Chapter 5

Some Important Discrete

Probability Distributions
Learning Objectives
In this chapter, you learn:
The properties of a probability distribution
To calculate the expected value, variance, and
standard deviation of a probability distribution
To calculate probabilities from binomial and
Poisson distributions
How to use the binomial and Poisson distributions
to solve business problems
Introduction to Probability
Distributions
Random Variable
Represents a possible numerical value from
an uncertain event

Random
Variables
Discrete
Random Variable
Continuous
Random Variable
Discrete Random Variables
Can only assume a countable number of values

Examples:

Roll a die twice
Let X be the number of times 4 comes up
(then X could be 0, 1, or 2 times)


Toss a coin 5 times.
Let X be the number of heads
(then X = 0, 1, 2, 3, 4, or 5)

Experiment: Toss 2 Coins. Let X = # heads.
T
T
Discrete Probability Distribution
4 possible outcomes
T
T
H
H
H H
Probability Distribution
0 1 2 X
X Value Probability
0 1/4 = 0.25
1 2/4 = 0.50
2 1/4 = 0.25
0.50
0.25
P
r
o
b
a
b
i
l
i
t
y






Example 5.3: Number of Radios
Sold at Sound City in a Week
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-6
Let x be the random variable of the number of
radios sold per week
x has values x = 0, 1, 2, 3, 4, 5
Given: Frequency distribution of sales history
over past 100 weeks
Let f be the number of weeks (of the past 100) during
which x number of radios were sold
# Radios, x Frequency Relative Frequency
0 f(0) = 3 3/100 = 0.03
1 f(1) = 20 20/100 = 0.20
2 f(2) = 50 0.50
3 f(3) = 20 0.20
4 f(4) = 5 0.05
5 f(5) = 2 0.02
100 1.00
Example 5.3 Continued
Interpret the relative frequencies as probabilities
So for any value x, f(x)/n = p(x)
Assuming that sales remain stable over time

Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-7
Number of Radios Sold at Sound City in a Week

Radios, x Probability, p(x)
0 p(0) = 0.03
1 p(1) = 0.20
2 p(2) = 0.50
3 p(3) = 0.20
4 p(4) = 0.05
5 p(5) = 0.02
1.00
Example 5.3 Continued
What is the chance that two radios will be
sold in a week?
p(x = 2) = 0.50

Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-8
Example 5.3 Continued
What is the chance that fewer than 2 radios will
be sold in a week?
p(x < 2) = p(x = 0 or x = 1)
= p(x = 0) + p(x = 1)
= 0.03 + 0.20 = 0.23
What is the chance that three or more radios
will be sold in a week?
p(x 3) = p(x = 3, 4, or 5)
= p(x = 3) + p(x = 4) + p(x = 5)
= 0.20 + 0.05 + 0.02 = 0.27

Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-9
Discrete Random Variable
Summary Measures
Expected Value (or mean) of a discrete
distribution (Weighted Average)




Example: Toss 2 coins,
X = # of heads,
compute expected value of X:
E(X) = (0 x 0.25) + (1 x 0.50) + (2 x 0.25)
= 1.0
X P(X)
0 0.25
1 0.50
2 0.25

=
= =
N
1 i
i i
) X ( P X E(X)
Variance of a discrete random variable




Standard Deviation of a discrete random variable





where:


E(X) = Expected value of the discrete random variable X
X
i
= the i
th
outcome of X
P(X
i
) = Probability of the i
th
occurrence of X
Discrete Random Variable
Summary Measures

=
=
N
1 i
i
2
i
2
) P(X E(X)] [X
(continued)

=
= =
N
1 i
i
2
i
2
) P(X E(X)] [X
Example 5.3: Number of Radios
Sold at Sound City in a Week
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-12
How many radios should be expected to be sold in a
week?
Calculate the expected value of the number of radios sold,
X








