Chapter 2

Probability Concepts and

Applications (Part 2)

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.
 Random Variables

A random variable assigns a real number

to every possible outcome or event in an
experiment
X = number of refrigerators sold during the day

Discrete random variables can assume only

a finite or limited set of values
Continuous random variables can assume
any one of an infinite set of values

© 2008 Prentice-Hall, Inc. 2 – 14

 Random Variables – Numbers
RANGE OF
RANDOM
EXPERIMENT OUTCOME RANDOM
VARIABLES
VARIABLES
Stock 50 Number of Christmas X 0, 1, 2,…, 50
Christmas trees trees sold
Inspect 600 Number of acceptable Y 0, 1, 2,…, 600
items items
Send out 5,000 Number of people Z 0, 1, 2,…, 5,000
sales letters responding to the
letters
Build an Percent of building R 0 ≤ R ≤ 100
apartment completed after 4
building months
Test the lifetime Length of time the S 0 ≤ S ≤ 80,000
of a lightbulb bulb lasts up to 80,000
(minutes) minutes

Table 2.4
© 2008 Prentice-Hall, Inc. 2 – 15
 Random Variables – Not Numbers

RANGE OF
RANDOM
EXPERIMENT OUTCOME RANDOM
VARIABLES
VARIABLES
Students Strongly agree (SA) 5 if SA 1, 2, 3, 4, 5
respond to a Agree (A) 4 if A..
questionnaire Neutral (N) X = 3 if N..
Disagree (D) 2 if D..
Strongly disagree (SD) 1 if SD

One machine Defective Y= 0 if defective 0, 1

is inspected Not defective 1 if not defective

Consumers Good 3 if good…. 1, 2, 3

respond to Average Z= 2 if average
how they like Poor 1 if poor…..
a product

Table 2.5
© 2008 Prentice-Hall, Inc. 2 – 16
 Probability Distribution of a
Discrete Random Variable
Selecting the right probability distribution
is important
n For discrete random variables a
probability is assigned to each event

Dr. Shannon asked students

to respond to the statement, 5. Strongly agree
4. Agree
“The textbook was well 3. Neutral
written and helped me 2. Disagree
acquire the necessary 1. Strongly disagree
information.”

© 2008 Prentice-Hall, Inc. 2 – 17

 Probability Distribution of a
Discrete Random Variable
RANDOM NUMBER PROBABILITY
OUTCOME VARIABLE (X) RESPONDING P (X)
Strongly agree 5 10 0.1 = 10/100
Agree 4 20 0.2 = 20/100
Neutral 3 30 0.3 = 30/100
Disagree 2 30 0.3 = 30/100
Strongly disagree 1 10 0.1 = 10/100
Total 100 1.0 = 100/100
Table 2.6
Distribution follows all three rules
1. Events are mutually exclusive and collectively exhaustive
2. Individual probability values are between 0 and 1
3. Total of all probability values equals 1
© 2008 Prentice-Hall, Inc. 2 – 18
 Probability Distribution for
Dr. Shannon’s Class

0.4 –

0.3 –
P (X)

0.2 –

0.1 –

0–
| | | | | |
1 2 3 4 5
Figure 2.5 X
© 2008 Prentice-Hall, Inc. 2 – 19
 Probability Distribution for
Dr. Shannon’s Class

0.4 – Central tendency of the

distribution is the mean
or expected value
0.3 –
Amount of variability or
spread is the variance
P (X)

0.2 –

0.1 –

0–
| | | | | |
1 2 3 4 5
Figure 2.5 X
© 2008 Prentice-Hall, Inc. 2 – 20
 Expected Value of a Discrete
Probability Distribution
The expected value is a measure of the central
tendency of the distribution and is a weighted
average of the values of the random variable
n
E(X ) = å X i P(X i )
i =1

= X 1 P ( X 1 ) + X 2 P ( X 2 ) + ... + X n P ( X n )
where
X i = random variable’s possible values
P ( X i ) = probability of each of the random variable’s
n possible values
å
i =1
= summation sign indicating we are adding all n
possible values
E ( X ) = expected value or mean of the random sample
© 2008 Prentice-Hall, Inc. 2 – 21
 Variance of a
Discrete Probability Distribution
For a discrete probability distribution the
variance can be computed by
n
σ 2 = Variance = å [ X i - E ( X )]2 P ( X i )
i =1

where
X i = random variable’s possible values
E ( X ) = expected value of the random variable
[ X i - E ( X )]= difference between each value of the random
variable and the expected mean
P ( X i ) = probability of each possible value of the
random sample

