0,6.

Counting the Possible Outcomes
 Use the Combinations formula to determine the

number of combinations of n items taken k at a time
n!
C 
n
k! (n  k)!
k
 where
 n! = n(n-1)(n-2)…(1)
 0! = 1 by definition

Permutations and Combinations
The number of possible orderings
 The total number of possible ways of arranging x

objects in order is
x!  x(x - 1)(x - 2) ...(2)(1)

 x! is read as “x factorial”

(continued)
Permutations: the number of possible

arrangements when x objects are to be
selected from a total of n objects and arranged
in order [with (n – x) objects left over]
P  n(n  1)(n  2) ...(n  x  1)

n
x
n!

(n  x)!
(continued)
 Combinations: The number of combinations

of x objects chosen from n is the number of
possible selections that can be made
n
P
C n
x  x
x!
n!

x!(n  x)!
Example
Suppose that two letters are to be selected
from A, B, C, D and arranged in order. How
many permutations are possible?
 Solution The number of permutations, with
4!
n = 4 and x = 2 , is P 
4
 12
(4  2)!
2
 The permutations are

AB AC AD BA BC BD
CA CB CD DA DB DC
Example
(continued)
Suppose that two letters are to be selected

from A, B, C, D. How many combinations are
possible (i.e., order is not important)?
 Solution The number of combinations is
4!
C 
4
6
2! (4  2)!
2
 The combinations are

AB (same as BA) BC (same as CB)
AC (same as CA) BD (same as DB)
AD (same as DA) CD (same as DC)

Example 3.7 Probability of Employee Selection
(Combinations)
A personnel officer has 8 candidates to fill 4 similar positions.

5 candidates are men, and 3 are women. If, in fact, every
combination of candidates is equally likely to be chosen,
what is the probability that no women will be hired?

Example 3.8 Computer Selection Revised
(Classical Probability)
Suppose that Karlyn’s store now contains 10 Hewlett-

Packard computers, 5 Dell computers, and 5 Sony
computers. Susan enters the store and wants to purchase
3 computers. The computers are selected purely by
chance from the shelf. Now what is the probability that she
selects 2 Hewlett-Packard computers and 1 Dell?

Three approaches (continued)
2. relative frequency probability
 the limit of the proportion of times that an event A occurs in a large
number of trials, n
nA number of events in the population that satisfy event A

P(A)  
n total number of events in the population
an individual opinion or belief about the probability of occurrence

Three approaches (continued)
an individual opinion or belief about the probability of occurrence
Subjective probabilities are personal. There is no requirement

that different individuals arrive at the same probabilities for
the same event.

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

Basic Exercises
1) The sample space contains 5 As and 7 Bs. What is the

probability that a randomly selected set of 2 will include
1 A and 1 B?

2) The sample space contains 6 As and 4 Bs. What is the
probability that a randomly selected set of 3 will include
1 A and 2 Bs?

3) In a city of 120,000 people there are 20,000
Norwegians. What is the probability that a randomly
selected person from the city will be Norwegian?

4) In a city of 180,000 people there are 20,000 legal
immigrants from Latin America. What is the probability that
a random sample of two people from the city will contain
two legal immigrants from Latin America?

3.3
Probability Rules
 The Complement rule:

P(A)  1 P(A) i.e., P(A)  P(A)  1
 The Addition rule:

 The probability of the union of two events is
P(A  B)  P(A)  P(B)  P(A  B)

For example, when a die is rolled, the probability of obtaining a
1 is 1/6, and, thus, by the complement rule the probability of
not getting a 1 is 5 /6.
This result is important because in some problems it may be

easier to find P( A ) and then obtain P(A), as seen
in Example 3.13.

Example 3.13 Personnel Selection (Complement Rule)
Wipro Ltd., an India-owned software firm, is hiring candidates

for 4 key positions in the management of its new office in
Denver. 5 candidates are from India and 3 are from the
United States. Assuming that every combination of Indian and
American is equally likely to be chosen, what is the probability
that at least 1 American will be selected?

3.3
Probability Rules
 The Addition rule:

 The probability of the union of two events is
P(A  B)  P(A)  P(B)  P(A  B)

Ex: The probability of A is 0.60, the probability of B is
0.45, and the probability of either is 0.80. What is the
probability of both A and B?

Ex: The probability of A is 0.40, the probability of B is
0.45, and the probability of either is 0.85. What is the
probability of both A and B?

