Econ 140

More on Univariate Populations

Lecture 4

Lecture 4 1
Today’s Plan Econ 140

• Examining known distributions:

• Normal distribution & Standard normal curve
• Student’s t distribution
• F distribution & 2 distribution
• Note: should have a handout for today’s lecture with all
tables and a cartoon
• Brief statements about: Bivariate populations and
conditional probabilities
• Joint and marginal probabilities

Lecture 4 2
Standard Normal Curve (6) Econ 140

• Going back to our earlier question: What is the probability

that someone earns between $300 and $400 [P(300Y
400)]?
Z1 Z2
  316.6
 2  25608
  25608  160 P(300Y 400)
300  316.6
Z300   0.104
160 300 316.6 400
400  316.6
Z 400   0.52
160
P (0.104  Z  0)  0.0418
P (0  Z  0.52)  0.1985
P (0.104  Z  0.52)  0.0418  0.1985  .2403
Lecture 4 3
 Standard Normal Curve (7) Econ 140

• We know from using our PDF that the chance of someone

earning between $300 and $400 is around 23%, so 0.24 is
a good approximation
• Now we can ask: What is the probability that someone
earns between $253 and $316?
253  316.6
Z1   0.3975
Z1 Z2 160
316  316.6
Z2   0.0038
P(253Y 316) 160
P (0.3975  Z  0)  0.1554
P (0.0038  Z  0)  0.0020
P (0.3975  Z  .0038)  .1554  .002
253 316.6  .1574  15.3%
Lecture 4
316 4
Standard Normal Curve (8) Econ 140

• There are instructions for how you can do this using Excel:
L4_1.xls. Note how to use STANDARDIZE and
NORMDIST and what they represent
• Our spreadsheet example has 3 examples of different
earnings intervals, using the same distribution that we used
today
• Testing the Normality assumption. We know the
approximate shape of the Earnings (L3_79.xls)
distribution. Slightly skewed. Is normality a good
assumption? Use in Excel (L4_2.xls) of NORMSINV

Lecture 4 5
Student’s T-Distribution Econ 140

• Starting next week, we’ll be looking more closely at

sample statistics
• In sample statistics, we have a sample that is small relative
to the population size

• We do not know the true population mean and variance

– So, we take samples and from those samples we will
estimate a mean Y and variance SY2

Lecture 4 6
T-Distribution Properties Econ 140

• Fatter tails than the Z distribution

• Variance is n/(n-2) where n is the number of observations
• When n approaches a large number (usually over 30), the t
approximates the normal curve

• The t-distribution is also centered on a mean of zero

• The t lets us approximate probabilities for small samples

Lecture 4 7
F and 2 Distributions Econ 140

• Chi-squared distribution:square of a standard normal (Z)

distribution is distributed 2 with one degree of freedom
(df).
• Chi-squared is skewed. As df increases, the 2
approximates a normal.
• F-distribution: deals with sample data. F stands for Fisher,
R.A. who derived the distribution. F tests if variances are
equal.
• F is skewed and positive. As sample sizes grow infinitely
large the F approximates a normal. F has two parameters:
degrees of freedom in the numerator and denominator.

Lecture 4 8
A recap on the story so far Econ 140

• Probability is concerned with random events.

• Nearly all data is the outcome of a ‘random draw’ - a
sample drawn at random.
• The probability of earning particular amounts
– Relationship between a sample and population
– Using standard normal tables
• Introduction to the t-distribution
• Introduction to the F and 2 distributions

Lecture 4 9
A quick note on bivariate probability Econ 140

• Bivariate populations and conditional probabilities

• Joint and marginal probabilities

Lecture 4 10
A Simple E.C.P Example Econ 140

• Introduce Bivariate probability with an example of empirical

classical probability (ecp).
• Consider a fictitious computer company. We might ask the
following questions:
– What is the probability that consumers will actually buy a
new computer?
– What is the probability that consumers are planning to buy
a new computer?
– What is the probability that consumers are planning to buy
and actually will buy a new computer?
– Given that a consumer is planning to buy, what is the
probability of a purchase?
Lecture 4 11
A Simple E.C.P Example(2) Econ 140

• Think of probability as relating to the outcome of a

random event (recap)
• All probabilities fall between 0 and 1:

null 0  P( A)  1 certain
• Probability of any event A is:
m
P( A)  with A   a1, a2 , a3...an 
n
Where m is the number of events A and n is the number
of possible events

Lecture 4 12
A Simple E.C.P Example(3) Econ 140

• The cumulative frequency is:  P (ai )  1

• The sample space (of a 1000 obs) looks like this:

Actually Purchase
Yes (b1) No (b2) Total
Plan Yes (a1) 200 50 250
to Purchase No (a2) 100 650 750
Total 300 700 1000

• Before we move on we’ll look at some simple definitions

Lecture 4 13
A Simple E.C.P Example(4) Econ 140
• If we have an event A there will be a compliment to A
which we’ll call A’ or B
• Computing marginal probabilities
– Event A consists of two outcomes, a1 and a2:
A   a1, a2 
– The compliment B consists also of two outcomes, b1
and b2: B   b1,b2 
– two events are mutually exclusive if both events
cannot occur
– A set of events is collectively exhaustive if one of the
events must occur

