QUANTITATIVE

METHODS IN
MANAGEMENT
Course content
Chapter Page number content
1 11-32 Introduction, variables, levels of measurement, types of statistics
2 33-98 Organizing and visualizing variables
3 99-148 Numerical descriptive measures – categorical / numerical – Measures of central
tendencies, measures of dispersion, skewness, kurtosis, measures of relations –
co variance and correlation
12 430-446 Simple linear regression, estimating bo and b1, measures of variations, SST, SSR
and SSE, coefficient of determination, coefficient of correlation.
4 149-182 Basic probability
5,6 183-232 Discrete probability distributions – binomial and poisson
Continuous probability distribution – Normal
7 234-257 Sampling distribution
8 258-293 Confidence interval – mean, proportion and determining sample size
9 294-304 Fundamentals of testing of hypothesis
11 402-415 Chi square test
15 15-1 to 15-17 Decision analysis
RECAP
• Introduction – definition, types of statistics, levels of measurement
• Collection / compilation/ classification / tabulation
• Presentation – graphical and diagrammatic
• Measures of central tendencies
• Measures of dispersion
• Measures of skewness
• Exploratory data analysis
• Association between variables – covariance and correlation
• Regression analysis – simple, measures of variations ( SSE, SSR, SST,
coefficient of determination and coefficient of correlation)
• Introduction to Probability – Addition and multiplication theorem,
Baye’s theorem
 Business Statistics:
A First Course
5th Edition

Chapter 5

RANDOM VARIABLES 183-188

Learning Objectives
In this chapter, you learn:
• The properties of a probability distribution
• To calculate the expected value and variance of
a probability distribution
• Discrete and continuous distribution
Random Variable
• Numerical description of the outcome of the experiment

• A variable that assumes different numerical values as a

result of random experiments or occurrences

• The values assumed by these variables are random and

cannot be predicted

• Example - Rainfall measured in cms, temp in Celsius,

share prices
Definitions
Random Variables
• A random variable represents a possible numerical
value from an uncertain event.

• Discrete random variables produce outcomes that

come from a counting process (e.g. number of courses
you are taking this semester).

• Continuous random variables produce outcomes that

come from a measurement (e.g. your annual salary, or
your weight).
 Definitions
Random Variables

Random
Variables

Ch. 5 Discrete Continuous Ch. 6

Random Variable 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 occurs
(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)
 Probability Distribution For A Discrete
Random Variable
A listing of all the outcomes of an experiment and the probability associated with each outcome.

Related to frequency distributions by simply replaces the actual numbers (frequencies) with the

proportion of the total at each level of frequency.

• A probability distribution for a discrete random variable is a mutually exclusive listing of all
possible numerical outcomes for that variable and a probability of occurrence associated with each
outcome.

Number of Classes Taken Probability

2 0.2
3 0.4
4 0.24
5 0.16
 Example of a Discrete Random Variable Probability
Distribution

Experiment: Toss 2 Coins. Let X = # heads.

4 possible outcomes
Probability Distribution
T T X Value Probability
0 1/4 = 0.25

T H 1 2/4 = 0.50
2 1/4 = 0.25

H T

Probability
0.50

0.25
H H
0 1 2 X
Discrete Random Variable
• A random variable that assumes a finite number of
values or an infinite sequence of values such as 0, 1,
2…. is a discrete random variable

• The number of values is limited

• Generated from experiments in which things are

‘counted’ not ‘measured’
Discrete Random Variable
• Example
• Number of people who visit a doctor
• Customers who place an order
• Number of defective radios in a shipment
• Gender of the customer
• Number of new subscribers to a magazine
• Number of bad checks received by a restaurant
• Number of absent employees on a given day
Continuous Random Variable

• A random variable that may assume any numerical value in

an interval or collection of intervals is a continuous random

variable

• Outcomes based on time, weight, distance or temperature

• Generated from experiments in which things are ‘measured’

not ‘counted’
Continuous Random Variable
• Example
• Temperature between 29oC and 30oC can be 29.1, 29.5
or 29.9
• Time between customer arrivals at a bank
• Current Ratio of a motorcycle distributorship
• Elapsed time between arrivals of bank customers
• Percent of the labor force that is unemployed
Discrete random variable Continuous random variable
• (X, p(x)) • (x, f(x))
• PMF (probability mass function) • PDF ( Probability Density Function)
• P(x) = 1 • f(x)dx = 1