A Probability Table
Probabilities and joint probabilities for two

events A and B are summarized in this table:
B B
A P(A  B) P(A  B ) P(A)
A P(A  B) P(A  B ) P(A)
P(B) P(B ) P(S)  1.0

Addition Rule Example
Consider a standard deck of 52 cards, with four

suits: ♥♣♦♠
Let event A = card is an Ace
Let event B = card is from a red suit

Addition Rule Example
(continued)
P(Red U Ace) = P(Red) + P(Ace) - P(Red ∩ Ace)
= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Conditional Probability
 A conditional probability is the probability of one
event, given that another event has occurred:
P(A  B) The conditional

P(A | B)  probability of A
P(B) given that B has
occurred
P(A  B) The conditional

P(B | A)  probability of B
P(A) given that A has
occurred

We can better understand these results and those that follow by
considering Table 3.3.

Conditional Probability 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.
 What is the probability that a car has a CD

player, given that it has AC ?
i.e., we want to find P(CD | AC)

(continued)
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
(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

Example 3.15 Product Choice: Cell Phone Features
(Conditional Probability)
A cell phone company found that 75% of all customers

want text messaging on their phones, 80% want photo
capability, and 65% want both. What are the probabilities
that a person who wants text messaging also wants photo
capability and that a person who wants photo capability
also wants text messaging?

Multiplication Rule
 Multiplication rule for two events A and B:
P(A  B)  P(A | B)P(B)
 also
P(A  B)  P(B | A)P(A)

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
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Example 3.17 Sensitive Questions
(Multiplication Rule)
Suppose that a survey was carried out in New York, and each respondent
was faced with the following two questions:
a. Is the last digit of your Social Security number odd?

b. Have you ever lied on an employment application?
The second question is, of course, quite sensitive, and for various reasons
we might expect that a number of people would not answer the question
honestly, especially if their response were yes. To overcome this potential
bias, respondents were asked to flip a coin and then to answer question (a)
if the result was “head” and answer (b) otherwise.
A yes response was given by 37% of all respondents. What is the

probability that a respondent who was answering the sensitive question,
(b), replied yes?

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
P(A | B)  P(A) if P(B)>0
P(B | A)  P(B) if P(A)>0

Statistical Independence
(continued)
 For multiple events:
E1, E2, . . . , Ek are statistically independent if

and only if:
P(E1  E1 ...  E1)  P(E1)P(E2 )...P(E k )

Example 3.18 Probability of College Degrees
(Statistical Independence)
Suppose that women obtain 54% of all bachelor’s degrees in

a particular country and that 20% of all bachelor’s degrees
are in business. Also, 8% of all bachelor’s degrees
go to women majoring in business. Are the events “the
bachelor’s degree holder is a woman” and “the bachelor’s
degree is in business” statistically independent?

Statistical Independence Example
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
 Are the events AC and CD statistically independent?

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
P(AC ∩ CD) = 0.2 ≠ P(AC)P(CD) = 0.28

So the two events are not statistically independent
Two events are mutually exclusive if they cannot occur jointly; that is,
the probability of their intersection is 0.
For independent events the probability of their intersection is the

product of their individual probabilities and, in general, that probability is
not 0 (unless the probability of one of the events is 0, and that result is
not very interesting).
Also note that if we know two events are mutually exclusive, then if one
occurs, the other cannot and the events are not independent.

Example 3.19 Computer Repair (Independence)
The experience for a particular computer model is that 90%

of the computers will operate for at least one year before
repair is required. A manager purchases three of these
computers. What is the probability that all three will work for
one year without requiring any repair?

Events are not always independent. The condition that
the events are independent is an assumption and
should be used only after careful analysis of the
process that is being analyzed.

Example 3.20 The Birthday Problem
(Complement Rule)
A great question for a party is, What is the probability that at least 2
people in this room have the same birthday (month and day)?
To make the problem manageable, we assume that all 365 possible
birthdays are equally likely in the population at large. We also
assume that the people in the room are a random sample, with
respect to birthdays, of the larger population.

Solution: Let M be the number in the group and A be the event “at
least 1 pair has a common birthday.”
Now, to find the probability of A directly would be very tedious, since we

would have to take into account the possibility of more than 1 pair of
matching birthdays. It is easier to find the probability of A
“all M people have different birthdays”.
Since there are 365 possible birthdays for each person and each can be
associated with every possible birthday of other individuals, the total
number of equally likely distinct arrangements for M people is 365M .

