BUSINESS

STATISTICS
MAIN MODULE

SESSION - IV

INSTRUCTOR: DR. ANKIT SHARMA

QUANTITATIVE METHODS & OPERATIONS MANAGEMENT

30/09/22 Business Statistics: MAIN MODULE SESSION IV

SESSIO
N THE POISSON
DISTRIBUTIO

FLOW N HANDS ON

BINOMIAL THE POISSON SUMMARY

DISTRIBUTIO DISTRIBUTIO &
N N WAY
FORWARD
BINOMIAL
DISTRIBUTIO
NHANDS ON

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Probability Distribution

Probability
Distributions

Discrete Continuous
Probability Probability
Distributions Distributions

Binomial Normal

Poisson Uniform

Exponential

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Binomial Probability Distribution
The binomial distribution is an important mathematical model used in many business situations. You use
the binomial distribution when the discrete variable is the number of events of interest in a sample of n
observations. The binomial distribution has four important properties.

 A fixed number of observations, n.

 e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse.
 Each observation is classified into one of two mutually exclusive & collectively exhaustive
categories.
 e.g., head or tail in each toss of a coin; defective or not defective light bulb.
 The probability of being classified as the event of interest, π, is constant from observation
to observation.
 Probability of getting a tail is the same each time we toss the coin.
 Since the two categories are mutually exclusive and collectively exhaustive, when the probability of the event of
interest is π, the probability of the event of interest not occurring is 1 – π.
 The value of any observation is independent of the value of any other observation.

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Binomial Probability Distribution
L ike most other large businesses, Ricknel Home Centers, LLC, a regional home improvement chain, uses an accounting
information system (AIS) to manage its accounting and financial data. The Ricknel AIS collects, organizes, stores, analyzes, and
distributes financial information to decision makers both inside and outside the firm.

One important function of the Ricknel AIS is to continuously audit accounting information, looking for errors or incomplete or
improbable information. For example, when customers submit orders online, the Ricknel AIS reviews the orders for possible
mistakes.

Any questionable invoices are tagged and included in a daily exceptions report. Recent data collected by the company show that
the likelihood is 0.10 that an order form will be tagged. As a member of the AIS team, you have been asked by Ricknel
management to determine the likelihood of finding a certain number of tagged forms in a sample of a specific size. For
example, what would be the likelihood that none of the order forms are tagged in a sample of four forms? That one of the order
forms is tagged? How could you determine the solution to this type of probability problem?
The event of interest is defined as a tagged order form. You want to determine the number of tagged order forms in a given
sample of orders.

If the sample contains four orders, there could be none, one, two, three, or four tagged order forms. No other value can occur
because the number of tagged order forms cannot be more than the sample size, n, and cannot be less than zero. Therefore,
the range of the binomial variable is from 0 to n.

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Binomial Probability Distribution
Suppose that you observe the following result in a sample of four orders:

What is the probability of having three tagged order forms in a sample of four orders in this particular sequence? Because the
historical probability of a tagged order is 0.10, the probability that each order occurs in the sequence is

Each outcome is essentially independent of the others because the order forms were selected from an extremely large or
practically infinite population and each order form could only be selected once. Therefore, the probability of having this
particular sequence is

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Binomial Probability Distribution
To find the number of ways of selecting x objects from n objects, irrespective of sequence, you use the rule of
combinations

Possible cases to select 3 tagged orders

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Binomial Distribution

represents the probability of exactly x events of interest from n observations in a particular sequence.

is the number of combinations of the x events of interest from the n observations possible.

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
If the likelihood of a tagged order form is 0.1, what is the probability that there are two or more (i.e., at least two) tagged
order forms in the sample of four?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Mean and Standard Deviation of Binomial Distribution

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
Accuracy in taking orders at a drive-through window is important for fast-food chains. Periodically, QSR Magazine publishes
“The Drive-Thru Performance Study: Order Accuracy” that measures the percentage of orders that are filled correctly. In a
recent month, the percentage of orders filled correctly at Wendy’s was approximately 86.8%. Suppose that you go to the drive
through window at Wendy’s and place an order. Two friends of yours independently place orders at the drive-through window at
the same Wendy’s.
What are the probabilities that

a. all three orders will be filled correctly?