E(X) E(X)
V(X) V(X)
• Decide which of the following distributions are probability
distributions:
a. The distribution takes the values -2,-1 ,0,1 and P(-2) =-0.5, P(-1) =
0.7, P(0) = 0.2 and P(1) = 0.6
b. The distribution takes the values 1,2,3,4 and corresponding
probabilities are 0.1,0.2,0.25,0.3
c. The distribution takes the values 20,30,40,50 with corresponding
probabilities as 0.1,0.2,0.3,0.4
 Discrete Random Variables
Expected Value (Measuring Center)
• Expected Value (or mean) of a discrete
random variable (Weighted Average)
N
  E(X)   Xi P( Xi )
i1

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

E(X) = ((0)(0.25) + (1)(0.50) + (2)(0.25))

= 1.0
 Discrete Random Variables
Measuring Dispersion
• Variance of a discrete random variable
N
σ   [X i  E(X)] P(Xi )
2 2

i 1

• Standard Deviation of a discrete random variable

N
σ σ  2
 [X
i1
i  E(X)] P(Xi )
2

where:
E(X) = Expected value of the discrete random variable X
Xi = the ith outcome of X
P(Xi) = Probability of the ith occurrence of X
 Discrete Random Variables
Measuring Dispersion
(continued)

• Example: Toss 2 coins, X = # heads,

compute standard deviation (recall E(X) = 1)

σ  [X i
 E(X)] P(Xi )2

σ  (0  1)2 (0.25)  (1  1)2 (0.50)  (2  1)2 (0.25)  0.50  0.707

Possible number of heads

= 0, 1, or 2
Probability Distribution
• Since the value of a RV cannot be predicted
accurately, probabilities are assigned to all the
likely values the variable might take
Example
Price of Share Probability
X P(X)
15 0.12
20 0.20
23 0.08
25 0.10
30 0.50
Total 1.00
Expected Value
• The Expected Value is the Mean of the probability
distribution
• It is the weighted average of the value that the RV
can assume
• The probabilities assigned are used as weights
• The mean price of the share is Rs.25.14
Discrete Distribution - Example

Distribution of Daily
Crises P
Number of r 0.5
Probability o
Crises 0.4
b
0 0.37 a 0.3
b
1 0.31 i
0.2
2 0.18 l 0.1
3 0.09 i
t
0
4 0.04 0 1 2 3 4 5
y
5 0.01 Number of Crises
Mean of the Crises Data Example

  E  X    X  P( X )  115
.
X P(X) XP(X) P
r 0.5
0 .37 .00
o 0.4
1 .31 .31 b
a 0.3
2 .18 .36 b
0.2
i
3 .09 .27
l 0.1
4 .04 .16 i
t
0
0 1 2 3 4 5
5 .01 .05 y
Number of Crises
1.15
Variance & SD - Crises Data

 X    P( X )  1.41 
2

  
2 2
  141
.  119
.
X P(X) (X- ) (X- ) 2 (X- ) 2 P(X)
0 .37 -1.15 1.32 .49
1 .31 -0.15 0.02 .01
2 .18 0.85 0.72 .13
3 .09 1.85 3.42 .31
4 .04 2.85 8.12 .32
5 .01 3.85 14.82 .15
1.41
Discrete Variables Expected Value (Measuring
Center)
• Expected Value (or mean) of a discrete
variable (Weighted Average)
N
  E(X)   xi P ( X  x i )
i 1
Interruptions Per Day In Probability
Computer Network (xi) P(X = xi) xiP(X = xi)
0 0.35 (0)(0.35) = 0.00
1 0.25 (1)(0.25) = 0.25
2 0.20 (2)(0.20) = 0.40
3 0.10 (3)(0.10) = 0.30
4 0.05 (4)(0.05) = 0.20
5 0.05 (5)(0.05) = 0.25
1.00 μ = E(X) = 1.40
Discrete Variables:
Measuring Dispersion
• Variance of a discrete variable
N
σ 2   [x i  E(X)]2 P(X  x i )
i 1

• Standard Deviation of a discrete variable

N
σ  σ2   i
[x
i 1
 E(X)]2
P(X  x i )

where:
E(X) = Expected value of the discrete variable X
xi = the ith outcome of X
P(X=xi) = Probability of the ith occurrence of X
 Discrete Variables:
Measuring Dispersion
(continued)
N
σ  i
[x 
i 1
E(X)]2
P(X  x i )

