Chapter 2

Probability Concepts and

Applications

To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna © 2008 Prentice-Hall, Inc.
Power Point slides created by Jeff Heyl © 2009 Prentice-Hall, Inc.
 Learning Objectives
After completing this chapter, students will be able to:
1. Understand the basic foundations of
probability analysis
2. Describe statistically dependent and
independent events
3. Use Bayes’ theorem to establish posterior
probabilities
4. Describe and provide examples of both
discrete and continuous random variables
5. Explain the difference between discrete and
continuous probability distributions
6. Calculate expected values and variances
and use the normal table
© 2008 Prentice-Hall, Inc. 2–2
 Chapter Outline
2.1 Introduction
2.2 Fundamental Concepts
2.3 Mutually Exclusive and Collectively
Exhaustive Events
2.4 Statistically Independent Events
2.5 Statistically Dependent Events
2.6 Revising Probabilities with Bayes’
Theorem
2.7 Further Probability Revisions

© 2008 Prentice-Hall, Inc. 2–3

 Chapter Outline
2.8 Random Variables
2.9 Probability Distributions
2.10 The Binomial Distribution
2.11 The Normal Distribution
2.12 The F Distribution
2.13 The Exponential Distribution
2.14 The Poisson Distribution

© 2008 Prentice-Hall, Inc. 2–4

 Introduction

n Life is uncertain, we are not sure

what the future will bring
n Risk and probability is a part of
our daily lives
n Probability is a numerical
statement about the likelihood
that an event will occur

© 2008 Prentice-Hall, Inc. 2–5

 Fundamental Concepts

1. The probability, P, of any event or

state of nature occurring is greater
than or equal to 0 and less than or
equal to 1. That is:

0 £ P (event) £ 1

2. The sum of the simple probabilities

for all possible outcomes of an
activity must equal 1
© 2008 Prentice-Hall, Inc. 2–6
 Diversey Paint Example
n Demand for white latex paint at Diversey Paint
and Supply has always been either 0, 1, 2, 3, or 4
gallons per day
n Over the past 200 days, the owner has observed
the following frequencies of demand
QUANTITY
NUMBER OF DAYS PROBABILITY
DEMANDED
0 40 0.20 (= 40/200)
1 80 0.40 (= 80/200)
2 50 0.25 (= 50/200)
3 20 0.10 (= 20/200)
4 10 0.05 (= 10/200)
Total 200 Total 1.00 (= 200/200)

© 2008 Prentice-Hall, Inc. 2–7

 Diversey Paint Example
n Demand for white latex paint at Diversey Paint
and Supply
Notice has always
the individual been either 0, 1, 2, 3, or 4
probabilities
aregallons per day
all between 0 and 1
n Over the0 ≤past 200 days,
P (event) ≤ 1 the owner has observed
the following frequencies of demand
And the total of all event
probabilities
QUANTITY equals 1
NUMBER OF DAYS PROBABILITY
DEMANDED
0 ∑P (event) = 1.0040 0.20 (= 40/200)
1 80 0.40 (= 80/200)
2 50 0.25 (= 50/200)
3 20 0.10 (= 20/200)
4 10 0.05 (= 10/200)
Total 200 Total 1.00 (= 200/200)

© 2008 Prentice-Hall, Inc. 2–8

 Types of Probability
Determining objective probability
n Relative frequency
n Typically based on historical data

Number of occurrences of the event

P (event) =
Total number of trials or outcomes

n Classical or logical method

n Logically determine probabilities without
trials
1 Number of ways of getting a head
P (head) =
2 Number of possible outcomes (head or tail)

© 2008 Prentice-Hall, Inc. 2–9

 Types of Probability

Subjective probability is based on

the experience and judgment of the
person making the estimate
n Opinion polls
n Judgment of experts
n Delphi method
n Other methods

© 2008 Prentice-Hall, Inc. 2 – 10

 Mutually Exclusive Events

Events are said to be mutually

exclusive if only one of the events can
occur on any one trial

n Tossing a coin will result

in either a head or a tail
n Rolling a die will result in
only one of six possible
outcomes

© 2008 Prentice-Hall, Inc. 2 – 11

 Collectively Exhaustive Events

Events are said to be collectively

exhaustive if the list of outcomes
includes every possible outcome
n Both heads and
OUTCOME
tails as possible OF ROLL
PROBABILITY

outcomes of 1 1/
6

coin flips 2 1/
6
3 1/
n All six possible 6
4 1/
outcomes 5 1/
6

6
of the roll 6 1/
6
of a die Total 1

© 2008 Prentice-Hall, Inc. 2 – 12

 Drawing a Card

Draw one card from a deck of 52 playing cards

P (drawing a 7) = 4/52 = 1/13

P (drawing a heart) = 13/52 = 1/4

n These two events are not mutually exclusive

since a 7 of hearts can be drawn
n These two events are not collectively
exhaustive since there are other cards in the
deck besides 7s and hearts

© 2008 Prentice-Hall, Inc. 2 – 13

 Table of Differences

MUTUALLY COLLECTIVELY
DRAWS
EXCLUSIVE EXHAUSTIVE
1. Draws a spade and a club Yes No
2. Draw a face card and a Yes Yes
number card
3. Draw an ace and a 3 Yes No
4. Draw a club and a nonclub Yes Yes
5. Draw a 5 and a diamond No No
6. Draw a red card and a No No
diamond

© 2008 Prentice-Hall, Inc. 2 – 14

Adding Mutually Exclusive Events

We often want to know whether one or a

second event will occur
n When two events are mutually
exclusive, the law of addition is –

P (event A or event B) = P (event A) + P (event B)

P (spade or club) = P (spade) + P (club)