b. that none of the three orders will be filled correctly?

c. that at least two of the three orders will be filled correctly?

d. What are the mean and standard deviation of the binomial distribution for the number of orders filled correctly?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check

A manufacturing company regularly conducts quality control checks at specified periods on the products it manufactures.
Historically, the failure rate for LED light bulbs that the company manufactures is 5%. Suppose a random sample of 10
LED light bulbs is selected. What is the probability that

a. none of the LED light bulbs are defective?

b. exactly one of the LED light bulbs is defective?

c. two or fewer of the LED light bulbs are defective?

d. three or more of the LED light bulbs are defective?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
A student is taking a multiple-choice exam in which each question has four choices. Assume that the student has no
knowledge of the correct answers to any of the questions. She has decided on a strategy in which she will place four balls
(marked A, B, C, and D) into a box. She randomly selects one ball for each question and replaces the ball in the box. The
marking on the ball will determine her answer to the question. There are five multiple-choice questions on the exam.

What is the probability that she will get

a. five questions correct?

b. at least four questions correct?

c. no questions correct?

d. no more than two questions correct?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 The Binomial Distribution
Shape
 The shape of the binomial
distribution depends on the P(X=x|5, 0.1)
values of π and n. .6
.4
.2
0
 Here, n = 5 and π = 0.1. 0 1 2 3 4 5 x

P(X=x|5, 0.5)
.6
.4
.2
0
 Here, n = 5 and π = 0.5.
0 1 2 3 4 5 x

Whenever p = 0.5, the binomial distribution is symmetrical, regardless of how large or small the value of n. When p ≠ 0.5, the
distribution is skewed. The closer p is to 0.5 and the larger the number of observations, n, the less skewed the distribution
becomes.
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30/09/22 Business Statistics: MAIN MODULE SESSION IV
Poisson Distribution

Many studies are based on counts of the occurrences of a particular event in a fixed interval of time or space (often referred
to as an area of opportunity). In such an area of opportunity there can be more than one occurrence of an event. The Poisson
distribution, named after French mathematician Denis Poisson, can be used to compute probabilities in such situations.

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 number of meteorites greater than 1 meter diameter that strike

Earth in a year

The number of patients arriving in an emergency room between

10 and 11 pm

The number of laser photons hitting a detector in a particular time

interval
30/09/22 Business Statistics: MAIN MODULE SESSION IV
Calculating Poisson Distribution Probabilities

 x
e 
P( X  x |  ) 
x!
Where,

x is the number of occurrences (k=0,1,2...)

e is Euler's number (e=2.71828...)

! is the factorial function.

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Poisson Distribution
 Apply the Poisson Distribution when:
 You are interested in counting the number of times a particular event occurs in a given area of
opportunity. An area of opportunity is defined by time, length, surface area, and so forth.
 The probability that an event occurs in a given area of opportunity is the same for all the areas
of opportunity.
 The number of events that occur in one area of opportunity is independent of the number of
events that occur in any other area of opportunity.
 The probability that two or more events will occur in an area of opportunity approaches zero as
the area of opportunity becomes smaller.
 The average number of events per unit is  (lambda).

The positive real number λ is equal to the expected value of X and also to its variance

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
The mean number of customers who arrive per minute at the bank during the noon-to-1 p.m. hour is equal to 3.0.

What is the probability that in a given minute, exactly two customers will arrive?

And what is the probability that more than two customers will arrive in a given minute?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
The number of work-related injuries per month in a manufacturing plant is known to follow a Poisson distribution, with a
mean of 2.5 work-related injuries a month.

What is the probability that in a given month, no work-related injuries occur?

That at least one work-related injury occurs?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
J.D. Power and Associates calculates and publishes various statistics concerning car quality. The dependability score
measures problems experienced during the past 12 months by owners of vehicles (2015). For these models of cars, Ford
had 1.88 problems per car and Toyota had 1.11 problems per car. (Data extracted from C. Woodyard, “Lexus Has Staying
‘Power’,” USA Today, February 26, 2015, p. 5B.)

Let X be equal to the number of problems with a Ford.

a. Making the assumptions for X to be distributed as a Poisson random variable, if you purchased a Ford in the 2015 model
year, what is the probability that in the past 12 months, the car had more than two problems.

b. zero problems?

c. two or fewer problems?

d. Give an operational definition for problem. Why is the operational definition important in interpreting the initial quality
score?
An operational definition for problem can be “a specific feature in the
car that is not performing according to its intended designed function.”

