Statistics For Business and Economics: Anderson Sweeney Williams

Statistics for Business
and Economics
Anderson
Williams
Sweeney
Slides by
John Loucks
St. Edwards University
2011 Cengage Learning. All Rights Reserved. May not be scanned, copied Slide
1
or duplicated, or posted to a publicly accessible website, in whole or in part.
Introduction to Probability
1. Experiments, Counting Rules,
and Assigning Probabilities
2. Events and Their Probability
3. Some Basic Relationships
of Probability
4. Conditional Probability
5. Bayes Theorem
2
Uncertainties
Managers
Managers often
often base
base their
their decisions
decisions on
on an
an analysis
analysis
of
of uncertainties
uncertainties such
such as
as the
the following:
following:
What are the chances that sales will decrease
if we increase prices?
What is the likelihood a new assembly method
method will increase productivity?
What are the odds that a new investment will
be profitable?
3
Probability
Probability
Probability is
is aa numerical
numerical measure
measure of
of the
the likelihood
likelihood
that
that an
an event
event will
will occur.
occur.
Probability
Probability values
values are
are always
always assigned
assigned on
on aa scale
scale
from
from 0
0 to
to 1.
1.
A
A probability
probability near
near zero
zero indicates
indicates an
an event
event is
is quite
quite
unlikely
unlikely to
to occur.
occur.
A
A probability
probability near
near one
one indicates
indicates an
an event
event is
is almost
almost
certain
certain to
to occur.
occur.
4
Probability as a Numerical Measure

of the Likelihood of Occurrence
Increasing Likelihood of Occurrence
Probability
:
0
The event
is very
unlikely
to occur.
.
5
The occurrence The event

is almost
of the event is
certain
just as likely as
to occur.
it is unlikely.
5
1. Experiments, Counting Rules, and

Assigning Probabilities
An
An experiment
experiment is
is any
any process
process that
that generates
generates wellwelldefined
defined outcomes.
outcomes.
The
The sample
sample space
space for
for an
an experiment
experiment is
is the
the set
set of
of
all
all experimental
experimental outcomes.
outcomes.
An
An experimental
experimental outcome
outcome is
is also
also called
called aa sample
sample
point.
point.
6
An Experiment and Its Sample Space

Experiment
Experiment Outcomes
Toss a coin
Inspection a part
Conduct a sales call
Roll a die
Play a football game
Head, tail
Defective, non-defective
Purchase, no purchase
1, 2, 3, 4, 5, 6
Win, lose, tie
An event is the collection of one or more outcomes of an

experiment.
e.g., Toss a die and observe a 6.
Toss a die and observe an even number.
7
An Experiment and Its Sample Space

Example: Bradley Investments
Bradley has invested in two stocks, Markley
Oil
and Collins Mining. Bradley has determined
that the
possible outcomes of these investments three
months Investment Gain or Loss
from now areinas3 follows.
Months (in $000)
Markley Oil Collins Mining
8
10
2
5
0
20
8
Counting Rules Multiplication
The multiplication formula

indicates that if there are m
ways of doing one thing and n
ways of doing another thing,
there are m x n ways of doing
both.
Example: Dr. Delong has 10 shirts and 8
ties. How many shirt and tie outfits does
he have?
Cengage
Learning.
(10)(8)
= All
80Rights Reserved. May not be scanned, copied Slide
9
2011
A Counting Rule for

Multiple-Step Experiments
Bradley Investments can be viewed as a
two-step
experiment. It involves two stocks, each with a
set of
experimental
outcomes.
Markley Oil:
n1 = 4
Collins Mining:
n2 = 2
Total Number of
Experimental Outcomes: n1n2 = (4)(2) = 8
10
Tree Diagram
Markley Oil
(Stage 1)
Collins Mining
(Stage 2)
Experimental
Outcomes
Gain 8(10, 8)
(10, -2)
Lose 2
Gain 8
(5, 8)
Gain 10
Gain 5 Lose 2
Even
Lose 20
(5, -2)
Gain 8
(0, 8)
(0, -2)
Lose 2
Gain 8
(-20, 8)
Lose 2
(-20, -2)
Gain $18,000
Gain
$8,000
Gain $13,000
Gain
$3,000
Gain
$8,000
Lose
$2,000
Lose
$12,000
Lose
$22,000
11
Counting Rule for Combinations