On average, expect to sell 2.1 radios per week
Radios, x Probability, p(x) x p(x)
0 p(0) = 0.03 0 0.03 = 0.00
1 p(1) = 0.20 1 0.20 = 0.20
2 p(2) = 0.50 2 0.50 = 1.00
3 p(3) = 0.20 3 0.20 = 0.60
4 p(4) = 0.05 4 0.05 = 0.20
5 p(5) = 0.02 5 0.02 = 0.10
1.00 2.10
Example 5.7: Number of Radios
Sold at Sound City in a Week
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-13
Radios, x Probability, p(x) (x -
X
)
2
p(x)
0 p(0) = 0.03 (0 2.1)
2
(0.03) = 0.1323
1 p(1) = 0.20 (1 2.1)
2
(0.20) = 0.2420
2 p(2) = 0.50 (2 2.1)
2
(0.50) = 0.0050
3 p(3) = 0.20 (3 2.1)
2
(0.20) = 0.1620
4 p(4) = 0.05 (4 2.1)
2
(0.05) = 0.1805
5 p(5) = 0.02 (5 2.1)
2
(0.02) = 0.1682
1.00 0.8900
Example 5.7 Continued
Variance equals 0.8900
Standard deviation is the square root of the
variance
Standard deviation equals 0.9434

Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-14
Portfolios with More Than Two Stocks
We can extend the formulas that describe the mean and variance of the
returns of a portfolio of two stocks to a portfolio of any number of
stocks.
Mean and Variance of a Portfolio of k Stocks

E(R
p
) =


V(R
p
) =

Where R
i
is the return of the ith stock, w
i
is the proportion of the
portfolio invested in stock i, and k is the number of stocks in the
portfolio.

=
k
i
i i
R E w
1
) (

= + = =
+ o
k
1 i
k
1 i j
j i j i
k
1 i
2
i
2
i
) R , R ( COV w w 2 w
Probability Distributions
Continuous
Probability
Distributions
Binomial
Poisson
Probability
Distributions
Discrete
Probability
Distributions
Normal
The Binomial Distribution
Binomial
Poisson
Probability
Distributions
Discrete
Probability
Distributions
Binomial Probability Distribution
A fixed number of observations, n
e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse
Two mutually exclusive and collectively exhaustive
categories
e.g., head or tail in each toss of a coin; defective or not defective
light bulb
Generally called success and failure
Probability of success is p, probability of failure is 1 p
Constant probability for each observation
e.g., Probability of getting a tail is the same each time we toss
the coin
Binomial Probability Distribution
(continued)
Observations are independent
The outcome of one observation does not affect the
outcome of the other

Possible Binomial Distribution
Settings
A manufacturing plant labels items as
either defective or acceptable
A firm bidding for contracts will either get a
contract or not
A marketing research firm receives survey
responses of yes I will buy or no I will
not
New job applicants either accept the offer
or reject it
Rule of Combinations
The number of combinations of selecting X
objects out of n objects is
X)! (n X!
n!
C
x n

=
where:
n! =(n)(n - 1)(n - 2) . . . (2)(1)
X! = (X)(X - 1)(X - 2) . . . (2)(1)
0! = 1 (by definition)
P(X) = probability of X successes in n trials,
with probability of success p on each trial

X = number of successes in sample,
(X = 0, 1, 2, ..., n)
n = sample size (number of trials
or observations)
p = probability of success
P(X)
n
X !
n X
p (1-p)
X
n
X
!
( ) !
=


Example: Flip a coin four
times, let x = # heads:
n = 4
p = 0.5
1 - p = (1 - 0.5) = 0.5
X = 0, 1, 2, 3, 4
Binomial Distribution Formula
Example:
Calculating a Binomial Probability
What is the probability of one success in five
observations if the probability of success is .1?
X = 1, n = 5, and p = 0.1
0.32805
.9) (5)(0.1)(0
0.1) (1 (0.1)
1)! (5 1!
5!
p) (1 p
X)! (n X!
n!
1) P(X
4
1 5 1
X n X
=
=

= =

Example 5.10: Incidence of
Nausea after Treatment
Let x be the number of patients who will
experience nausea following treatment with
Phe-Mycin out of the 4 patients tested.
Ten percent of all patients treated with Phe-
Mycin.
Find the probability that 0 of the 4 patients
treated will experience nausea
Given: n = 4, p = 0.1, with x = 0
Then: q = 1 p = 1 0.1 = 0.9
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-24
Example 5.10 Continued
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-25
( )
( )
( ) ( )
( ) ( )
.
% 61 . 65 exp
6561 . 0 9 . 0 1 . 0 1
9 . 0 1 . 0
! 0 4 ! 0
! 4
0
4 0
4 0
sample possible all of
in nausea erience would paitients sampled f our The
x p
= =