Next, we ask how many of these outcomes are contained in the event A .
This is precisely the same as asking in how many ways M birthdays can be
selected from 365 possible birthdays and arranged in order.
The first person’s birthday can occur on any of 365 days, the second on
any of 364 days, the third on any of 363 days, and so forth.
Thus, for M people the number of different birthdays is as follows:
(365) (364) (363) ……. (365 - M + 1)

The number of possible birthdays for M people is 365M . Hence, the
probability that all M birthdays will be different is as follows:
(365) (364) ...(365  M  1)
P( A ) 
365M
The required probability of at least two persons is the complement:
(365)(364)...(365  M  1)
P( A)  1  P( A )  1
365M

Example 3.21 Winning Airline Tickets
(Complement Rule)
In a promotion for a particular airline, customers and potential customers

were given vouchers. A 1/325 proportion of these were worth a free round-
trip ticket anywhere this airline flies. How many vouchers would an
individual need to collect in order to have a 50% chance of winning at least
one free trip?

Solution The event of interest, A, is “at least one free trip is won from M
vouchers.”
Again, it is easier to find first the probability of the complement, ,

where is the event “no free trips are won with M vouchers.”
The probability of a win with one voucher is 1/325, and, thus, the
probability of not winning is 324/325.
If the individual has M vouchers, the event that none of these wins is just
the intersection of the “no win” events for each of the vouchers.
Moreover, these events are independent, and, thus,

M
 324 
P( A )   
 325 
and the probability of at least one win is
M
 324 
P( A)  1  P( A )  1   
 325 
In order for P(A) to be at least 0.5, the individual needs at least M = 225
vouchers.

Basic Exercises:
1) The probability of A is 0.60, the probability of B is 0.45, and the

probability of both is 0.30. What is the conditional probability of A, given
B? Are A and B independent in a probability sense?

2) A financial analyst was asked to evaluate earnings prospects for
seven corporations over the next year and to rank them in order of
predicted earnings growth rates.
a. How many different rankings are possible?
b. If, in fact, a specific ordering is the result of a guess, what is the

probability that this guess will turn out to be correct?

3) A student committee has 6 members—4 undergraduate and 2
graduate students. A subcommittee of 3 members is to be chosen
randomly so that each possible combination of 3 of the 6 students is
equally likely to be selected. What is the probability that there will be
no graduate students on the subcommittee?

Bivariate Probabilities
We introduce a class of problems that involve two distinct sets of events,

which we label A1 , A2 ,..., AH and B1 , B2 ,..., BK . The events Ai and B j are
mutually exclusive and collectively exhaustive within their sets, but
intersections ( Ai  Bi ) can occur between all events from the two sets.
These intersections can be regarded as basic outcomes of a random

experiment. Two sets of events, considered jointly in this way, are called
bivariate, and the probabilities are called bivariate probabilities.
Table 3.6 illustrates the outcomes of bivariate events labeled

A1 , A2 ,..., AH and B1 , B2 ,..., BK . If probabilities can be attached to all
intersections ( Ai  Bi ), then the whole probability structure of the random
experiment is known, and other probabilities of interest can be calculated.

3.4
Bivariate Probabilities
Outcomes for bivariate events:
B1 B2 ... Bk
A1 P(A1B1) P(A1B2) ... P(A1Bk)
A2 P(A2B1) P(A2B2) ... P(A2Bk)
. . . . .
. . . . .
. . . . .
Ah P(AhB1) P(AhB2) ... P(AhBk)

Consider a potential advertiser who wants to know both income and other
relevant characteristics of the audience for a particular television show.
Families may be categorized, using Ai , as to whether they regularly,
occasionally, or never watch a particular series. In addition, they can be
categorized, using B j , according to low-,middle-, and high-income
subgroups.

Joint and Marginal Probabilities
In the context of bivariate probabilities the intersection probabilities,

( Ai  Bi ) , are called joint probabilities.
The probabilities for individual events, P( Ai ) or P( Bi ) are called marginal

probabilities. Marginal probabilities are at the margin of a table such as
Table 3.7 and can be computed by summing the corresponding row or
column.