Number of Combinations of N Objects
Taken n at a Time
A second useful counting rule enables us to
count
the number of experimental outcomes when n
objects
are to be selected N
from a set of N objects. The
N
! important in
N
order of arrangement
is
not
Cn
n!(N n)!
combinations. n
where:
N! = N(N 1)(N 2) . . . (2)(1)

n! = n(n 1)(n 2) . . . (2)(1)
0! = 1
12
Counting Rule for Permutations

Number of Permutations of N Objects
Taken n at a Time
A third useful counting rule enables us to
count
the number of experimental outcomes when n
objects are to be selected from a set of N
objects,
where the order
Nis
! important.
N
N of selection
Pn n!
n
(N n)!
where:
N! = N(N 1)(N 2) . . . (2)(1)

n! = n(n 1)(n 2) . . . (2)(1)
0! = 1
13
Combination and Permutation Examples
COMBINATION EXAMPLE
There are 12 players on the
Carolina Forest High School
basketball team. Coach
Thompson must pick five
players among the twelve
on the team to comprise
the starting lineup. How
many different groups are
possible?
12!
792
12 C5
5!(12 5)!
PERMUTATION EXAMPLE
Suppose that in addition
to selecting the group, he
must also rank each of
the players in that
starting lineup according
to their ability.
12!
95,040
12 P 5
(12 5)!
14
Basic Requirements for Assigning Probabilities
1.
1. The
The probability
probability assigned
assigned to
to each
each experimental
experimental
outcome
outcome must
must be
be between
between 0
0 and
and 1,
1, inclusively.
inclusively.
0 < P(Ei) < 1 for all i
where:
Ei is the ith experimental outcome
and P(Ei) is its probability
15
Basic Requirements for Assigning Probabilities
2.
2. The
The sum
sum of
of the
the probabilities
probabilities for
for all
all experimental
experimental
outcomes
outcomes must
must equal
equal 1.
1.
P(E1) + P(E2) + . . . + P(En) = 1
where:
n is the number of experimental outcomes
16
Classical Method
Assigning probabilities based on the assumption
of equally likely outcomes
Relative Frequency Method/empirical method
Assigning probabilities based on experimentation
or historical data
Subjective Method
Assigning probabilities based on judgment
17
Classical Method
Example: Rolling a Dice
If an experiment has n possible
outcomes, the
classical method would assign a probability
of 1/n
Experiment:
Rolling a dice
to each outcome.
Sample Space: S = {1, 2, 3, 4, 5, 6}
Probabilities: Each sample point has a

1/6 chance of occurring
18
Relative Frequency Method

Example: Lucas Tool Rental
Lucas Tool Rental would like to assign
probabilities
to the number of car polishers it rents each day.
Office records show the following frequencies of
Number of
Number
daily
Polishers Rented of Days
rentals for the last 40 days.
0
4
1
6
2
18
3
10
4
2
19
Relative Frequency Method

Example: Lucas Tool Rental
Each probability assignment is given by
dividing
the frequency (number of days) by the total
frequency
Numberof
ofdays).
Number
(total number
Polishers Rented of Days Probability
.10
4
0
.15
6
1
.45
4/40
18
2
.25
10
3
.05
2
4
1.00
40
20
Subjective Method
When economic conditions and a companys
circumstances change rapidly it might be
inappropriate to assign probabilities based solely on
historical data.
We can use any data available as well as our
experience and intuition, but ultimately a probability
value should express our degree of belief that the
experimental outcome will occur.
The best probability estimates often are obtained by
combining the estimates from the classical or relative
frequency approach with the subjective estimate.
21
Subjective Method
An analyst made the following probability
estimates.
Exper. Outcome Net Gain or Loss Probability
.20
(10, 8)
$18,000 Gain
.08
(10, 2)
$8,000 Gain
.16
(5, 8)
$13,000 Gain
.26
(5, 2)
$3,000 Gain
(0, 8)
.10
$8,000 Gain
(0, 2)
$2,000 Loss
.12
(20, 8)
$12,000 Loss
.02
(20, 2)
$22,000 Loss
.06
22
Summary of Types of Probability
23
Mutually Exclusive Events and Collectively

Exhaustive Events
Events are mutually exclusive if the

occurrence of any one event means that
none of the others can occur at the same
time.
Events are independent if the occurrence of
one event does not affect the occurrence of
another.
Events are collectively exhaustive if at least
one of the events must occur when an
experiment is conducted. Events are
collectively exhaustive if their union is the
2011 Cengage
Learning.
All Rights
Reserved.
entire
sample
space
S. May not be scanned, copied Slide
24
2. Events and Their Probabilities