Interruptions Per
Day In Computer Probability
Network (xi) P(X = xi) [xi – E(X)]2 [xi – E(X)]2P(X = xi)

0 0.35 (0 – 1.4)2 = 1.96 (1.96)(0.35) = 0.686

1 0.25 (1 – 1.4)2 = 0.16 (0.16)(0.25) = 0.040
2 0.20 (2 – 1.4)2 = 0.36 (0.36)(0.20) = 0.072
3 0.10 (3 – 1.4)2 = 2.56 (2.56)(0.10) = 0.256
4 0.05 (4 – 1.4)2 = 6.76 (6.76)(0.05) = 0.338
5 0.05 (5 – 1.4)2 = 12.96 (12.96)(0.05) = 0.648
σ2 = 2.04, σ = 1.4283
Problem
• An auto dealer determines the demand he can
expect for autos during a 1-month period. The
probability of demand for 50, 55, 60 & 65 cars
sold per month is 0.15, 0.2, 0.3 and 0.35. Find
the expected value

(Expected # of cars sold during a 1- month

period is 59.25)
Problem
• A person expects a gain of Rs.80, Rs.120, Rs.160
and Rs.20 with associated probabilities of 0.2,
0.4, 0.3 & 0.1 respectively. If he wishes to
compare this with another security whose gains
are 150, 80 & 20 with prob of 0.1, 0.8 & 0.1
respectively, where would he invest?
 Problem
Share 1 Share 1 Share 2 Share 2
Gain(X) PGain(X)
PX P PX P(X-
Gain(Y)
)2 PGain(Y)
PY P(Y-Y)
P PY 2
P(Y-Y)2
80 .2 8016 .2 16
231.2 231.2
150 .1 150
15 .1 15
476.1 476.1
120 .4 120
48 .414.448 14.4
80 .8 8064 .80.864 0.8
160 .3 160
48 .3
634.8
48 634.8
20 .1 202 .1
372.12 372.1
20 .1 202 .1
883.62 883.6

 1.0 114 1.0

1764
114 1764 1 81 184981 849
Problem
Share 1 Share 2

Mean 114 81

Variance 1764 849

SD 42 29.14

CV 36.84% 35.97%

Return – Share 1
Risk – Share 2
Problem
The probability distribution for the # of TV sets
per household is
X 0 1 2 3 4 5
P(X) .01 .23 .41 .2 .1 .05

• Compute the expected value of # of TVs per household and

compare it with the average. What are the variance and SD
of the # of TV sets per household?

(EV = 2.3 / Variance = 1.23 / SD = 1.11)

• A software company conducts a survey among its programmers and project
leaders regarding their job satisfaction. The data obtained regarding job
satisfaction of 50 programmers and 15 project leaders is given below.
Job satisfaction score Programmers Project leaders
1 5 1
2 10 3
3 20 3
4 10 6
5 5 2

• Develop probability distribution for the job satisfaction of programmers and

project leaders.
• Find the mean and variance
• Who is more satisfied with his job, a randomly selected programmer or a
randomly selected project leader?
RANDOM VARIABLE
Bob Walters, who frequently invests in the stock market, carefully studies any potential investment.
He is currently examining the possibility of investing in the Trinity Power Company. Through
studying past performance, Walters has broken the potential results of the investment into five
possible outcomes with accompanying probabilities. The outcomes are annual rates of return on a
single share of stock that currently costs $150. Find the expected value of the return for investing in
a single share of Trinity Power
Return Investment 0.00 10.00 15.00 25.00 50.00
Probability 0.20 0.25 0.30 0.15 0.10

If Walters purchases stock whenever the expected rate of return exceeds 10 per cent, will he
purchase the stock, according to these data? What is your suggestion to Walters?
 