= 13/52 + 13/52
= 26/52 = 1/2 = 0.50 = 50%

© 2008 Prentice-Hall, Inc. 2 – 15

Adding Not Mutually Exclusive Events

The equation must be modified to account

for double counting
n The probability is reduced by
subtracting the chance of both events
occurring together
P (event A or event B) = P (event A) + P (event B)
– P (event A and event B both occurring)

P (A or B) = P (A) + P (B) – P (A and B)

P(five or diamond) = P(five) + P(diamond) – P(five and diamond)
= 4/52 + 13/52 – 1/52
= 16/52 = 4/13

© 2008 Prentice-Hall, Inc. 2 – 16

 Venn Diagrams

P (A and B)

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

Events that are mutually Events that are not

exclusive mutually exclusive

P (A or B) = P (A) + P (B) P (A or B) = P (A) + P (B)

– P (A and B)
Figure 2.1 Figure 2.2
© 2008 Prentice-Hall, Inc. 2 – 17
 Statistically Independent Events

Events may be either independent or

dependent
n For independent events, the occurrence
of one event has no effect on the
probability of occurrence of the second
event

© 2008 Prentice-Hall, Inc. 2 – 18

Which Sets of Events Are Independent?

1. (a) Your education

Dependent events
(b) Your income level

2. (a) Draw a jack of hearts from a full 52-card deck Independent

(b) Draw a jack of clubs from a full 52-card deck events

3. (a) Chicago Cubs win the National League pennant Dependent

(b) Chicago Cubs win the World Series events

4. (a) Snow in Santiago, Chile

Independent events
(b) Rain in Tel Aviv, Israel

© 2008 Prentice-Hall, Inc. 2 – 19

 Three Types of Probabilities
n Marginal (or simple) probability is just the
probability of an event occurring
P (A)
n Joint probability is the probability of two or more
events occurring and is the product of their
marginal probabilities for independent events
P (AB) = P (A) x P (B)
n Conditional probability is the probability of event
B given that event A has occurred
P (B | A) = P (B)
n Or the probability of event A given that event B
has occurred
P (A | B) = P (A)
© 2008 Prentice-Hall, Inc. 2 – 20
 Joint Probability Example

The probability of tossing a 6 on the first

roll of the die and a 2 on the second roll
P (6 on first and 2 on second)
= P (tossing a 6) x P (tossing a 2)
= 1/6 x 1/6 = 1/36 = 0.028

© 2008 Prentice-Hall, Inc. 2 – 21

 Independent Events
A bucket contains 3 black balls and 7 green balls
n We draw a ball from the bucket, replace it, and
draw a second ball

1. A black ball drawn on first draw

P (B) = 0.30 (a marginal probability)
2. Two green balls drawn
P (GG) = P (G) x P (G) = 0.7 x 0.7 = 0.49
(a joint probability for two independent events)

© 2008 Prentice-Hall, Inc. 2 – 22

 Independent Events
A bucket contains 3 black balls and 7 green balls
n We draw a ball from the bucket, replace it, and
draw a second ball
3. A black ball drawn on second draw if the first
draw is green
P (B | G) = P (B) = 0.30
(a conditional probability but equal to the marginal
because the two draws are independent events)
4. A green ball is drawn on the second if the first
draw was green
P (G | G) = P (G) = 0.70
(a conditional probability as in event 3)

© 2008 Prentice-Hall, Inc. 2 – 23

Statistically Dependent Events
The marginal probability of an event occurring is
computed the same
P (A)

Calculating conditional probabilities is slightly more

complicated. The probability of event A given that
event B has occurred is
P (AB)
P (A | B) =
P (B)
The formula for the joint probability of two events is
P (AB) = P (B | A) P (A)

© 2008 Prentice-Hall, Inc. 2 – 24

 When Events Are Dependent

Assume that we have an urn containing 10 balls of

the following descriptions
n 4 are white (W) and lettered (L)
n 2 are white (W) and numbered (N)
n 3 are yellow (Y) and lettered (L)
n 1 is yellow (Y) and numbered (N)

P (WL) = 4/10 = 0.4 P (YL) = 3/10 = 0.3

P (WN) = 2/10 = 0.2 P (YN) = 1/10 = 0.1
P (W) = 6/10 = 0.6 P (L) = 7/10 = 0.7
P (Y) = 4/10 = 0.4 P (N) = 3/10 = 0.3

© 2008 Prentice-Hall, Inc. 2 – 25

 When Events Are Dependent

4 balls
White (W) 4
and Probability (WL) =
10
Lettered (L)

2 balls
Urn contains 2
White (W) Probability (WN) =
10 balls and 10
Numbered (N)
3 balls
Yellow (Y) 3
Probability (YL) =
and 10
Lettered (L)
1 ball Yellow (Y) 1
Figure 2.3 and Numbered (N) Probability (YN) =
10
© 2008 Prentice-Hall, Inc. 2 – 26
 When Events Are Dependent

The conditional probability that the ball drawn

is lettered, given that it is yellow, is

P (YL) 0.3
P (L | Y) = = = 0.75
P (Y) 0.4

Verify P (YL) using the joint probability formula

P (YL) = P (L | Y) x P (Y) = (0.75)(0.4) = 0.3

© 2008 Prentice-Hall, Inc. 2 – 27

 Joint Probabilities
for Dependent Events
If the stock market reaches 12,500 point by January,
there is a 70% probability that Tubeless Electronics
will go up
n There is a 40% chance the stock market will
reach 12,500
n Let M represent the event of the stock market
reaching 12,500 and let T be the event that
Tubeless goes up in value

P (MT) = P (T | M) x P (M) = (0.70)(0.40) = 0.28

© 2008 Prentice-Hall, Inc. 2 – 28