Event M = Markley Oil Profitable
M = {(10, 8), (10, 2), (5, 8), (5, 2)}
P(M) = P(10, 8) + P(10, 2) + P(5, 8) + P(5, 2)
= .20 + .08 + .16 + .26
= .70
25
Events and Their Probabilities

Event C = Collins Mining Profitable
C = {(10, 8), (5, 8), (0, 8), (20, 8)}
P(C) = P(10, 8) + P(5, 8) + P(0, 8) + P(20, 8)
= .20 + .16 + .10 + .02
= .48
26
3. Some Basic Relationships of Probability

There are some basic probability relationships
that
can be used to compute the probability of an
event
without knowledge
of all the
point
Complement
of sample
an Event
probabilities.
Union of Two Events
Intersection of Two Events
Mutually Exclusive Events
27
Complement of an Event
The complement of event A is defined to be the event
consisting of all sample points that are not in A.
c
The
The complement
complement of
of A
A is
is denoted
denoted by
by A
Ac..
Event A
Ac
Sample
Space S
Venn
Diagra
m
28
Union of Two Events

The union of events A and B is the event containing
all sample points that are in A or B or both.
The
The union
union of
of events
events A
A and
and B
B is
is denoted
denoted by
by A
A B
B
Event A
Event B
Sample
Space S
29
Union of Two Events

M C = Markley Oil Profitable
or Collins Mining Profitable (or both)
M C = {(10, 8), (10, 2), (5, 8), (5, 2), (0, 8), (20, 8)
P(M C) = P(10, 8) + P(10, 2) + P(5, 8) + P(5, 2)
+ P(0, 8) + P(20, 8)
= .20 + .08 + .16 + .26 + .10 + .02
= .82
30

The
The intersection
intersection of
of events
events A
A and
and B
B is
is the
the set
set of
of all
all
sample
sample points
points that
that are
are in
in both
both A
A and
and B.
B.
The
The intersection
intersection of
of events
events A
A and
and B
B is
is denoted
denoted by
by A
A
Event A
Event B
Sample
Space S
Intersection of A and B
31

M C = M and C = Markley Oil Profitable
and Collins Mining Profitable
M C = {(10, 8), (5, 8)}
P(M C) = P(10, 8) + P(5, 8)
= .20 + .16
= .36
32
Addition Law
The addition law provides a way to compute the
probability of event A, or B, or both A and B occurring.
The law is written as:
P(A B) = P(A) + P(B) P(A B
Event A
Event B
33
Addition Law
M C = M or C =Markley Oil Profitable
or Collins Mining Profitable
We know: P(M) = .70, P(C) = .48, P(M C) = .36
Thus: P(M C) = P(M) + P(C) P(M C)
= .70 + .48 .36
= .82
(This result is the same as that obtained earlier
using the definition of the probability of an event.)
34
The Venn Diagram shows the result of a survey

of 200 tourists who visited Florida during the
year. The survey revealed that 120 went to
Disney World, 100 went to Busch Gardens and
60 visited both.
What is the probability a selected person visited
either Disney World or Busch Gardens?
P(Disney or Busch) = P(Disney) + P(Busch) - P(both Disney and
Busch)
= 120/200 + 100/200 60/200
= .60 + .50 .30
35
Addition Rule Not Mutually Exclusive

Events Example
What is the probability that a card chosen at
random from a standard deck of cards will be
either a king or a heart?
P(A or B) = P(A) + P(B) - P(A and B)

= 4/52 + 13/52 - 1/52
= 16/52, or .3077
Note: =or, and
36

Two
Two events
events are
are said
said to
to be
be mutually
mutually exclusive
exclusive if
if the
the
events
events have
have no
no sample
sample points
points in
in common.
common.
Two
Two events
events are
are mutually
mutually exclusive
exclusive if,
if, when
when one
one event
event
occurs,
occurs, the
the other
other cannot
cannot occur.
occur.
Event A
Event B
Sample
Space S
37

If
If events
events A
A and
and B
B are
are mutually
mutually exclusive,
exclusive, P(A
P(A
B
B =
= 0.
0.
The
The addition
addition law
law for
for mutually
mutually exclusive
exclusive events
events is:
is:
P(A B) = P(A) + P(B)
There is no need to
include P(A B
38
Addition Rule Mutually Exclusive Events

