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COURSE CODE: COURSE DESCRIPTION: LECTURE No.:

BUS STAT BUSINESS STATISTICS MLN01B
 Experiments and the Sample Space
 Assigning Probabilities to Experimental
Outcomes
 Events and Their Probability
 Some Basic Relationships of Probability
 Bayes’ Theorem
 Experiment
◦ to be any process that generates well-defined outcomes

Experiment Experimental Outcomes

Toss a coin Head, Tail
Select a part for inspection Defective, nondefective
Conduct a sales call Purchase, no purchase
Roll a die 1, 2, 3, 4, 5, 6
Play a football game Win, lose, tie
 Increasing Likelihood of Occurrence

0 .5 1
Probability:

The event The occurrence The event

is very of the event is is almost
unlikely just as likely as certain
to occur. it is unlikely. to occur.
 Assigning Probabilities

Classical Method
• Assigning probabilities based on the assumption
of equally likely outcomes
Relative Frequency Method
• Assigning probabilities based on experimentation
or historical data
Subjective Method
• Assigning probabilities based on judgment
 Events and Their Probabilities

An experiment is any process that generates well-defined

outcomes.

An experimental outcome is also called a sample point.

The sample space for an experiment is the set of all

sample points.

An event is a collection of particular sample points.

Classical Method
If an experiment has n possible
outcomes, this method would assign a
probability of 1/n to each outcome.

Example
Experiment: Rolling a die
Sample Space: S = {1, 2, 3, 4, 5, 6}

Probabilities: Each sample point has a

1/6 chance of occurring
Relative Frequency Method
Example:
Lucas Tool Rental:
Lucas Tool Rental would like to
assign probabilities to the number of car
polishers it rents each day. Office records show the
following frequencies of daily rentals for the last 40 days.
Number of Number
Polishers Rented of Days
0 4
1 6
2 18
3 10
4 2
Relative Frequency Method
Each probability assignment is given by
dividing the frequency (number of days) by
the total frequency (total number of days).
Number of Number of Days Probability
Polishers Rented

0 4 0.10
1 6 0.15
2 18 0.45
3 10 0.25
4 2 0.05
Total 40 1.0
Subjective Method
 When economic conditions and a company’s
circumstances change rapidly it might be
inappropriate to assign probabilities based solely on
historical data.
 We can use any data available as well as our
experience and intuition, but ultimately a probability
value should express our degree of belief that the
experimental outcome will occur.
 The best probability estimates often are obtained by
combining the estimates from the classical or relative
frequency approach with the subjective estimate.
Subjective Method

Consider the case in which Tom and Gerry just

made an offer to purchase a house. Two
outcomes are possible
E1 = their offer is accepted
E2 = their offer is rejected

 Gerry believes that P(E1) = 0.8 and P(E2) = 0.2

 Tom believes that P(E1) = 0.6 and P(E2) = 0.4
1. Tossing a coin 3 times.
2. You think you have a 95% chance of passing your next
business statistics exam. This is an example of which
approach to probability?
3. The estimate of number of defective parts based on
previous production data.
4. Your estimate of the probability of a pop quiz in class
on a given day.
5. The annual estimate of the number of deaths of
persons age 25.
6. The probability of drawing an Ace from a deck of
cards.
 There are some basic probability relationships that
can be used to compute the probability of an event
without knowledge of all the sample point
probabilities.

Complement of an Event

Union of Two Events

Intersection of Two Events

Mutually Exclusive Events

Mutually Exclusive Events

Events that cannot happen at the same time.

If events A and B are mutually exclusive, P(A  B = 0.

Complement of an Event

The complement of event A is defined to be

the event consisting of all sample points that
are not in A.

The complement of A is denoted by Ac or 𝐴ҧ

Sample
A Ac Space S
 Complement of an Event

Consider the case of a sales manager

who, after reviewing sales reports,
states that 80% of new customer
contacts result in no sale.
Union of Two Events

The union of events A and B is the event containing all sample points that are
in A or B or both.

The union of events A and B is denoted by A ‫ ڂ‬B.

Sample
Event A Event B Space S
Union of Two Events

The union of events A and B is the event containing all sample points that are
in A or B or both.

The union of events A and B is denoted by A ‫ ڂ‬B.