• Answer= Yes, he will purchase the stock because he carefully studies any potential investment.
Exercises
• 5.5
• 5.6
• 5.7
• 5.8
page no. 187,188
 Probability Distributions

Probability
Distributions

Ch. 5 Discrete Continuous Ch. 6

Probability Probability
Distributions Distributions

Binomial Normal

Poisson
For any distribution
• When to apply
• Prob mass function/ density function
• Range
• Parameter
• Constants/ characteristics
• Simple problem
• Given parameter  calculate probability
• Given probability, parameters  get the random variable ( INVERSE)
• Expected value : E(X) = NP(X=x)
Binomial Probability Distribution
 A fixed number of observations, n
 e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse
 Each observation is categorized as to whether or not
the “event of interest” occurred
 e.g., head or tail in each toss of a coin; defective or not defective light bulb
 Since these two categories are mutually exclusive and collectively
exhaustive
 When the probability of the event of interest is represented as p, then the
probability of the event of interest not occurring is 1 - p
 Constant probability for the event of interest occurring (p) for each
observation
 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
 Two sampling methods deliver independence
 Infinite population without replacement
 Finite population with replacement
 Possible Applications for the
Binomial Distribution

• 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
The Binomial Distribution
Counting Techniques
• Suppose the event of interest is obtaining heads on the toss
of a fair coin. You are to toss the coin three times. In how
many ways can you get two heads?

• Possible ways: HHT, HTH, THH, so there are three ways you
can getting two heads.

• This situation is fairly simple. We need to be able to count

the number of ways for more complicated situations.
 Counting Techniques
Rule of Combinations

• The number of combinations of selecting X objects out

of n objects is

n!
n Cx 
X!(n  X)!
where:
n! =(n)(n - 1)(n - 2) . . . (2)(1)
X! = (X)(X - 1)(X - 2) . . . (2)(1)
0! = 1 (by definition)
Counting Techniques
Rule of Combinations

• How many possible 3 scoop combinations could you create at

an ice cream parlor if you have 31 flavors to select from?
• The total choices is n = 31, and we select X = 3.

31! 31! 31  30  29  28!

31 C3     31  5  29  4495
3!(31  3)! 3!28! 3  2  1  28!
Binomial Distribution Formula
n! X n-X
P(X) = π (1-π)
X ! (n - X)!
P(X) = probability of X events of interest in n
trials, with the probability of an “event of
interest” being π for each trial Example: Flip a coin four
times, let x = # heads:
X = number of “events of interest” in sample, n=4
(X = 0, 1, 2, ..., n)
π = 0.5
n = sample size (number of trials 1 - π = (1 - 0.5) = 0.5
or observations)
π = probability of “event of interest” X = 0, 1, 2, 3, 4
 Characteristics

- Experiment involves n identical trials

- Each trial has exactly two possible outcomes: success and failure
- Each trial is independent of the previous trials
p is the probability of a success on any one trial
q = (1-p) is the probability of a failure on any one trial
p and q are constant throughout the experiment
X is the number of successes in the n trials

 Main parameters are n and p X ~ B(n,p)

 E(X) = N P(X=x)
Binomial Distribution

• Probability n! X n X
function P( X ) 
X ! n  X  !
p q for 0  X  n

• Mean value   n p

• Variance and  2
 n pq
standard
deviation
   2
 n pq
Example:
Calculating a Binomial Probability
What is the probability of one success in five
observations if the probability of an event of
interest is .1?
X = 1, n = 5, and p = 0.1
n!
P(X  1)  π X (1  π ) n  X
X!(n  X)!
5!
 (0.1)1 (1  0.1)5 1
1!(5  1)!
 (5)(0.1)(0.9)4
 0.32805
The Binomial Distribution
Example
Suppose the probability of purchasing a defective
computer is 0.02. What is the probability of
purchasing 2 defective computers in a group of 10?
X = 2, n = 10, and p = .02
n!
P(X  2)  π X (1  π ) n  X
X!(n  X)!
10!
 (.02)2 (1  .02)10  2
2!(10  2)!
 (45)(.0004)(.8508)
 .01531
Using Excel For The
Binomial Distribution
Problem
• Find the probability of getting
I) exactly 3 heads in 4 tosses of a biased coin,
where p(H) = ¾ and p(T) = ¼
P(X = 3) = 4C3 (¾)3 (¼)1 = 0.421875
ii) Atleast 3 heads p(X ≥ 3) = .737
iii) No more than 2 heads p(X ≤2) = .263
Problem
• Assume that on an average, 1 telephone line out of
5 is busy. What is the probability that if 3
randomly selected telephone numbers are called