© 2008 Prentice-Hall, Inc. 2 – 22

 Variance of a
Discrete Probability Distribution

For Dr. Shannon’s class

5
variance = å [ X i - E ( X )]2 P ( X i )
i =1

variance = (5 - 2.9)2 (0.1) + ( 4 - 2.9)2 (0.2) +

(3 - 2.9)2 (0.3) + (2 - 2.9)2 (0.3) +
(1 - 2.9)2 (0.1)
= 0.441 + 0.242 + 0.003 + 0.243 + 0.361
= 1.29

© 2008 Prentice-Hall, Inc. 2 – 23

 Variance of a
Discrete Probability Distribution

A related measure of dispersion is the

standard deviation

σ = Variance = σ 2

where
= square root
σ = standard deviation

© 2008 Prentice-Hall, Inc. 2 – 24

 Variance of a
Discrete Probability Distribution

A related measure of dispersion is the

standard deviation

σ = Variance = σ 2

where
= square
Forroot
the textbook question
σ = standard deviation
σ = Variance
= 1.29 = 1.14

© 2008 Prentice-Hall, Inc. 2 – 25

 Probability Distribution of a
Continuous Random Variable
Since random variables can take on an infinite
number of values, the fundamental rules for
continuous random variables must be modified
n The sum of the probability values must still
equal 1
n But the probability of each value of the
random variable must equal 0 or the sum
would be infinitely large
The probability distribution is defined by a
continuous mathematical function called the
probability density function or just the probability
function
n Represented by f (X)

© 2008 Prentice-Hall, Inc. 2 – 26

 Probability Distribution of a
Continuous Random Variable
Probability

| | | | | | |
5.06 5.10 5.14 5.18 5.22 5.26 5.30
Weight (grams)

Figure 2.6

© 2008 Prentice-Hall, Inc. 2 – 27

 The Binomial Distribution

n Many business experiments can be

characterized by the Bernoulli process
n The Bernoulli process is described by the
binomial probability distribution
1. Each trial has only two possible outcomes
2. The probability stays the same from one trial
to the next
3. The trials are statistically independent
4. The number of trials is a positive integer

© 2008 Prentice-Hall, Inc. 2 – 28

 The Binomial Distribution
The binomial distribution is used to find the
probability of a specific number of successes
out of n trials
We need to know
n = number of trials
p = the probability of success on any
single trial
We let
r = number of successes
q = 1 – p = the probability of a failure

© 2008 Prentice-Hall, Inc. 2 – 29

 The Binomial Distribution
The binomial formula is

n!
Probability of r successes in n trials = p r q n- r
r ! ( n - r )!

The symbol ! means factorial, and

n! = n(n – 1)(n – 2)…(1)
For example
4! = (4)(3)(2)(1) = 24
By definition
1! = 1 and 0! = 1

© 2008 Prentice-Hall, Inc. 2 – 30

 The Binomial Distribution

NUMBER OF 5!
HEADS (r) Probability = (0.5)r(0.5)5 – r
r!(5 – r)!
0 0.03125 = 5! (0.5)0(0.5)5 – 0
0!(5 – 0)!
1 0.15625 = 5! (0.5)1(0.5)5 – 1
1!(5 – 1)!
2 0.31250 = 5! (0.5)2(0.5)5 – 2
2!(5 – 2)!
3 0.31250 = 5! (0.5)3(0.5)5 – 3
3!(5 – 3)!
4 0.15625 = 5! (0.5)4(0.5)5 – 4
4!(5 – 4)!
5 0.03125 = 5! (0.5)5(0.5)5 – 5
5!(5 – 5)!

Table 2.7
© 2008 Prentice-Hall, Inc. 2 – 31
 Solving Problems with the
Binomial Formula

We want to find the probability of 4 heads in 5 tosses

n = 5, r = 4, p = 0.5, and q = 1 – 0.5 = 0.5

Thus
5!
P = ( 4 successes in 5 trials ) = 0.5 4 0.5 5 - 4
4! (5 - 4 )!
5( 4 )(3)(2)(1)
= (0.0625 )(0.5 ) = 0.15625
4(3)(2)(1)(1! )

Or about 16%

© 2008 Prentice-Hall, Inc. 2 – 32

 Solving Problems with the
Binomial Formula
0.4 –

0.3 –
Probability P (r)

0.2 –

0.1 –

0 –| | | | | | |
1 2 3 4 5 6
Values of r (number of successes)
Figure 2.7

© 2008 Prentice-Hall, Inc. 2 – 33

 Solving Problems with
Binomial Tables
MSA Electronics is experimenting with the
manufacture of a new transistor
n Every hour a sample of 5 transistors is taken
n The probability of one transistor being
defective is 0.15
What is the probability of finding 3, 4, or 5 defective?