= =
Chap 5-26
Example 5.11: Incidence of Nausea
after Treatment
x = number of patients who will experience nausea following
treatment with Phe-Mycin out of the 4 patients tested

Find the probability that at least 3 of the 4 patients treated
will experience nausea
Set x = 3, n = 4, p = 0.1, so q = 1 p = 1 0.1 = 0.9
Then:




( ) ( )
( ) ( )
0037 . 0 0001 . 0036 . 0
4 3
4 or 3 3
= + =
= + = =
= = >
x p x p
x p x p
Binomial Distribution
Characteristics
Mean

Variance and Standard Deviation
np E(x) = =
p) - np(1
2
=
p) - np(1 =
Where n = sample size
p = probability of success
(1 p) = probability of failure
Back to Example 5.11
Chap 5-28
Of 4 randomly selected patients, how many
should be expected to experience nausea after
treatment?
Given: n = 4, p = 0.1
Then
X
= n p = 4 0.1 = 0.4
So expect 0.4 of the 4 patients to experience
nausea.
Case Analysis
Case :1- Given p = 0.5 and n = 5, P(X = 5) =
0.0312.
Case:2- Given p = .6 and n = 5,
(a) P( X = 5) = 0.0778
(b) P( X 3) = 0.6826
(c) P( X < 2) = 0.0870
(d) (a) P( X = 5) = 0.3277
(b) P( X 3) = 0.9421
(c) P( X < 2) = 0.0067
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-29
>
>
Case :3- If p = 0.25 and n = 5,
(a) P(X = 5) = 0.0010
(b) P(X 4) = P(X = 4) + P(X = 5) = 0.0146 +
0.0010 = 0.0156
(c) P(X = 0) = 0.2373
(d) P(X 2) = P(X = 0) + P(X = 1) + P(X = 2)
= 0.2373 + 0.3955 + 0.2637 = 0.8965

>
>
Case 4- Given p = 0.90 and n = 3,
(a) P(X = 3) = = = 0.729
(b) P(X = 0) = = = 0.001
(c) P(X 2) = P(X = 2) + P(X = 3) = + = 0.972
(d) E(X) = np = = 2.7


>
The Poisson Distribution
Binomial
Poisson
Probability
Distributions
Discrete
Probability
Distributions
The Poisson Distribution
Apply the Poisson Distribution when:
You wish to count the number of times an event
occurs in a given area of opportunity
The probability that an event occurs in one area of
opportunity is the same for all areas of opportunity
The number of events that occur in one area of
opportunity is independent of the number of events
that occur in the other areas of opportunity
The average number of events per unit is (mu)
Arrivals (e.g., customers, defects, accidents) must
be independent of each other.
Some examples of Poisson models in which
assumptions are sufficiently met are:
X = number of customers arriving at a bank
ATM in a given minute.
X = number of file server virus infections at
a data center during a 24-hour period.
Poisson Distribution
Poisson Distribution Formula
where:
X = number of events in an area of opportunity
= expected number of events
e = base of the natural logarithm system (2.71828...)


!
) (
X
e
X P
x

=
Poisson Distribution
Characteristics
Mean

Variance and Standard Deviation
=
x

=
2

=
where = expected number of events

Example 5.13: ATC Center
Errors
An air traffic control (ATC) center has been
averaging 20.8 errors per year and lately has
been making 3 errors per week
Let x be the number of errors made by the ATC
center during one week
Given: = 20.8 errors per year
Then: = 0.4 errors per week
There are 52 weeks per year so
for a week is:
= (20.8 errors/year)/(52 weeks/year)
= 0.4 errors/week
Example 5.13: ATC Center
Errors Continued
Find the probability that 3 errors (x =3) will
occur in a week
Want p(x = 3) when = 0.4


Find the probability that no errors (x = 0) will
occur in a week
Want p(x = 0) when = 0.4
( )
( )
0072 . 0
! 3
4 . 0
3
3 4 . 0
= = =

e
x p
( )
( )
6703 . 0
! 0
4 . 0
0
0
4 . 0
= = =

e
x p
Back to Example 5.13
Business Statistics, A First Course (4e) 2008 Pearson Education Chap 5-39
In the ATC center situation, 28.0 errors
occurred on average per year
Assume that the number x of errors during any
span of time follows a Poisson distribution for
that time span
Per week, the parameters of the Poisson
distribution are:
mean = 0.4 errors/week
standard deviation = 0.6325 errors/week