I) not more than 2 will be busy

II) At least 2 will be busy

P = 1/5 = 0.2 q = 0.8 n=3

i) p(X ≤ 2)=p(0)+p(1)+p(2)=.512+.384+.096=.992
ii) p(X ≥ 2) = p(2) + p(3) = .096 + .008 = .104
Problem
• Consider a binomial experiment with 2 trials
and p = .4. Compute
• p(1)
• p(0)
• p(2)
• The probability of at least one success
• The expected value, variance and SD
( 0.48, 0.36, 0.16, 0.64)
(.8 / .48 / .6928)
• A bank of a nationalized bank is giving educational loans to students.
The persons in charge of disbursement of loans claim that 40% of the
students do not repay the loan. The manager is not convinced and
takes a random sample of 10 students. If the person in-charge of
sanction of loans is correct, find the probability that
• There of the 10 students do not repay
• None of the 10 students do not repay
Practice
• 5.13 page no. 194
• 5.14 page no. 195
• 5.15
• 5.16
• 5.17
Poisson distribution
 Poisson Distribution
 It describes the number of times some event occurring during a
specified interval
 It is a discrete probability because it is formed by counting
 Based on two assumptions:
 The probability is proportional to the length of the interval
 The intervals are independent.
( That means the longer the interval the larger the probability, and the
number of occurrences in one interval does not affect the other intervals)

When ‘n’ is very large and ‘p’ is very small

The p of the occurrence of events in an interval of time is independent

The expected number of occurrences must hold constant throughout the

experiment
Simeon –Denis Poisson in 1837 published a work entitled “Researches on the probability of criminal &
civil verdicts” which includes a discussion of what later became known as Poisson Distribution
Poisson Distribution: Applications

• Arrivals at queuing systems

• airports -- people, airplanes, automobiles, baggage

• banks -- people, automobiles, loan applications

• computer file servers -- read and write operations

• Defects in manufactured goods

• number of defects per 1,000 feet of extruded copper wire

• number of blemishes per square foot of painted surface

• number of errors per typed page

The Poisson Distribution
Definitions
• You use the Poisson distribution when you are
interested in the number of times an event occurs in
a given area of opportunity.
• An area of opportunity is a continuous unit or
interval of time, volume, or such area in which more
than one occurrence of an event can occur.
• The number of scratches in a car’s paint
• The number of mosquito bites on a person
• The number of computer crashes in a day
 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 probability that two or more events occur in an area of
opportunity approaches zero as the area of opportunity becomes
smaller
• The average number of events per unit is  (lambda)
 Poisson Distribution Formula

 x
e 
P( X) 
X!
where:
X = number of events in an area of opportunity
 = expected number of events
e = base of the natural logarithm system (2.71828...)
Poisson Distribution
Characteristics

• Mean
μλ
 Variance and Standard Deviation

σ λ
2

σ λ
where  = expected number of events
Using Poisson Tables


X 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

0 0.9048 0.8187 0.7408 0.6703 0.6065 0.5488 0.4966 0.4493 0.4066

1 0.0905 0.1637 0.2222 0.2681 0.3033 0.3293 0.3476 0.3595 0.3659
2 0.0045 0.0164 0.0333 0.0536 0.0758 0.0988 0.1217 0.1438 0.1647
3 0.0002 0.0011 0.0033 0.0072 0.0126 0.0198 0.0284 0.0383 0.0494
4 0.0000 0.0001 0.0003 0.0007 0.0016 0.0030 0.0050 0.0077 0.0111
5 0.0000 0.0000 0.0000 0.0001 0.0002 0.0004 0.0007 0.0012 0.0020
6 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0001 0.0002 0.0003
7 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Example: Find P(X = 2) if  = 0.50

e  λ λ X e 0.50 (0.50) 2
P(X  2)    0.0758
X! 2!
Using Excel For The
Poisson Distribution
 Graph of Poisson Probabilities
0.70

Graphically: 0.60

 = 0.50 0.50

= 0.40

P(x)
X 0.50
0.30
0 0.6065
0.20
1 0.3033
2 0.0758 0.10

3 0.0126
0.00
4 0.0016 0 1 2 3 4 5 6 7

5 0.0002 x
6 0.0000
7 0.0000 P(X = 2) = 0.0758
Poisson Distribution Shape
• The shape of the Poisson Distribution depends
on the parameter  :

0.70
 = 0.50 0.25
 = 3.00
0.60
0.20
0.50

0.15
0.40

P(x)
P(x)

0.30 0.10

0.20
0.05
0.10

0.00 0.00
0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 8 9 10 11 12

x x
Types of problem in Poisson distribution
• Given mean, find the probability of X=x
• Given: n and p , find the probability of X=x
• Given : probability and mean, find X ( inverse)
• Given, N, mean and find expected value
Problem
On an average, 1 in 400 items are defective.
Out of 100 items chosen, what is the
probability that there are more than 3
defectives?