So n = 5, p = 0.15, and r = 3, 4, or 5

We could use the formula to solve this problem,

but using the table is easier

© 2008 Prentice-Hall, Inc. 2 – 34

 Solving Problems with
Binomial Tables
P
n r 0.05 0.10 0.15
5 0 0.7738 0.5905 0.4437
1 0.2036 0.3281 0.3915
2 0.0214 0.0729 0.1382
3 0.0011 0.0081 0.0244
4 0.0000 0.0005 0.0022
5 0.0000 0.0000 0.0001
Table 2.8 (partial)

We find the three probabilities in the table

for n = 5, p = 0.15, and r = 3, 4, and 5 and
add them together

© 2008 Prentice-Hall, Inc. 2 – 35

 Solving Problems with
Binomial Tables
P
P (3 or
n more
r 0.05 ) = P (3 ) + P
defects ( 4 ) + P (5 )
0.10 0.15
5 0 0.7738 = 0.0244 + 0.0022 + 0.0001
0.5905 0.4437= 0.0267
1 0.2036 0.3281 0.3915
2 0.0214 0.0729 0.1382
3 0.0011 0.0081 0.0244
4 0.0000 0.0005 0.0022
5 0.0000 0.0000 0.0001
Table 2.8 (partial)

We find the three probabilities in the table

for n = 5, p = 0.15, and r = 3, 4, and 5 and
add them together

© 2008 Prentice-Hall, Inc. 2 – 36

 Solving Problems with
Binomial Tables
It is easy to find the expected value (or mean) and
variance of a binomial distribution

Expected value (mean) = np

Variance = np(1 – p)

For the MSA example

Expected value = np = 5(0.15 ) = 0.75

Variance = np(1 - p ) = 5(0.15 )(0.85 ) = 0.6375

© 2008 Prentice-Hall, Inc. 2 – 37

 The Normal Distribution
The normal distribution is the most popular
and useful continuous probability
distribution
n The formula for the probability density
function is rather complex
- ( x - µ )2
1
f (X ) = e 2s 2
s 2p

n The normal distribution is specified

completely when we know the mean, µ,
and the standard deviation, s

© 2008 Prentice-Hall, Inc. 2 – 38

 The Normal Distribution

n The normal distribution is symmetrical,

with the midpoint representing the mean
n Shifting the mean does not change the
shape of the distribution
n Values on the X axis are measured in the
number of standard deviations away from
the mean
n As the standard deviation becomes larger,
the curve flattens
n As the standard deviation becomes
smaller, the curve becomes steeper
© 2008 Prentice-Hall, Inc. 2 – 39
 The Normal Distribution

| | |

40 µ = 50 60

Smaller µ, same s

| | |

µ = 40 50 60

Larger µ, same s

| | |

40 50 µ = 60
Figure 2.8
© 2008 Prentice-Hall, Inc. 2 – 40
 The Normal Distribution

Same µ, smaller s

Same µ, larger s

Figure 2.9
µ
© 2008 Prentice-Hall, Inc. 2 – 41
 The Normal Distribution

16% 68% 16%

–1s +1s
a µ b

2.3% 95.4% 2.3%

–2s +2s
a µ b

0.15% 99.7% 0.15%

–3s +3s
a µ b
Figure 2.10
© 2008 Prentice-Hall, Inc. 2 – 42
 The Normal Distribution

If IQs in the United States were normally distributed

with µ = 100 and s = 15, then

1. 68% of the population would have IQs

between 85 and 115 points (±1s)
2. 95.4% of the people have IQs between 70
and 130 (±2s)
3. 99.7% of the population have IQs in the
range from 55 to 145 points (±3s)
4. Only 16% of the people have IQs greater
than 115 points (from the first graph, the
area to the right of +1s)

© 2008 Prentice-Hall, Inc. 2 – 43

Using the Standard Normal Table
Step 1
Convert the normal distribution into a standard
normal distribution
n A standard normal distribution has a mean
of 0 and a standard deviation of 1
n The new standard random variable is Z

