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Business Statistics, 4e
by Ken Black


Chapter 4
Probability
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Learning Objectives
Comprehend the different ways of assigning
probability.
Understand and apply marginal, union,
joint, and conditional probabilities.
Select the appropriate law of probability to
use in solving problems.
Solve problems using the laws of
probability including the laws of addition,
multiplication and conditional probability
Revise probabilities using Bayes rule.
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Methods of Assigning Probabilities
Classical method of assigning probability
(rules and laws)
Relative frequency of occurrence
(cumulated historical data)
Subjective Probability (personal intuition or
reasoning)
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Classical Probability
Number of outcomes leading
to the event divided by the
total number of outcomes
possible
Each outcome is equally likely
Determined a priori -- before
performing the experiment
Applicable to games of chance
Objective -- everyone correctly
using the method assigns an
identical probability
P E
N
Where
N
e
n
( )
:
=
=
=
total number of outcomes
number of outcomes in E
e
n
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Relative Frequency Probability
Based on historical
data
Computed after
performing the
experiment
Number of times an
event occurred divided
by the number of trials
Objective -- everyone
correctly using the
method assigns an
identical probability
P E
N
Where
N
e
n
( )
:
=
=
=
total number of trials
number of outcomes
producing E
e n
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Subjective Probability
Comes from a persons intuition or
reasoning
Subjective -- different individuals may
(correctly) assign different numeric
probabilities to the same event
Degree of belief
Useful for unique (single-trial) experiments
New product introduction
Initial public offering of common stock
Site selection decisions
Sporting events
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Structure of Probability
Experiment
Sample Space
Event
Mutually Exclusive Events
Collectively Exhaustive Events
Equally Likely Events
Complementary Events
Unions and Intersections
Independent Events
Dependent Events
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Experiment
Experiment: a process that produces outcomes
More than one possible outcome
Only one outcome per trial
Trial: one repetition of the process
Event: an outcome of an experiment
may be an elementary event, or
may be an aggregate of elementary events
usually represented by an uppercase letter, e.g.,
A, E
1
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Sample Space
The set of all elementary events for an
experiment
Ex. When a coin is tossed, the sample space
is {head, tail}
Sample Point
Each possible outcome in a sample space is
called sample point.
Ex. Head and tail in tossing a coin
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Union of Sets
The union of two sets contains an instance
of each element of the two sets.
{ }
{ }
{ }
X
Y
X Y
=
=
=
1 4 7 9
2 3 4 5 6
1 2 3 4 5 6 7 9
, , ,
, , , ,
, , , , , , ,
{ }
{ }
{ }
C IBM DEC Apple
F Apple Grape Lime
C F IBM DEC Apple Grape Lime
=
=
=
, ,
, ,
, , , ,
Y
X
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Intersection of Sets
The intersection of two sets contains only
those element common to the two sets.
{ }
{ }
{ }
X
Y
X Y
=
=
=
1 4 7 9
2 3 4 5 6
4
, , ,
, , , ,
{ }
{ }
{ }
C IBM DEC Apple
F Apple Grape Lime
C F Apple
=
=
=
, ,
, ,
Y
X
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Mutually Exclusive Events
Events with no
common outcomes
Occurrence of one
event precludes the
occurrence of the
other event
{ }
{ }
{ }
X
Y
X Y
=
=
=
17 9
2 3 4 5 6
, ,
, , , ,
{ }
{ }
{ }
C IBM DEC Apple
F Grape Lime
C F
=
=
=
, ,
,
Y X
P X Y ( ) = 0
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Collectively Exhaustive Events
Contains all elementary events for an
experiment
Ex. There are 6 exhaustive numbers of
cases in throwing a dice.
E
1
E
2
E
3
Sample Space with three
collectively exhaustive events
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Independent Events
Occurrence of one event does not affect the
occurrence or nonoccurrence of the other
event
Ex. It will rain tomorrow in India and India
will win the match tomorrow in Australia.
Dependent Events
Two or more events are said to be
dependent if the occurrence of one event
influence the occurrence of the other.
Ex. If a card is drawn from a deck of 52
cards without replacement, will affect the
chances of second card drawn.
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Complementary Events