P = 1/400 n = 100  = np = 0.25

P(X > 3) = 1 – [p(0) + p(1) + p(2) + p(3)] = 1–
[e-.25(.250/0!+.251/1!+.252/2!+.253/3!)]
= 1 – [.7787(1 + .25 + .03125 + .0026)]
= 1 – (.7787474 * 1.28385)
= 0.0002052 ( 2 in 10000)
(e-.25 = e -.20 * e -.05 = .8187 * .9512 = .7787474)
Problem
A factory produces an item in packets of 10.
The probability of an item to be defective is .
2%. Find the number of packets having 2
defective items in a consignment of 10000
packets

P = .2/100 = .002 n = 10  = np = 0.02

P(X=2) = (.02)2 * .9802 / 2 = 0.00019608
# of packets = 10000 * 0.00019608
= 1.9608

≃ 2
Poisson Approximation
of the Binomial Distribution
• Binomial probabilities are difficult to
calculate when n is large.
• Under certain conditions binomial
probabilities may be approximated by
Poisson probabilities.
If n  20 and n  p  7, the approximation is acceptable .

• Poisson approximation

Use   n  p.
Customer Dissatisfaction Survey –
Airline Passengers
Complaints per 100,000
Southwest 0.25
Alaska Air 0.54
Delta 0.79
US Airways 0.84
Continental 1.02
Tower Air 1.91
Northwest 2.21
If 1000,000 boarded passengers were contacted, what is
the probability that exactly 3 of them logged a
complaint?  = 1.08
(1.08)3e-1.08 /3! = 0.0713
7.13% of the time, 3 would have logged complaints
• On the average, six people per hour use a self-service
banking facility during the prime shopping hours in a
department store. What is the probability that
a. Exactly six people will use the facility during a randomly
selected hour?
b. Fewer than five people will use the facility during a
randomly selected hour.
c. No one will use the facility during a 10 minutes interval?
d. No one will use the facility during a 5 – minutes interval
* X ~P(λ) st p(x=1) = P(x=2)

find the mean and P(x=0) (2, 0.1353)

• The variance of the PD is 0.5. Find P(X=3) 0.0126

Normal distribution

Chapter 6
207-233
Learning Objectives
In this chapter, you learn:
• Normal distribution and its properties
• Standard normal variate
• To compute probabilities from the normal distribution
• Inverse normal probability
Continuous Probability Distributions

• A continuous random variable is a variable that can

assume any value on a continuum (can assume an
uncountable number of values)
• thickness of an item
• time required to complete a task
• temperature of a solution
• height, in inches

• These can potentially take on any value depending

only on the ability to precisely and accurately
measure
 The Normal Distribution
• ‘Bell
Shaped’
• Symmetrical f(X)
• Mean, Median and Mode
are Equal
Location is determined by the mean, σ
μ X
Spread is determined by the μ
standard deviation, σ
Mean
= Median
The random variable has an infinite = Mode
theoretical range:
+  to  
Properties of Normal distribution
• It is symmetrical, thus the mean, median and mode are equal
• It is bell shaped, thus the empirical rule applies
• The interquartile range equals 1.33 standard deviations
• The range is approximately equal to 6 standard deviations.
The Normal Distribution
Density Function
 The formula for the normal probability density function is

2
1  (X  μ) 
1  
2  

f(X)  e
2π
Where e = the mathematical constant approximated by 2.71828
π = the mathematical constant approximated by 3.14159
μ = the population mean
σ = the population standard deviation
X = any value of the continuous variable
 Many Normal Distributions

By varying the parameters μ and σ, we obtain different normal

distributions
 The Normal Distribution Shape

f(X) Changing μ shifts the distribution

left or right.