Sample
Event A Event B Space S
Intersection of Two Events

The intersection of events A and B is the set of all sample

points that are in both A and B.
The intersection of events A and B is denoted by A 

Sample
Event A Event B Space S
Intersection of Two Events

The intersection of events A and B is the set of all sample

points that are in both A and B.
The intersection of events A and B is denoted by A 

Sample
Event A Event B Space S

Intersection of A and B
 Addition Law

The addition law provides a way to compute the

probability of event A, or B, or both A and B occurring.

The law is written as:

P(A B) = P(A) + P(B) - P(A  B

 Addition Law

P(A B) = P(A) + P(B) - P(A  B

Let’s consider a class with 40 students. Below is a table
summarizing how the class is composed.

Achiever Non achiever

Male 6 10
Female 15 9
What is the P(Male  Non achiever)?
 Example

 Of 200 students taking the course in quantitative

techniques, 160 passed the midterm examination
and 140 passed the final examination; 124 students
passed both exams.

A = event of passing the midterm exam

B = event of passing the final exam
The relative frequency information leads to the following
probabilities
 P(A) = 160/200
 P(B) = 140/200
 P(A)  P(B) = 124/200
 Example

Consider a study involving the television-

viewing habits of married couples. It was
reported that 30% of the husbands and 20% of
the wives were regular viewers of “FPJ’s: Ang
Probinsyano”. For 12% of the couples in the study,
both husband and wife were regular viewers of
the said program.

What is the probability that at least one

member of a married couple is a regular viewer of
FPJ’s: “Ang Probinsyano”?
 Conditional Probability

The probability of an event given that another event has

occurred is called a conditional probability.

The conditional probability of A given B is denoted by

P(A|B).

A conditional probability is computed as follows :

P( A  B)
P( A|B) 
P( B)
 After reviewing the promotional record, a
committee of female officers filed a discrimination
case on the basis that only 36 female officers had
received promotions during the past two years.
 The police administration argued that the relatively
low number of promotions for female officers is due
not to discrimination but to the fact that few female
officers are on the force.
 Conditional Probability

Contingency Table for Promotional Status of Police Officers

During the Past 2 Years

Promoted Not Promoted Total

Men 288 672 960
Women 36 204 240
Total 324 876 1200

Let
M = event an officer is a man
W = event an officer is a woman
B = event an officer is promoted
 Conditional Probability

Joint Probability Table for Police Officers Promotions

Let
M = event an officer is a man 1. P(M|W)
W = event an officer is a woman
B = event an officer is promoted 2. P(W|M)
3. P(B|M)
4. P(B|W)
 Multiplication Law

The multiplication law provides a way to compute the

probability of the intersection of two events.

The law is written as:

P(A B) = P(B)P(A|B)

 Multiplication Law

P(A B) = P(B)P(A|B)

Example:
1. (T/F) Your Business Statistics lecturer is Rey Parcon.
2. (MC) The dean of IABF is
A. Mr. Ramil Baldres
B. Dr. Joselito Tem
C. Dr. Alma Emerita Dela Cruz
D. Dr. Marietta Israel
What is the probability of getting correct answers
in Q1 and Q2?
a. P(Red and Blue) with replacement
b. P(Red and Blue) without replacement
c. P(Green and Yellow and Red) without replacement
d. P(Blue and Blue and Blue) without replacement
A political telephone survey of 360 people asked whether they were in favor or
not in favor of a proposed law. Each person was identified as either Republican or
Democrat. The results are shown in the following table:

Party In Favor Not in Favor Undecided Total

Republican 98 54 40 192
Democrat 79 29 60 168
Total 177 83 100 360
1. What is the probability that a randomly selected respondent was in favor of the
proposed law?
2. What is the probability that a randomly selected respondent was a Democrat?
3. What is the probability that a randomly selected respondent was a Republican
and undecided about the proposed law?
4. What is the probability that a randomly selected respondent was a Democrat or
not in favor of the proposed law?
5. Given that the respondent was in favor of the proposed law, what is the
probability that they were a Republican?
 Often we begin probability analysis with initial or
prior probabilities.
 Then, from a sample, special report, or a product
test we obtain some additional information.
 Given this information, we calculate revised or
posterior probabilities.
 Bayes’ theorem provides the means for revising the
prior probabilities.

