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Week 06: Discrete Vs Continuous Variables Part 2: Calculating Binomial Probabilities

This document provides information about calculating binomial probabilities. It discusses the necessary information needed, including defining success, number of trials, probability of success, and sample space. It then gives an example of calculating the probabilities of different numbers of oil well strikes succeeding, with 5 trials and a 30% probability of success at each trial. It demonstrates using the BINOM.DIST function in Excel to calculate these probabilities and shows the resulting binomial probability distribution. It also discusses calculating probabilities for ranges of values and more than one value.

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16 views

Week 06: Discrete Vs Continuous Variables Part 2: Calculating Binomial Probabilities

This document provides information about calculating binomial probabilities. It discusses the necessary information needed, including defining success, number of trials, probability of success, and sample space. It then gives an example of calculating the probabilities of different numbers of oil well strikes succeeding, with 5 trials and a 30% probability of success at each trial. It demonstrates using the BINOM.DIST function in Excel to calculate these probabilities and shows the resulting binomial probability distribution. It also discusses calculating probabilities for ranges of values and more than one value.

Uploaded by

Jane Doe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPSX, PDF, TXT or read online on Scribd
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E370

5/13/17
Week 06: Discrete vs
Continuous Variables
Part 2: Calculating
Binomial Probabilities
Success must be defined.
Number of trials must be
determined.
The probability of success
must be known or estimated.
Sample space must be
defined.

Necessary Information for the Binomial


.. . drilled in areas deemed X P(X)
favorable strike oil. A 0
company has found 5 sites 1
with favorable conditions,
2
that are widely separated
geographically, and decides to 3
drill at each site. 4
Lets create the probability
5
distribution for this variable.
In Excel, list the sample space for
this variable in a column.
We will use Excel and this
command to calculate probabilities:
=BINOM.DIST(x, n, , 0)

About 30% of wells . . .


=BINOM.DIST(x, n, , 0) X P(X)
x is the number of successes of 0 =BINOM.DIST
interest. (
n is the number of trials.
is the probability of success. 1
0 means that we want the
2
probability of a single value, whatever
x is. 3
Click on the cell immediately to the
right of the first value in the sample
4
space. Type in =BINOM.DIST( 5
Point to the cell to the left and click.
Type a comma , 5, 0.3, 0). Now,
highlight the cell you were working in,
and drag the handle down so that all
the probabilities for the sample space
have been calculated.

The Excel Command


X Command P(X)
0 =BINOM.DIST(0,5,0.3,0) 0.1681
1 =BINOM.DIST(1,5,0.3,0) 0.3601
2 =BINOM.DIST(2,5,0.3,0) 0.3087
3 =BINOM.DIST(3,5,0.3,0) 0.1323
4 =BINOM.DIST(4,5,0.3,0) 0.0284
5 =BINOM.DIST(5,5,0.3,0) 0.0024

The Probability Distribution


Oil Well Strikes
0.3602
0.3087

0.1681
0.1323

0.0284
0.0024
0 1 2 3 4 5
Suppose you wanted to know the probability
that as many as 2 wells came in.
A minor adjustment in the Excel command:
=BINOM.DIST(X, n, , 1)
The 1 tells Excel to add the probabilities for all
values up to and including the x value you
designate.
=BINOM.DIST(2, 5, 0.3, 1) = 0.8369

Combining this feature of Excel with our


knowledge of the requirements for valid
probability distributions makes for a very
flexible tool.

Calculating probabilities for more than one


value. . .
0 1 2 3 4 5

0 1 2 3 4 5

0 1 2 3 4 5

A useful diagram . . .
and easy to sketch!
The company must have at least 2
strikes to cover its costs. What is
the probability that the company
will cover its costs or even make
money?
0 1 2 3 4 5

=1-BINOM.DIST(1,5,0.3,1) =
0.4718

Calculate the probabilities


What is the probability that the
company will NOT cover its costs?
=BINOM.DIST(1,5,0.3,1) = 0.5282

0 1 2 3 4 5
What is the probability that more
than two but no more than four
wells come in?
=BINOM.DIST(4,5,0.3,1)
BINOM.DIST(2,5,0.3,1)= 0.1607

0 1 2 3 4 5
A right tailed or interior option
=BINOM.DIST.RANGE(n, , x1, x2)
Calculates the cumulative
probability of a range including the
probability of the limiting values.
What is the probability that more
than two but no more than four wells
come in?
=BINOM.DIST(4,5,0.3,1)
BINOM.DIST(2,5,0.3,1)= 0.1607
=BINOM.DIST.RANGE(5, 0.3, 3,

New from 2013


4)=0.1607

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