Changing σ increases or decreases

the spread.
σ

μ X
 The Standardized Normal

• Any normal distribution (with any mean and standard

deviation combination) can be transformed into the
standardized normal distribution (Z)

• Need to transform X units into Z units

• The standardized normal distribution (Z) has a mean of

0 and a standard deviation of 1
 Translation to the Standardized
Normal Distribution

• Translate from X to the standardized normal (the

“Z” distribution) by subtracting the mean of X and
dividing by its standard deviation:

X μ
Z
σ
The Z distribution always has mean = 0 and standard
deviation = 1
 The Standardized Normal Probability
Density Function

• The formula for the standardized normal probability

density function is

1 (1/2)Z 2
f(Z)  e
2π

Where e = the mathematical constant approximated by 2.71828

π = the mathematical constant approximated by 3.14159
Z = any value of the standardized normal distribution
 The Standardized
Normal Distribution

• Also known as the “Z” distribution

• Mean is 0
• Standard Deviation is 1
f(Z)

Z
0

Values above the mean have positive Z-values, values below the mean have negative Z-values
 Problem
The mean length of time spent on a training program
is 500 hrs and this normally distributed random
variable has a SD of 100 hrs
What is the probability that a participant will take
• More than 500 hrs (0.50)
• Between 500 & 600 hrs (.3413)
• Between 550 & 650 hrs (.2417)
• Between 420 & 570 hrs (.5461) -inf 0 1.5+inf

Given mean = 500 SD= 100

P(550<=X<=650)=?
P([550-500]/100<=X<=[650-500]/100)
2) A p r oject yie ld s a n a ver a ge ca sh – flow of Rs. 50 0 la kh s w it h a st a n d a r d
devia t ion of Rs. 6 0 la kh s. Ca lcu la t e t h e follow in g p r oba bilit ies.
(i) Ca sh flow w ill be m or e t h a n Rs . 56 0 la kh s
(ii) Ca sh flow w ill be less t h a n Rs. 4 20 la kh s
(iii) Ca sh flow w ill be bet w een Rs. 4 6 0 a n d Rs. 54 0 la kh s
(iv) Ca sh flow w ill be m or e t h a n Rs. 6 8 0 la kh s
Solution:
Let x Cash flow in Rs.
  Rs. 500 lakhs
σ = Rs. 60 lakhs

(i) Cash flow will be more than Rs. 560 lakhs

-3 -2 -1 0 1 2 3


P (X ≥ 560) = P(Z≥ )

560  500
P (X ≥ 560) = P(Z≥ )
60
= P (Z  1)

= ( Area from 0 to ∞ ) - ( Area from 0 to 1 )

= 0.5 – 0.3413

= 0.1587
(ii) Ca sh flow w ill be les s t h a n Rs. 4 20 la kh s

-3 -2 -1 0 -1 -2 -3


P ( X ≤ 4 20 ) = P( Z≤ )

420  500
P ( X ≤ 4 20 ) = P(Z≤ )
60
= P ( Z  1.33)

= ( Ar ea fr om 0 t o -∞ ) - ( Ar ea fr om -1.33 t o 0 )

= 0 .5 – 0 .4 0 8 2

= 0 .0 9 18
 (iii) Cash flow will be between Rs. 460 and Rs. 540 lakhs

-3 -2 -1 0 1 2 3

460  500 540  500

P (460≤ X ≤ 540) = P(  )
60 60
P (460≤ X ≤ 540) = P(-0.67≤ Z≤ 0.66)

= ( Area from - 0.67 to 0 ) - ( Area from 0 to 0.67 )

= 0.2486 + 0.2486

= 0.4972
(iv) Cash flow will be more than Rs. 680 lakhs

-3 -2 -1 0 1 2 3

P (X ≥ 680) = P(Z≥ )

680  500
P (X ≥ 560) = P(Z≥ )
60
= P (Z  3)

= ( Area from 0 to ∞ ) - ( Area from 0 to 3 )

= 0.5 – 0.4987

= 0.0013
 Problem
A normal variable has a mean of 10 and SD 5.
What is the probability that the normal
variable will take a value in the interval 0.2 to
19.8?
P(0.2 < X < 19.8)
= p[((0.2 – 10)/5) < Z < ((19.8 – 10)/5)]
= p(-1.96 < Z < 1.96)
= 2 * .4750
= .9500
 Finding Probabilities of the
Standard Normal Distribution:
P(0 < Z < 1.56)
Standard Normal Probabilities
St andar d Nor mal Di stri buti on z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.4 0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.3 0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
f(z)