Joint and
Marginal Probabilities
 The probability of a joint event, A ∩ B:

number of outcomes satisfying A and B
P(A  B) 
total number of elementary outcomes
 Computing a marginal probability:
P(A)  P(A  B1)  P(A  B2 )   P(A  Bk )

 Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

Marginal Probability Example
P(Ace)
2 2 4
 P(Ace  Red)  P(Ace  Black)   
52 52 52
Color
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Using a Tree Diagram
.2
.7 P(AC ∩ CD) = .2
Given AC or
no AC:
P(AC ∩ CD) = .5
.5
.7
All
Cars
.2
.3 P(AC ∩ CD) = .2
.1 P(AC ∩ CD) = .1
.3
In many applications we find that conditional probabilities are
of more interest than the marginal probabilities.
The conditional probability can be obtained easily from the

table because we have all the joint probabilities and the
marginal probabilities.

We can also check, by using a two-way table, whether or not
paired events are statistically independent.

Odds
 The odds in favor of a particular event are

given by the ratio of the probability of the
event divided by the probability of its
complement
 The odds in favor of A are
P(A) P(A)
odds  
1- P(A) P(A)

Odds: Example
 Calculate the probability of winning if the odds
of winning are 3 to 1:
3 P(A)
odds  
1 1- P(A)
 Now multiply both sides by 1 – P(A) and solve for P(A):
3 x (1- P(A)) = P(A)

3 – 3P(A) = P(A)
3 = 4P(A)
P(A) = 0.75
Overinvolvement Ratio
 The probability of event A1 conditional on event B1
divided by the probability of A1 conditional on activity B2
is defined as the overinvolvement ratio:
P(A1 | B1 )
P(A1 | B2 )
 An overinvolvement ratio greater than 1 implies that

event A1 increases the conditional odds ratio in favor of
B1:
P(B1 | A 1 ) P(B1 )

P(B2 | A 1 ) P(B2 )

Example 3.22 Alcohol and Highway Crashes
(Overinvolvement Ratios)
Researchers at the National Highway Traffic Safety Administration in the

U.S. Department of Transportation wished to determine the effect of alcohol
on highway crashes.
Researchers did find that 10.3% of the nighttime drivers in a specific county
had been drinking and that 32.4% of the single-vehicle-accident drivers
during the same time and in the same county had been drinking. Single-
vehicle accidents were chosen to ensure that any driving error could be
assigned to only one driver, whose alcohol usage had been measured.
Based on these results they wanted to know if there was evidence to

conclude that accidents increased at night when drivers had been drinking.
Use the data to determine if alcohol usage leads to an increased probability
of crashes (Carlson 1972).

Solution: Using the overinvolvement ratios can help solve this problem.
First, the events in the sample space need to be defined:
A1: The driver had been drinking.

A2: The driver had not been drinking.
C1: The driver was involved in a crash.
C2: The driver was not involved in a crash.
We know that alcohol, A1, increases the probability of a crash if
P(A1 | C1 )
 1.0
P(A1 | C 2 )
Then the overinvolvement ratio is as follows: P(A1 | C1 ) 0.324

  3.15
P(A1 | C 2 ) 0.103
Basic Exercises
Exercises 1–2 refer to Table 3.10.

1) What is the joint probability of “high income” and “never”?
2) What is the conditional probability of “low income, given “occasional”?

3) The probability of a sale is 0.80. What are the odds in favor of a sale?

4) Consider two groups of students: B1, students who received high
scores on tests, and B2, students who received low scores on tests.
In group B1, 80% study more than 25 hours per week, and in group
B2, 40% study more than 25 hours per week.
What is the overinvolvement ratio for high study levels in high test
scores over low test scores?

3.5
Bayes’ Theorem
Let A1 and B1 be two events. Bayes’ theorem states that
P(A1 | B 1 )P(B 1 )
P(B 1 | A 1 ) 
P(A 1 )
and
P(B1 | A 1 )P(A 1 )
P(A 1 | B1 ) 
P(B1 )
 a way of revising conditional probabilities by using

available or additional information
3.5
Bayes’ Theorem
Bayes’ theorem (alternative statement)
P(A | E i )P(E i )
P(E i | A) 
P(A)
P(A | E i )P(E i )

P(A | E 1 )P(E 1 )  P(A | E 2 )P(E 2 )    P(A | E k )P(E k )
 where:
Ei = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Ei)

Solution Steps for Bayes’ Theorem
1. Define the subset events from the problem.
2. Define the probabilities and conditional probabilities for

the events defined in Step 1.
3. Compute the complements of the probabilities.
4. Formally state and apply Bayes’ theorem to compute the

solution probability.

