INTRODUCTORY MATHEMATICAL ANALYSIS

For Business, Economics, and the Life and Social Sciences

Chapter 9
Additional Topics in Probability

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Chapter 9: Additional Topics in Probability

Chapter Objectives
• To develop the probability distribution of a
random variable.
• To develop the binomial distribution and relate it
to the binomial theorem.
• To develop the notions of a Markov chain and
the associated transition matrix.

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Chapter 9: Additional Topics in Probability

Chapter Outline
9.1) Discrete Random Variables and Expected
Value
9.2) The Binomial Distribution
9.3) Markov Chains

2011 Pearson Education, Inc.

Chapter 9: Additional Topics in Probability

9.1 Discrete Random Variables and Expected Value

• A variable whose values depend on the outcome of

a random process is called a random variable.
Example 1 – Random Variables
a. Suppose a die is rolled and X is the number that
turns up. Then X is a random variable and X = 1,
2, 3, 4, 5, 6.

b. Suppose a coin is successively tossed until a

head appears. If Y is the number of such tosses,
then Y is a random variable and Y = y where y =
1, 2, 3, 4, . . .

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Chapter 9: Additional Topics in Probability
9.1 Discrete Random Variables and Expected Value
Example 1 – Random Variables

c. A student is taking an exam with a one-hour limit.

If X is the number of minutes it takes to complete
the exam, then X is a random variable.
Values that X may assume = (0,60] or 0  X  60.

• If X is a discrete random variable with distribution f,

then the mean of X is given by
μ  μ X   E X    xf x 
x

2011 Pearson Education, Inc.

Chapter 9: Additional Topics in Probability
9.1 Discrete Random Variables and Expected Value

Example 3 – Expected Gain

An insurance company offers a $180,000
catastrophic fire insurance policy to homeowners of a
certain type of house. The policy provides protection
in the event that such a house is totally destroyed by
fire in a one-year period. The company has
determined that the probability of such an event is
0.002. If the annual policy premium is $379, find the
expected gain per policy for the company.

2011 Pearson Education, Inc.

Chapter 9: Additional Topics in Probability
9.1 Discrete Random Variables and Expected Value
Example 3 – Expected Gain

Solution:
If f is the probability function for X, then
f  179,621  P X  179,621  0.002
f 379   P X  379   1  0.002  0.998

The expected value of X is given by

E X    xf x 
x

 179,621f  179,621  379f 379 

 179,6210.002   3790.998 
 19

2011 Pearson Education, Inc.

Chapter 9: Additional Topics in Probability
9.1 Discrete Random Variables and Expected Value

Variance of X
 
Var X   E X  μ    x  μ  f x 
2 2

Standard Deviation of X
σ  σ X   Var X 

Rewriting the formula, we have

Var X   σ 2   x 2f x   μ 2  E X  E X  
2 2

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Chapter 9: Additional Topics in Probability

9.2 Binomial Distribution

• If n is a positive integer, then
a  b n  n C0a n  n C1a n 1b  n C2a n 2b 2  ...  n Cn 1ab n 1  n Cn b n
n
  n Ci a n  i b i
i 0

Example 1 – Binomial Theorem

Use the binomial theorem to expand (q + p)4.
q  p 4  4 C0q 4  4 C1q 3 p 4 C2q 2 p 2  3 C0q1p 3  4 C4 p 4
4! 4 4! 3 1 4! 2 2 4! 1 3 4!
 q  q p  q p  qp  p
0!4! 1!3! 2!2! 3!1! 4!0!
 q 4  4q 3 p  6q 2 p 2  4qp 3  p 4

2011 Pearson Education, Inc.

Chapter 9: Additional Topics in Probability
9.2 Binomial Distribution

Binomial Distribution
• If X is the number of successes in n independent
trials, probability of success = p and probability of
failure = q, the distribution f for X is
f x   P X  x   n C x p x q n  x

• The mean and standard deviation of X are given by

  np   npq

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Chapter 9: Additional Topics in Probability
9.2 Binomial Distribution

Example 3 – At Least Two Heads in Eight Coin Tosses

A fair coin is tossed eight times. Find the probability
of getting at least two heads.
Solution:
X has a binomial distribution with n = 8, p = 1/2, q =
1/2.
P X  2  P X  0   P X  1
0 8 1 7
 1  1  1  1
 8 C0      8 C1   
2 2 2 2
1 1 1 9
 1 1 8  
256 2 128 256

9 247
Thus, P X  2  1  
256 256
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Chapter 9: Additional Topics in Probability

9.3 Markov Chains

• A Markov chain is a sequence of trials in which
the possible outcomes of each trial remain same,
are finite in number, and have probabilities
dependent upon the outcome of the previous trial.
• The transition matrix for a k-state Markov chain is
t ij  P next state is i current state is j 

• State vector Xn is a k-entry column vector in which

xj is the probability of being in state j after the nth
trial.
• T is the transition matrix and Xn is given by
X n  TX n 1
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Chapter 9: Additional Topics in Probability
9.3 Markov Chains

Example 1 – Demography
A county is divided into 3 regions. Each year, 20% of
the residents in region 1 move to region 2 and 10%
move to region 3. Of the residents in region 2,10%
move to region 1 and 10% move to region 3. Of the
residents in region 3, 20% move to region 1 and 10%
move to region 2.
a. Find the transition matrix T for this situation.
Solution:

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Chapter 9: Additional Topics in Probability
9.3 Markov Chains
Example 1 – Demography

b. Find the probability that a resident of region 1 this

year is a resident of region 1 next year; in two
years.
1 2 3
Solution:
1 0.53 0.17 0.29
T 2  2  0.31 0.67 0.19
3 0.16 0.16 0.52

c. This year, suppose 40% of county residents live in

region 1, 30% live in region 2, and 30% live in
region 3. Find the probability that a resident of the
county lives in region 2 after three years.
2011 Pearson Education, Inc.
Chapter 9: Additional Topics in Probability
9.3 Markov Chains
Example 1 – Demography

Solution:
Initial Vector: 0.40

X0  0.30 
0.30

Probability is
X3  T 3 X0  TT 2 X0
0.7 0.1 0.2 0.53 0.17 0.29  0.40  0.3368 
 0.2 0.8 0.1  0.31 0.67 0.16  0.30   0.4024 
 0.1 0.1 0.7 0.16 0.16 0.52 0.30  0.2608 

2011 Pearson Education, Inc.

Chapter 9: Additional Topics in Probability
9.3 Markov Chains

Steady-State Vectors
• When T is the k × k transition matrix, the steady-
state vector
 q1 
Q    
qk 

is the solution to the matrix equations

1  1Q  1
T  Ik Q  O

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