0.2 0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
0.1
1.56 1.0
1.1
0.3413
0.3643
0.3438
0.3665
0.3461
0.3686
0.3485
0.3708
0.3508
0.3729
0.3531
0.3749
0.3554
0.3770
0.3577
0.3790
0.3599
0.3810
0.3621
0.3830

0.0
-5 -4 -3 -2 -1 0
{
1 2 3 4 5
1.2
1.3
1.4
0.3849
0.4032
0.4192
0.3869
0.4049
0.4207
0.3888
0.4066
0.4222
0.3907
0.4082
0.4236
0.3925
0.4099
0.4251
0.3944
0.4115
0.4265
0.3962
0.4131
0.4279
0.3980
0.4147
0.4292
0.3997
0.4162
0.4306
0.4015
0.4177
0.4319
Z 1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817

Look in row 2.1

2.2
0.4821
0.4861
0.4826
0.4864
0.4830
0.4868
0.4834
0.4871
0.4838
0.4875
0.4842
0.4878
0.4846
0.4881
0.4850
0.4884
0.4854
0.4887
0.4857
0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
labeled 1.5 and 2.4
2.5
0.4918
0.4938
0.4920
0.4940
0.4922
0.4941
0.4925
0.4943
0.4927
0.4945
0.4929
0.4946
0.4931
0.4948
0.4932
0.4949
0.4934
0.4951
0.4936
0.4952

column labeled .06 2.6

2.7
0.4953
0.4965
0.4955
0.4966
0.4956
0.4967
0.4957
0.4968
0.4959
0.4969
0.4960
0.4970
0.4961
0.4971
0.4962
0.4972
0.4963
0.4973
0.4964
0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
to find P(0  z  2.9
3.0
0.4981
0.4987
0.4982
0.4987
0.4982
0.4987
0.4983
0.4988
0.4984
0.4988
0.4984
0.4989
0.4985
0.4989
0.4985
0.4989
0.4986
0.4990
0.4986
0.4990

1.56) = 0.4406
 Given a Normal Probability
Find the X Value

• Steps to find the X value for a known probability:

1. Find the Z value for the known probability
2. Convert to X units using the formula:

X  μ  Zσ
 Finding the X value for a Known
Probability

Example:
• Let X represent the time it takes (in seconds) to download an
image file from the internet.
• Suppose X is normal with mean 8.0 and standard deviation
5.0
• Find X such that 20% of download times are less than X.

0.2000

? 8.0 X
? 0 Z
 Find the Z value for
20% in the Lower Tail

1. Find the Z value for the known probability

Standardized Normal Probability
Table (Portion) • 20% area in the lower tail
is consistent with
a Z value of -0.84
Z … .03 .04 .05

-0.9 … .1762 .1736 .1711

0.2000
-0.8 … .2033 .2005 .1977

-0.7 … .2327 .2296 .2266

? 8.0 X
-0.84 0 Z
 Finding the X value

2. Convert to X units using the formula:

X  μ  Zσ
 8.0  ( 0.84)5.0

 3.80

So 20% of the values from a distribution with mean 8.0 and

standard deviation 5.0 are less than 3.80
 Problem
The average time a person spends in reading the
Economic Times is 49 minutes. Assume SD is 16 min
and that they are normally distributed.
What is the probability that a person will spend
a) At least 1 hour reading it – p(X ≥ 60) = .2451
b) No more than 30 min reading the ET – p(X ≤ 30) = .1170
c) For the 10% who spend the most time reading ET,
how much time do they spend? 69.48 min
 Problem
A person must score in the upper 2% of the population on
an IQ test to qualify for membership in MENSA, the
international high IQ society. If IQ scores are normally
distributed with a mean of 100 and SD of 15, what score
must a person get to qualify for MENSA? (130.75)
• Data indicates that the time to download check$mart’s
home page is normally distributed with mean 7 seconds
and standard deviation of 2 seconds.
• what is the probability that the download time will be more than
9 seconds
• what is the probability that the download time will be between 7
and 9 seconds
• what is the probability that the download time is under 7second
or over 9 seconds
• what is the probability that the download time will be between 5
and 9 seconds
• what is the probability that the download time is less than 3.5
seconds
• How much time ( in seconds) will elapse before 10% of the
download are complete.
• What are the Upper Limit and Lower limit of X , located
symmetrically around the mean, which include 95% of the
download times