All elementary events not in the event A
are in its complementary event.
Sample
Space
A
P SampleSpace ( ) =1
P A P A ( ) ( ) ' = 1
' A
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Counting the Possibilities
mn Rule
Sampling from a Population with
Replacement
Combinations: Sampling from a Population
without Replacement
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mn Rule
If an operation can be done m ways and a
second operation can be done n ways, then
there are mn ways for the two operations to
occur in order.
Scientist want to set a research design to
study the effects of gender (M,F) marital
status (single never married, divorced,
married) and economic class (lower,
middle, upper)
No. of groups= 2*3*3 = 18 groups
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Sampling from a Population with
Replacement
A tray contains 1,000 individual tax returns.
If 3 returns are randomly selected with
replacement from the tray, how many
possible samples are there?
(N)
n
= (1,000)
3
= 1,000,000,000
Sampling from a Population without
Replacement

N
C
n
= N!
n!(N-n)!

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Four Types of Probability
Marginal Probability
Union Probability
Joint Probability
Conditional Probability
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Four Types of Probability
Marginal

The probability
of X occurring
Union

The probability
of X or Y
occurring
Joint

The probability
of X and Y
occurring
Conditional

The probability
of X occurring
given that Y
has occurred
Y
X
Y
X
Y
X
P X ( )
P X Y ( )
P X Y ( )
P X Y ( | )
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General Law of Addition
P X Y P X P Y P X Y ( ) ( ) ( ) ( ) = +
Y
X
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General Law of Addition -- Example
P N S P N P S P N S ( ) ( ) ( ) ( ) = +
S
N
.56
.67 .70
P N
P S
P N S
P N S
( ) .
( ) .
( ) .
( ) . . .
.
=
=
=
= +
=
70
67
56
70 67 56
081
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Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
SP
Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
P N S P N P S P N S ( ) ( ) ( ) ( )
. . .
.
= +
= +
=
70 67 56
81
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Office Design Problem
Probability Matrix
.11
.19
.30
.56 .14 .70
.67 .33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
P N S ( ) . . .
.
= + +
=
56 14 11
81
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Venn Diagram of the X or Y
but not Both Case
Y
X
SP
The Neither/Nor Region
Y
X
P X Y P X Y ( ) ( ) = 1
SP
The Neither/Nor Region
S
N
P N S P N S ( ) ( )
.
.
=
=
=
1
1 81
19
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Special Law of Addition
If X and Y are mutually exclusive,
P X Y P X P Y ( ) ( ) ( ) = +
X
Y
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Demonstration Problem 4.3
Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155
P T C P T P C ( ) ( ) ( )
.
= +
= +
=
69
155
31
155
645
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Demonstration Problem 4.3
Type of Gender
Position Male Female Total
Managerial 8 3 11
Professional 31 13 44
Technical 52 17 69
Clerical 9 22 31
Total 100 55 155
P P C P P P C ( ) ( ) ( )
.
= +
= +
=
44
155
31
155
484
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Law of Multiplication
Demonstration Problem 4.5
P X Y P X P Y X P Y P X Y ( ) ( ) ( | ) ( ) ( | ) = =
P M
P S M
P M S P M P S M
( ) .
( | ) .
( ) ( ) ( | )
( . )( . ) .
= =
=
=
= =
80
140
0 5714
0 20
0 5714 0 20 0 1143
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Law of Multiplication
Demonstration Problem 4.5
Total
.7857
Yes No
.4571 .3286
.1143 .1000 .2143
.5714 .4286 1.00
Married
Yes
No
Total
Supervisor
Probability Matrix
of Employees
20 . 0 ) | (
5714 . 0
140
80
) (
2143 . 0
140
30
) (
=
= =
= =
M S P
M P
S P
P M S P M P S M ( ) ( ) ( | )
( . )( . ) .
=
= = 0 5714 0 20 0 1143
P M S P M P M S
P M S P S P M S
P M P M
( ) ( ) ( )
. . .
( ) ( ) ( )
. . .
( ) ( )
. .
=
= =
=
= =
=
= =
0 5714 0 1143 0 4571
0 2143 0 1143 0 1000
1
1 0 5714 0 4286
P S P S
P M S P S P M S
( ) ( )
. .
( ) ( ) ( )
. . .
=
= =
=
= =
1
1 0 2143 0 7857
0 7857 0 4571 0 3286
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Special Law of Multiplication
for Independent Events
General Law