Example 3.24 Automobile Sales Incentive
(Bayes’ Theorem)
A car dealership knows from past experience that 10% of the people who
come into the showroom and talk to a salesperson will eventually purchase a
car. To increase the chances of success, you propose to offer a free dinner
with a salesperson for all people who agree to listen to a complete sales
presentation. You know that some people will do anything for a free dinner,
even if they do not intend to purchase a car. However, some people would
rather not spend a dinner with a car salesperson. Thus, you wish
to test the effectiveness of this sales promotion incentive. The project is
conducted for 6 months, and 40% of the people who purchased cars had a
free dinner. In addition, 10% of the people who did not purchase cars had a
free dinner. The specific questions to be answered are the following:
a. Do people who accept the dinner have a higher probability of purchasing a

new car?
b. What is the probability that a person who does not accept a free dinner will
purchase a car?
Bayes’ Theorem Example
 A drilling company has estimated a 40%

chance of striking oil for their new well.
 A detailed test has been scheduled for more
information. Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
 Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

(continued)
 Let S = successful well

U = unsuccessful well
 P(S) = .4 , P(U) = .6 (prior probabilities)
 Define the detailed test event as D
 Conditional probabilities:
P(D|S) = .6 P(D|U) = .2
 Goal is to find P(S|D)

(continued)
Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) 
P(D | S)P(S)  P(D | U)P(U)
(.6)(. 4)

(.6)(. 4)  (.2)(. 6)
.24
  .667
.24  .12
So the revised probability of success (from the original estimate of .4),
given that this well has been scheduled for a detailed test, is .667

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
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Statistics for

Business and Economics

Elements of Chance: Probability Methods

Copyright © 2013 Pearson Education Ch. 3-1

 Use a Venn diagram or tree diagram to illustrate

 Compute conditional probabilities

 Determine whether events are statistically

Copyright © 2013 Pearson Education Ch. 3-2

 Random Experiment – a process leading to an

Copyright © 2013 Pearson Education Ch. 3-3

 Intersection of Events – If A and B are two

Copyright © 2013 Pearson Education Ch. 3-4

 A and B are Mutually Exclusive Events if they

Copyright © 2013 Pearson Education Ch. 3-5

 Union of Events – If A and B are two events in a

Copyright © 2013 Pearson Education Ch. 3-6

 Events E1, E2, …,Ek are Collectively Exhaustive

 The Complement of an event A is the set of all

Copyright © 2013 Pearson Education Ch. 3-7

Let A be the event “Number rolled is even”

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

Copyright © 2013 Pearson Education Ch. 3-10

3.1) Given A  E1 , E3 , E6 , E9 , define A.

Copyright © 2013 Pearson Education Ch. 3-11

b. What is the union of A and B?

c. Is the union of A and B collectively exhaustive?

Copyright © 2013 Pearson Education Ch. 3-12

 Probability – the chance that 1 Certain

0 ≤ P(A) ≤ 1 For any event A .5

Copyright © 2013 Pearson Education Ch. 3-14

2. relative frequency probability

Copyright © 2013 Pearson Education Ch. 3-15

Classical probability of event A:

 Requires a count of the outcomes in the sample space

Copyright © 2013 Pearson Education Ch. 3-16

Karlyn Akimoto operates a small computer store. On a

Copyright © 2013 Pearson Education Ch. 3-17

The number of outcomes in the sample space is 10.

The required probability of event A—one Hewlett-Packard and one Dell—

Copyright © 2013 Pearson Education Ch. 3-18

 Use the Combinations formula to determine the

Copyright © 2013 Pearson Education Ch. 3-19

The number of possible orderings

 The total number of possible ways of arranging x

x!  x(x - 1)(x - 2) ...(2)(1)

Copyright © 2013 Pearson Education Ch. 3-20

Permutations: the number of possible

P  n(n  1)(n  2) ...(n  x  1)

 Combinations: The number of combinations

 The permutations are

Suppose that two letters are to be selected

 The combinations are

Copyright © 2013 Pearson Education Ch. 3-24

A personnel officer has 8 candidates to fill 4 similar positions.

Copyright © 2013 Pearson Education Ch. 3-25

Suppose that Karlyn’s store now contains 10 Hewlett-

Copyright © 2013 Pearson Education Ch. 3-26

nA number of events in the population that satisfy event A

Copyright © 2013 Pearson Education Ch. 3-28

Subjective probabilities are personal. There is no requirement

Copyright © 2013 Pearson Education Ch. 3-31

1. If A is any event in the sample space S, then