X -µ
Z=
s
where
X = value of the random variable we want to measure
µ = mean of the distribution
s = standard deviation of the distribution
Z = number of standard deviations from X to the mean, µ
© 2008 Prentice-Hall, Inc. 2 – 44
Using the Standard Normal Table
For example, µ = 100, s = 15, and we want to find
the probability that X is less than 130
X -µ 130 - 100
Z= =
s 15
30
= = 2 std dev µ = 100
15 P(X < 130) s = 15

| | | | | | |
X = IQ
55 70 85 100 115 130 145

X -µ
| | | | | | | Z=
–3 –2 –1 0 1 2 3 s
Figure 2.11
© 2008 Prentice-Hall, Inc. 2 – 45
 Using the Standard Normal Table
Step 2
Look up the probability from a table of normal
curve areas
n Use Appendix A or Table 2.9 (portion below)
n The column on the left has Z values
n The row at the top has second decimal
places for the Z values
AREA UNDER THE NORMAL CURVE
Z 0.00 0.01 0.02 0.03
1.8 0.96407 0.96485 0.96562 0.96638
P(X < 130)
1.9 0.97128 0.97193 0.97257 0.97320 = (Z < 2.00)
2.0 0.97725 0.97784 0.97831 0.97882
2.1 0.98214 0.98257 0.98300 0.98341 = 97.7%
2.2 0.98610 0.98645 0.98679 0.98713

Table 2.9
© 2008 Prentice-Hall, Inc. 2 – 46
Haynes Construction Company

Haynes builds apartment buildings

n Total construction time follows a normal
distribution
n For triplexes, µ = 100 days and s = 20 days
n Contract calls for completion in 125 days
n Late completion will incur a severe penalty
fee
n What is the probability of completing in 125
days?

© 2008 Prentice-Hall, Inc. 2 – 47

 Haynes Construction Company

X -µ 125 - 100
Z= =
s 20
25
= = 1.25
20

µ = 100 days X = 125 days

s = 20 days
Figure 2.12

From Appendix A, for Z = 1.25 the area is 0.89435

n There is about an 89% probability Haynes
will not violate the contract
© 2008 Prentice-Hall, Inc. 2 – 48
Haynes Construction Company

Haynes builds apartment buildings

n Total construction time follows a normal
distribution
n For triplexes, µ = 100 days and s = 20 days
n Completion in 75 days or less will earn a
bonus of $5,000
n What is the probability of getting the
bonus?

© 2008 Prentice-Hall, Inc. 2 – 49

 Haynes Construction Company

X -µ 75 - 100
Z= =
s 20
- 25
= = -1.25 P(X < 75 days)
20
Area of
Interest

X = 75 days µ = 100 days

Figure 2.12

n But Appendix A has only positive Z values, the

probability we are looking for is in the negative tail

© 2008 Prentice-Hall, Inc. 2 – 50

 Haynes Construction Company

X -µ 75 - 100
Z= =
s 20
- 25 P(X > 125 days)
= = -1.25
20 Area of
Interest

µ = 100 days X = 125 days

n Because the curve is symmetrical, we can look

at the probability in the positive tail for the
same distance away from the mean
© 2008 Prentice-Hall, Inc. 2 – 51
 Haynes Construction Company
n We know the probability
completing in
125 days is 0.89435
n So the probability
completing in more
than 125 days is
1 – 0.89435 = 0.10565

µ = 100 days X = 125 days

© 2008 Prentice-Hall, Inc. 2 – 52

 Haynes Construction Company
n The probability
completing in more
than 125 days is
1 – 0.89435 = 0.10565
n Going back to
the left tail of the
distribution

X = 75 days µ = 100 days

n The probability of completing in less than

75 days is 0.10565 or about 11%
© 2008 Prentice-Hall, Inc. 2 – 53
Haynes Construction Company

Haynes builds apartment buildings

n Total construction time follows a normal
distribution
n For triplexes, µ = 100 days and s = 20 days
n What is the probability of completing
between 110 and 125 days?

n We know the probability of completing in 125

days, P(X < 125) = 0.89435
n We have to complete the probability of
completing in 110 days and find the area
between those two events
© 2008 Prentice-Hall, Inc. 2 – 54
 Haynes Construction Company

X -µ 110 - 100
Z= = s = 20 days
s 20
10
= = 0.5
20

µ = 100 110 125

days days days
Figure 2.14

n From Appendix A, for Z = 0.5 the area is 0.69146

n P(110 < X < 125) = 0.89435 – 0.69146 = 0.20289
or about 20%
© 2008 Prentice-Hall, Inc. 2 – 55