Lecture 4 14
A Simple E.C.P Example(5) Econ 140
• Computing marginal probabilities
Pr( A)  P A  B1   P A  B2   ...  P A  Bk 
Where k is some arbitrary large number
• If A = planned to purchase and B=actually purchased:
P(planned to buy) = P(planned & did) + P(planned & did not)=
Actually Purchase
Yes (b1) No (b2) Total
Plan Yes (a1) 200 50 250
to Purchase No (a2) 100 650 750
Total 300 700 1000
200 50 250
   0.25
1000 1000 1000

Lecture 4 15
A Simple E.C.P Example(6) Econ 140
• If the two events, A and B, are mutually exclusive, then
P( AorB)  P( A)  P( B )
– General rule written as:
P ( AorB )  P ( A)  P ( B )  P ( A  B)
– Example: Probability that you draw a heart or spade
from a deck of cards
• They’re mutually exclusive events
P(Heart or Spade) = P(Heart) + P(Spade) – P(Heart + Spade)=

13 13 26 1
 0    0.50
52 52 52 2

Lecture 4 16
A Simple E.C.P Example(6) Econ 140

• Probability that someone planned to buy or actually did

buy: use the general addition rule:
P ( AorB )  P ( A)  P ( B )  P ( A  B )
• If A is planning to purchase, and B is actually purchasing,
we can plug in the marginal probabilities to find
250 300 200 350
    0.35
1000 1000 1000 1000
Actually Purchase
Yes (b1) No (b2) Total
Plan Yes (a1) 200 50 250
to Purchase No (a2) 100 650 750
Total 300 700 1000

Joint Probability: P(A and B): Planned and Actually Purchased

Lecture 4 17
Conditional Probabilities Econ 140

• Lets leave the example for a while and consider conditional

probabilities.
• Conditional probabilities are represented as P(Y|X)
• This looks similar to the conditional mean function:

Y X
n

• We’ll use this to lead into regression line inference.

Lecture 4 18
Conditional Probabilities (2) Econ 140

• Probabilities will be defined as

p jk  P ( X  X j , Y  Yk )
j  1,...J
k  1,...K

• If we sum over j and k, we will get 1, or:

 j  k p jk  1
• We define the conditional probability as f (X|Y)
– This is read “a function of X given Y”
– We can define this as:
Joint probability of X &Y
 f  X |Y 
Marginal probability of Y

Lecture 4 19
Conditional Probabilities (3) Econ 140

• Similarly we can define f (Y|X):

Joint probability of Y &X
 f Y | X 
Marginal probability of X

• Looking at our example spreadsheet, we have a sample of

weekly earnings and years of education: L5_1.XLS.

• There are two statements on the spreadsheet that will

clarify the difference between a joint and conditional
probabilities

Lecture 4 20
Conditional Probabilities (4) Econ 140
• The joint probability is a relative frequency and it asks:
– How many people earn between $600 and $799 and have 10 years of education?

• The conditional probability asks:

– How many people earn between $600 and $799 given they have 10 years of education?

• On the spreadsheet I’ve outlined the cells that contain the highest probability in each completed years of education
– There’s a pattern you should notice

Lecture 4 21
Conditional Probabilities (5) Econ 140

• We can use the same data to graph the conditional mean function
– the graph shows the same pattern we saw in the outlined cells
– The conditional probability table gives us a small distribution
around each year of education

Lecture 4 22
Conditional Probabilities (6) Econ 140

• To summarize, conditional probabilities can be written as

P( X &Y ) Joint probability of X & Y
  f (X |Y)
P( X ) Marginal probability of X

– This is read as “The probability of X given Y”

– For example: The probability that someone earns
between $200 and $300, given that he/she has
completed 10 years of education
• Joint probabilities are written as P(X&Y)
– This is read as “the probability of X and Y”
– For example: The probability that someone earns
between $200 and $300 and has 10 years of education
Lecture 4 23
A Marketing Example Econ 140

• Now we’ll look at joint probabilities again using the

marketing example from earlier in the lecture.

• We will look at:

– Marginal probabilities P(A) or P(B)
– Joint probabilities P(A&B)
– Conditional probabilities P( A& B)
P( B)

Lecture 4 24
Marketing Example(2) Econ 140

• Here’s the matrix

Actually Purchase
Yes No Total
Plan Yes 200 50 250
to Purchase No 100 650 750
Total 300 700 1000
• Let’s look at the probability you purchased a computer
given that you planned to purchase:
• P(actually purchased | planned to purchase)  200  .8  80%
250
• The joint probability that you purchased and planned to
purchase: 200/1000 = .2 = 20%

Lecture 4 25
What we’ve done Econ 140

• Introduction to standardized normal (Z) distribution

• Introduction to the t-distribution
• Introduction to the F and 2 distributions

• Bi-variate probabilities: calculate marginal, joint, and

conditional probabilities
– Computer company example
– Earnings and years of education

Lecture 4 26