Special Law
P X Y P X P Y X P Y P X Y ( ) ( ) ( | ) ( ) ( | ) = =
If events X and Y are independent ,
and P X P X Y P Y P Y X
Consequently
P X Y P X P Y
( ) ( | ), ( ) ( | ).
,
( ) ( ) ( )
= =
=
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Law of Conditional Probability
The conditional probability of X given Y is
the joint probability of X and Y divided by
the marginal probability of Y.
P X Y
P X Y
P Y
P Y X P X
P Y
( | )
( )
( )
( | ) ( )
( )
=

=

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Law of Conditional Probability
N
S
.56
.70
P N
P N S
P S N
P N S
P N
( ) .
( ) .
( | )
( )
( )
.
.
.
=
=
=

=
=
70
56
56
70
80
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Office Design Problem
164 .
67 .
11 .
) (
) (
) | (
=
=

=
S P
S N P
S N P
.19
.30
.14 .70
.33 1.00
Increase
Storage Space
Yes No Total
Yes
No
Total
Noise
Reduction
.11
.56
.67
Reduced Sample
Space for
Increase
Storage Space
= Yes
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Independent Events
If X and Y are independent events, the
occurrence of Y does not affect the
probability of X occurring.
If X and Y are independent events, the
occurrence of X does not affect the
probability of Y occurring.
If X and Y are independent events ,
, and P X Y P X
P Y X P Y
( | ) ( )
( | ) ( ).
=
=
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Independent Events
Demonstration Problem 4.11
D E
A 8 12 20
B 20 30 50
C 6 9 15
34 51 85
2353 . 0 ) ( ) | (
2353 .
85
20
) (
2353 .
34
8
) (
) (
) | (
= =
= =
= =

=
A P D A P
A P
D P
D A P
D A P
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Revision of Probabilities: Bayes Rule
An extension to the conditional law of
probabilities
Enables revision of original probabilities
with new information
) | ( ) ( ) | ( ) ( ) | ( ) (
) | ( ). (
) | (
2 2 1 1 n n
i i
i
X Y P X P X Y P X P X Y P X P
X Y P X P
Y X P
+ +
=
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Revision of Probabilities
with Bayes' Rule: Ribbon Problem
P Alamo
P SouthJersey
P d Alamo
P d SouthJersey
P Alamo d
P d Alamo P Alamo
P d Alamo P Alamo P d SouthJersey P SouthJersey
P SouthJersey d
P d SouthJersey P SouthJersey
P d Alamo P Alamo P d SouthJersey P SouthJersey
( ) .
( ) .
( | ) .
( | ) .
( | )
( | ) ( )
( | ) ( ) ( | ) ( )
( . )( . )
( . )( . ) ( . )( . )
.
( | )
( | ) ( )
( | ) ( ) ( | ) ( )
( . )( . )
( .
=
=
=
=
=

+
=
+
=
=

+
=
0 65
0 35
0 08
0 12
0 08 0 65
0 08 0 65 0 12 0 35
0 553
0 12 0 35
0 08)( . ) ( . )( . )
.
0 65 0 12 0 35
0 447
+
=
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Revision of Probabilities
with Bayes Rule: Ribbon Problem
Conditional
Probability

0.052




0.042

0.094
0.65




0.35
0.08




0.12
0.052
0.094

=0.553

0.042
0.094

=0.447
Alamo




South Jersey




Event
Prior
Probability

P Ei ( )
Joint
Probability

P E d i ( )
Revised
Probability

P E d i ( | )
P d
E
i
( |
)