Example
An automatic Shaw machine fills plastic bags with a mixture of
beans, broccoli, and other vegetables. Most of the bags contain
the correct weight, but because of the variation in the size of
the beans and other vegetables, a package might be
underweight or overweight. A check of 4,000 packages filled in
the past month revealed:
What is the probability that a particular package will be either

underweight or overweight?
P(A or C) = P(A) + P(C) = .025 + .075 = .10

39
5. Conditional Probability
The probability of an event given that another event
has occurred is called a conditional probability.
The conditional probability of A given B is denoted
by P(A|B).
A conditional probability is computed as follows :
P( A B)
P( A| B)
P(B)
40
Conditional Probability
P(C| M ) = Collins Mining Profitable
given Markley Oil Profitable
We know: P(M C) = .36, P(M) = .70
P(C M ) .36
.5143
Thus: P(C| M )
P( M )
.70
41
Multiplication Law
The multiplication law provides a way to compute the
probability of the intersection of two events.
The law is written as:
P(A B) = P(B)P(A|B)
Obtained by
rearranging:
P( A| B)
P( A B)
P(B)
42
Multiplication Law
M C = Markley Oil Profitable
and Collins Mining Profitable
We know: P(M) = .70, P(C|M) = .5143
Thus: P(M C) = P(M)P(M|C)
= (.70)(.5143)
= .36
(This result is the same as that obtained earlier
using the definition of the probability of an event.)
43
Joint Probability Table
Markley Oil
Collins Mining
Profitable (C) Not Profitable (Cc) Total
Profitable (M)
.36
.34
.70
Not Profitable (Mc)
.12
.18
.30
Total
.48
Joint Probabilities
(appear in the
body
of the table)
.52
1.00
Marginal Probabilities
(appear in the
margins
of the table)
44
Independent Events
If
If the
the probability
probability of
of event
event A
A is
is not
not changed
changed by
by the
the
existence
existence of
of event
event B,
B, we
we would
would say
say that
that events
events A
A
and
and B
B are
are independent.
independent.
Two
Two events
events A
A and
and B
B are
are independent
independent if:
if:
P(A|B)
P(A|B) =
= P(A)
P(A)
or
P(B|A)
P(B|A) =
= P(B)
P(B)
45
Multiplication Law
for Independent Events
The multiplication law also can be used as a test to see
if two events are independent.
The
The law
law is
is written
written as:
as:
P(A B) = P(A)P(B)
Suppose P(A)=0.5, P(B)=0.6 and P(A B)=0.4. Find
(i) P(A|B)
(ii) P(B|A)
(ii) Are the two events independent?
46
Bayes Theorem
Often we begin probability analysis with initial or
prior probabilities.
Then, from a sample, special report, or a product
test we obtain some additional information.
Given this information, we calculate revised or
posterior probabilities.
Bayes theorem provides the means for revising the
prior probabilities.
Prior
Prior
Probabilities
Probabilities
New
New
Information
Information
Application
Application
of
of Bayes
Bayes
Theorem
Theorem
Posterior
Posterior
Probabilities
Probabilities
47
6. Bayes Theorem
Bayes Theorem is a method for

revising a probability given
additional information.
It is computed using the following
formula:
48
Conditional Probabilities
Example: TWO SUPPLIERS
A1=spare parts from supplier 1, A2= spare
parts from supplier 2.
P(A1)=0.65, P(A2)=0.35
Past history indicates the following:
P(G|A22)) =
= .95
.95
P(G|A11) = .98 P(G|A
P(B|A22)) =
= .05
.05
P(B|A11) = .02 P(B|A
G=good, B=bad
49
Tree Diagrams
A tree diagram is useful for portraying

conditional and joint probabilities. It
is particularly useful for analyzing
business decisions involving several
stages.
A tree diagram is a graph that is helpful in
organizing calculations that involve several
stages. Each segment in the tree is one stage of
the problem. The branches of a tree diagram are
by probabilities.
2011 weighted
Cengage Learning.
All Rights Reserved. May not be scanned, copied Slide
50
Tree Diagram
P(X
P(X Y)
Y) =
= P(Y)P(X|Y)
P(Y)P(X|Y)
Step 2: Condition Probability of

Step 1: Supplier
Outcomes
P(A1) = .65
P(A2) = .35
P(G|A1) = .98 P(A1 G)=

P(A1 )P(G|A1 )= .6370
P(B|A1) = .02 P(A1 B) =
P(A1 )P(B|A1 )= .0130
P(G|A2) = .95
P(A2 G) =
P(A2 )P(G|A2 )=.3325
P(A2 B) =
P(B|A2) = .05
P(A2 )P(B|A2 )= .0175
51
Posterior Probabilities
Given the part is bad, the probability that it

came from supplier 1 is:
=
= 0.0130/(0.0130+0.0175)=
0.0130/(0.0130+0.0175)= 0.4262
0.4262
52
A cell phone salesperson has kept records on

the customers who visited the store. 40% of
the customers who visited the store were
female. Furthermore, the data show that 35%
of the females who visited his store purchased
a cell phone, while 20% of the males who
visited his store purchased a cell phone.
Draw a suitable tree diagram to represent the
above situation.
53
P(F ) = 0.4, P( M) =0.6, P(B|F )=0.35,