30/09/22 Business Statistics: MAIN MODULE SESSION IV

Expected Value in Poisson Distribution

30/09/22 Business Statistics: MAIN MODULE SESSION IV

 Concept Check
A toll-free phone number is available from 9 a.m. to 9 p.m. for your customers to register complaints about a product
purchased from your company. Past history indicates that a mean of 0.8 calls is received per minute.

a. What properties must be true about the situation described here in order to use the Poisson distribution to calculate
probabilities concerning the number of phone calls received in a one-minute period?
Assuming that this situation matches the properties discussed in (a), what is the probability that during a one-minute
period

b. zero phone calls will be received?

c. three or more phone calls will be received?

d. What is the maximum number of phone calls that will be received in a one-minute period 99.99% of the time?

30/09/22 Business Statistics: MAIN MODULE SESSION IV

30/09/22 Business Statistics: MAIN MODULE SESSION IV
Continuous Distribution
MyTVLab Scenario

In the MyTVLab scenario, you are examining the load time, a continuous numerical variable.

You are no longer considering a table of discrete (specific) values, but a continuous range of values. For example, the phrase
“load times are between 5 and 9 seconds” includes any value between 5 and 9 and not just the values 5, 6, 7, 8, and 9.

If you plotted the phrase on a graph, you would draw a continuous line from 5 to 9 and not just plot five specific points.

When you add information about the shape of the range of values, such as two-thirds of the load times are between 5 and 9
seconds or about 95% of the load times are between 3 and 11 seconds, you can visualize the plot of all values as an area
under a curve.

If that area under the curve follows the well-known pattern of certain continuous distributions, you can use the continuous
probability distribution for that pattern to estimate the likelihood that a load time is within a range of values.

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Continuous Distribution
Let X be a continuous rv. Then a probability distribution or probability density function (pdf) of X is a
function f(x) such that for any two numbers a and b with a ≤ b,

That is, the probability that X takes on a value in the interval [a, b] is the area above this interval and under the graph of the
density function, as illustrated in Figure below. The graph of f(x) is often referred to as the density curve.

P(a ≤ X ≤ b) = the area under the density curve between a

and b
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Continuous Distribution
The support of a pdf f(x) consists of all x values for which f(x) > 0.

Although a pdf is defined for -∞ ≤ x ≤ ∞, we will typically display a pdf for the values in its support, and it is always
understood that f(x) = 0 otherwise.

For f(x) to be a legitimate pdf, it must satisfy the following two conditions:

for all x

[area under the entire graph of f(x) ] = 1

When X is a discrete random variable, each possible value is assigned positive probability. This is not true of a continuous
random variable, because the area under a density curve that lies above any single value is zero:

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Continuous Distribution
The fact that P(X = c) = 0 when X is continuous has an important practical consequence:

The probability that X lies in some interval between a and b does not depend on whether the lower limit a or the upper
limit b is included in the probability calculation:

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Continuous Distribution

Climate change has made effective modeling and management of floodwaters ever more important in coastal areas. One variable
of particular importance is the flow rate of water above some minimum threshold (typically where the rate becomes hazardous
and requires intervention). The following pdf of X = hazardous flood rate (m 3/s) is suggested under certain conditions by the
article “A Framework for Probabilistic Assessment of Clear-Water Scour Around Bridge Piers” (Structural Safety 2017: 11–22):

The graph of f(x) is given in Figure below ; there is no density associated with flow rates below 10 m 3/s, because such flow
rates are deemed nonhazardous under these particular conditions. The flow rate density decreases rapidly R (exponentially
fast) as x increases from 10.
1. The probability that flood rate is at most 50 m3/s is

2. The probability the flood rate hits at least 200 m3/s, the point at which a nearby bridge will collapse

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Continuous Probability Distributions Vary By Shape

 Symmetrical  Symmetrical  Right skewed

 Bell-shaped  Also known as  Mean > Median
 Ranges from negative to Rectangular  Ranges from zero to
positive infinity Distribution positive infinity
 Every value between the
smallest & largest is
equally likely

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