School of Commerce

BAIS (Year 3)
BUSINESS STATISTICS II
Alem Shumiye (Asst. Prof.)
November 2023

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 Course Outline
Chapter 1: Probability distribution
Chapter 2: Sampling and sampling
distributions
Chapter 3: Statistical estimation
Chapter 4: Tests of hypotheses
Chapter 5: Chi-square and some
other non-parametric
tests (optional)
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Chapter 1:
Probability Distributions
1.1. Random Variables
❑ A random variable x represents a numerical value
associated with each outcome of a probability
distribution.
❑ A random variable is discrete if it has a finite or
countable number of possible outcomes that can be listed.
x
0 2 4 6 8 10

❑ A random variable is continuous if it has an uncountable

number or possible outcomes, represented by the
intervals on a number line.
x
0 2 4 6 8 10
(All measurements are continuous random variables )
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1.2. Types of Probability Distributions
A) Discrete Probability Distribution
B) Continuous Probability Distribution
A) A Discrete Probability Distribution lists each possible
value the random variable can assume, together with its
probability. A probability distribution must satisfy the
following conditions.

In Words In Symbols
1. The probability of each value of 0  P (x)  1
the discrete random variable is
between 0 and 1, inclusive.

2. The sum of all the probabilities is 1. ΣP (x) = 1

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Constructing a Discrete Probability Distribution

Guidelines
Let x be a discrete random variable with possible
outcomes x1, x2, … , xn.
1. Make a frequency distribution for the possible
outcomes.
2. Find the sum of the frequencies.
3. Find the probability of each possible outcome by
dividing its frequency by the sum of the frequencies.
4. Check that each probability is between 0 and 1 and
that the sum is 1.

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1.3. Mean of a Discrete Probability Distribution

❑ The mean of a discrete random variable is given by

Expected Value = E(x) = μ = Σ x P(x).
❑ Each value of x is multiplied by its corresponding
probability and the products are added.
Example: Suppose a fair coin is tossed twice and X is the number
of heads that occur. (a) Find the probability distribution of X,
(b) Calculate the mean and variance of X

x P ( x) xP (x)
0 0.25 0 (0.25) = 0
ΣxP(x) = 1
1 0.50 1 (0.50)= 0.5
2 0.25 2 (0.25) = 0.5 Mean of X = 1
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1.4. Variance of a Discrete Probability Distribution

The variance of a discrete random variable is given

by 2 = Σ(x – μ)2P (x).

Example: Refer to the previous example and calculate the

variance of X . The mean is 1

x P ( x) x – μ (x – μ)2 P (x)(x – μ)2 ΣP(x)(x – 2)2

0 0.25 –1 1 0.25 = 0.50
1 0.50 0 0 0
The variance of X is
2 0.25 1 1 0.25 0.50

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1.5. Binomial Distribution
A Binomial Experiment is a probability
experiment that satisfies the following conditions.

1. n, the number of trails is finite

2. Each trail results in one of two possible
outcomes: success (S) or failure (F).
3. The probability of a success P (S) is the
same for each trial.
4. Trials are independent
Notation for Binomial Experiments

Symbol Description
n The number of times a trial is repeated.

p = P (S ) The probability of success in a single trial.

q = P (F) The probability of failure in a single trial.

[q = 1 – p ]

x The random variable represents a count

of the number of successes in n trials:
x = 0, 1, 2, 3, … , n.

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 Binomial Probability Formula
In a binomial experiment, the probability of exactly x
successes in n trials is

P (x ) = nC x p xq n −x = n! p xq n −x .
(n − x )! x !
Example 1: Studies show color blindness affect about 8% of
men. A random sample of 10 men is taken.
a) What makes this a binomial distribution?
b) What is the probability that all men are color blind?
c) What is the probability that no men are color blind?
d) What is the probability that at least 3 mean are color
blind?

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 Binomial Distribution:
Mean, Variance and Standard Deviation
Population Parameters of a Binomial Distribution
Mean: μ = np
Variance: σ 2 = npq
Standard deviation: σ = npq
Example 1:
One out of 5 students at SOC skip breakfast in the morning. Find the
mean, variance and standard deviation if 10 students are randomly
selected.
n = 10 μ = np σ 2 = npq σ = npq
p = 1 = 0.2 = 10(0.2) = (10)(0.2)(0.8) = 1.6
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q = 0.8 =2 = 1.6  1.3

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1.6. Geometric Probability Distribution

A geometric distribution is a discrete probability

distribution of a random variable x that satisfies the
following conditions.
1. A trial is repeated until a success occurs (p).
2. The repeated trials are independent of each
other.
3. The probability of a success p is constant for
each trial.

The probability that the first success will occur on

trial x is P (x) = pqx – 1, where q = 1 – p.
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…geometric probability … (Cont’d)

❑ Here, instead of the number of successes that

occur in n trials, the geometric random
variable x is the number of the trial on which
the first success occurs.
❑ Thus, the experiment consists of a series of
trials that is concluded when the first success
is observed.
❑ Consequently, the experiment could end with
the first trial if a success is observed, or it
could go on indefinitely.