P(B|M)=0.2
P(F and B) = P(F) x P(B|F)=0.4 x
0.35=0.14
P(M|B)=0.12/(0.14+0.12)=0.4615
54
Exercise
Promotion status of police

Promoted
Yes
No
Total
Men
288
672
960
Women
36
204
240
Total
324
876
1200
Develop a joint probability table

P(Men)=
P(Women)=
P(promoted)=
P(not promoted)=
P(promoted|Men)=
P(Men|Promoted)=
P(Women | not promoted)=
P( not promoted | Women)=
55
Exercise
Promotion status of police

Promoted
Yes
No
Total
Men
288
672
960
Women
36
204
240
Total
324
876
1200
Develop a joint probability table

P(Men not promoted)=
P(Women promoted)=
P(Women U promoted)=
P(Men U Women)=
P(promoted U not promoted)=
56
Quiz
Sample data on health insurance on US

population:
Gender
Male
Female
Health Insurance
Yes
No
750
170
950
130
1. Develop a joint probability table

2. What is the probability that a randomly selected individual does not
have health insurance coverage?
3. What is the probability that a randomly selected individual is a
male?
4. What is the probability that a respondent chosen at random is either
a male or has health insurance coverage?
5. If the individual is a male, what is the probability that the individual
does not have health insurance coverage?
6. If the individual does not have health insurance coverage, what is
the probability that the individual is a male?
57
Quiz
Sample date on health insurance on US

population:
Gender
Male
Female
Health Insurance
Yes
No
750
170
950
130
7. What is the probability that a randomly selected individual is either

a Male or does not have health insurance coverage?
a Female or has health insurance coverage?
a Female or a Male?
10. What is the probability that a respondent chosen at random is a
Female with health insurance coverage?
58
Quiz
Sample date on health insurance on US

population:
Age
18 to 34
35 and older
Health Insurance
Yes
No
750
170
950
130
Suppose a person chosen has health insurance

coverage. What is the probability that he is 18 to 34?
Suppose a person chosen at random is 18 to 34. what is
th eprobability that he ha sinsurance coverage?
If the individual does not have health insurance, what is
the probability that the individual is in the 18 to 35 age
group?
What is the probability that a person chosen at random
either has or has no health insurance coverage?
59

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Statistics for Business

Probability as a Numerical Measure

The occurrence The event

1. Experiments, Counting Rules, and

An Experiment and Its Sample Space

An event is the collection of one or more outcomes of an

An Experiment and Its Sample Space

Counting Rules Multiplication

The multiplication formula

A Counting Rule for

Counting Rule for Combinations

N! = N(N 1)(N 2) . . . (2)(1)

Counting Rule for Permutations

N! = N(N 1)(N 2) . . . (2)(1)

Combination and Permutation Examples

Probabilities: Each sample point has a

Relative Frequency Method

Relative Frequency Method

Summary of Types of Probability

Mutually Exclusive Events and Collectively

Events are mutually exclusive if the

or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Events and Their Probabilities

Events and Their Probabilities

3. Some Basic Relationships of Probability

Union of Two Events

Union of Two Events

Intersection of Two Events

Intersection of Two Events

The Venn Diagram shows the result of a survey

Addition Rule Not Mutually Exclusive

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

Mutually Exclusive Events

Mutually Exclusive Events

Addition Rule Mutually Exclusive Events

What is the probability that a particular package will be either

P(A or C) = P(A) + P(C) = .025 + .075 = .10

Joint Probability Table

Not Profitable (Mc)

Bayes Theorem is a method for

A tree diagram is useful for portraying

Step 2: Condition Probability of

P(G|A1) = .98 P(A1 G)=

Given the part is bad, the probability that it

A cell phone salesperson has kept records on

P(F ) = 0.4, P( M) =0.6, P(B|F )=0.35,

Promotion status of police

Develop a joint probability table

Promotion status of police

Develop a joint probability table

Sample data on health insurance on US

1. Develop a joint probability table

Sample date on health insurance on US

7. What is the probability that a randomly selected individual is either

Sample date on health insurance on US

Suppose a person chosen has health insurance

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