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Example: Geometric Distribution
Shoa Supermarket puts a winning game piece on every
fifth package of French fries. Find the probability that
you will win a prize,
a.) with your third purchase of French fries,
b.) with your third or fourth purchase of French fries.
p = 0.20 q = 0.80
a.) x = 3 b.) x = 3, 4
P (3) = (0.2)(0.8)3 – 1 P (3 or 4) = P (3) + P (4)
= (0.2)(0.8)2  0.128 + 0.102
= (0.2)(0.64)  0.230
= 0.128
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Mean and Variance of Geometric Distribution

❑ Mean = E(X) = 1/p

❑ Variance (X) = q/p2
Example: Refer to the previous example
and find the mean and variance of the
geometric distribution.

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1.7. Poisson Probability Distribution

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…Poisson …(Cont’d)
The Poisson distribution is a discrete probability distribution of
a random variable x that satisfies the following conditions.

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Assumptions of Poisson Distribution

1) Independence: events should be independent of

each other within the specified interval.
2) Constant Rate: the probability of an event occurring
in a very small time or space interval is proportional
to the length of that interval.
3) Discreteness: The events are counted in whole
numbers.
4) Homogeneity: The probability of an event occurring
is the same across all subintervals of the given
interval.

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Example: Poisson Distribution
The mean number of power outages in Addis Ababa
is 4 per month. Find the probability that in a given
month,
a.) there are exactly 3 outages,
b.) there are more than 3 outages.
b.) P (more than 3)
= 1 − P (x  3)
43(2.71828)-4
P (3) = = 1 − [P (3) + P (2) + P (1) + P (0)]
3!

 0.195 = 1 − (0.195 + 0.147 + 0.073 + 0.018)

 0.567

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Mean & Variance of Poisson Distribution

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B) Continuous Probability Distributions
❑ Uniform Probability Distribution
❑ Normal Probability Distribution

f (x) Uniform f (x) Normal

x x

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Continuous Probability Distributions

A continuous random variable can

assume any value in an interval on the
real line or in a collection of intervals.
It is not possible to talk about the
probability of the random variable
assuming a particular value.
Instead, we talk about the probability of
the random variable assuming a value
within a given interval.
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…Continuous Probability… (Cont’d)
The probability of the random variable assuming
a value within some given interval from x1 to x2 is
defined to be the area under the graph of the
probability density function between x1 and x2.

f (x) Uniform Normal

f (x)

x x
x1 x2 x1 x2

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1.8. Uniform (Rectangular) Probability Distribution

A random variable is uniformly distributed

whenever the probability is proportional to
the interval’s length.

The uniform probability density function is:

f (x) = 1/(b – a) for a < x < b

=0 elsewhere

where: a = smallest value the variable can assume

b = largest value the variable can assume

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Uniform Probability Distribution
Expected Value of x

E(x) = (a + b)/2

Variance of x

Var(x) = (b - a)2/12

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Area as a Measure of Probability
The area under the graph of f(x) and
probability are identical.

This is valid for all continuous random

variables.
The probability that x takes on a value
between some lower value x1 and some
higher value x2 can be found by
computing the area under the graph of
f(x) over the interval from x1 to x2.
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Example: Uniform Probability Distribution

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1.9. Normal Probability Distribution
❑ The normal probability distribution is the
most important distribution for describing
a continuous random variable.

❑ It is widely used in statistical inference.

❑ Abraham de Moivre, a French

mathematician, published The Doctrine of
Chances in 1733.

❑ He derived the normal distribution.

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Normal Probability Distribution
Normal Probability Density Function

1 −( x −  )2 /2 2
f (x) = e
 2
where:
 = mean
 = standard deviation
 = 3.14159
e = 2.71828

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 …Normal …(Cont’d)
Characteristics
The distribution is symmetric; its skewness
measure is zero.

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 …Normal …(Cont’d)
Characteristics
The entire family of normal probability
distributions is defined by its mean  and its
standard deviation  .

Standard Deviation 

x
Mean 

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 …Normal …(Cont’d)
Characteristics
The highest point on the normal curve is at the
mean, which is also the median and mode.

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 …Normal …(Cont’d)
Characteristics
The mean can be any numerical value: negative,
zero, or positive.

x
-10 0 25

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 …Normal …(Cont’d)
Characteristics
The standard deviation determines the width of the
curve: larger values result in wider, flatter curves.

 = 15

 = 25

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 …Normal …(Cont’d)
Characteristics
Probabilities for the normal random variable are
given by areas under the curve. The total area under the
curve is 1 (0.5 to the left of the mean and 0.5 to the right).

.5 .5
x

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Standard Normal Probability Distribution
Characteristics

A random variable having a normal distribution

with a mean of 0 and a standard deviation of 1 is
said to have a standard normal probability
distribution.

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Standard Normal Probability Distribution

Characteristics

The letter z is used to designate the standard

normal random variable.

=1

z
0

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 Standard Normal Probability Distribution

Converting to the Standard Normal Distribution

x−
z=


We can think of z as a measure of the

number of standard deviations x is from .

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Example: Normal Probability (finding probabilities)

A survey indicates that people use their cellular

phones an average of 1.5 years before buying a
new one. The standard deviation is 0.25 year. A
cellular phone user is selected at random.
Find the probability that the user will use their
current phone for less than 1 year before buying a
new one. Assume that the variable x is normally
distributed. (Adapted from Fonebak)
Interpretation: So, 2.28% of cellular phone users will
use their cellular phone for less than 1 year before
buying a new one. Because 2.28% is less than 5%, this
is an unusual event.
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End of Chapter 1

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