Application
Prior New Posterior
of Bayes’
Probabilities Information Probabilities
Theorem
 A proposed shopping center
will provide strong competition
for downtown businesses like
L. S. Clothiers. If the shopping
center is built, the owner of
L. S. Clothiers feels it would be best
to relocate to the center.
The shopping center cannot be built unless a
zoning change is approved by the town council. The
planning board must first make a recommendation,
for
or against the zoning change, to the council.
 Bayes’ Theorem

n Prior Probabilities
Let:
A1 = town council approves the zoning change
A2 = town council disapproves the change

Using subjective judgment:

P(A1) = .7, P(A2) = .3

 New Information
The planning board has recommended
against the zoning change. Let B denote the
event of a negative recommendation by the
planning board.
Given that B has occurred, should L. S.
Clothiers revise the probabilities that the town
council will approve or disapprove the zoning
change?
 Bayes’ Theorem

n Conditional Probabilities
Past history with the planning board and the
town council indicates the following:

P(B|A1) = .2 P(B|A2) = .9

Hence: P(BC|A1) = .8 P(BC|A2) = .1

 Bayes’ Theorem

Tree Diagram

Town Council Planning Board Experimental

Outcomes

P(B|A1) = .2
P(A1  B) = .14
P(A1) = .7
c
P(B |A1) = .8 P(A1  Bc) = .56

P(B|A2) = .9
P(A2  B) = .27
P(A2) = .3
c
P(B |A2) = .1 P(A2  Bc) = .03
 To find the posterior probability that event Ai will
occur given that event B has occurred, we apply
Bayes’ theorem.

P( Ai )P( B| Ai )
P( Ai |B) 
P( A1 )P( B| A1 )  P( A2 )P( B| A2 )  ...  P( An )P( B| An )

 Bayes’ theorem is applicable when the events for

which we want to compute posterior probabilities
are mutually exclusive and their union is the entire
sample space.
 Posterior Probabilities
Given the planning board’s recommendation
not to approve the zoning change, we revise the
prior probabilities as follows:
P( A1 )P( B| A1 )
P( A1 |B) 
P( A1 )P( B| A1 )  P( A2 )P( B| A2 )
(. 7)(. 2)

(. 7)(. 2)  (.3)(.9)
= .34
 Bayes’ Theorem

n Conclusion
The planning board’s recommendation is good
news for L. S. Clothiers. The posterior probability of
the town council approving the zoning change is .34
compared to a prior probability of .70.
 Step 1
Prepare the following three columns:
Column 1 - The mutually exclusive events for which
posterior probabilities are desired.
Column 2 - The prior probabilities for the events.
Column 3 - The conditional probabilities of the new
information given each event.
 (1) (2) (3) (4) (5)
Prior Conditional
Events Probabilities Probabilities
Ai P(Ai) P(B|Ai)

A1 .7 .2
A2 .3 .9
1.0
 Step 2
Column 4
Compute the joint probabilities for each event
and the new information B by using the
multiplication law.
Multiply the prior probabilities in column 2 by
the corresponding conditional probabilities in
column 3. That is, P(Ai IB) = P(Ai) P(B|Ai).
 (1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B)

A1 .7 .2 .14
A2 .3 .9 .27
.7 x .2
1.0
 Tabular Approach

n Step 2 (continued)
We see that there is a .14 probability of the town
council approving the zoning change and a negative
recommendation by the planning board.
There is a .27 probability of the town council
disapproving the zoning change and a negative
recommendation by the planning board.
 Step 3
Column 4
Sum the joint probabilities. The sum is the
probability of the new information, P(B). The sum
.14 + .27 shows an overall probability of .41 of a
negative recommendation by the planning board.
 (1) (2) (3) (4) (5)
Prior Conditional Joint
Events Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B)

A1 .7 .2 .14
A2 .3 .9 .27
1.0 P(B) = .41
 Step 4
Column 5
Compute the posterior probabilities using the
basic relationship of conditional probability.
P( Ai  B)
P( Ai | B) 
P( B)

The joint probabilities P(Ai I B) are in column

4 and the probability P(B) is the sum of column 4.
 (1) (2) (3) (4) (5)
Prior Conditional Joint Posterior
Events Probabilities Probabilities Probabilities Probabilities
Ai P(Ai) P(B|Ai) P(Ai I B) P(Ai |B)

A1 .7 .2 .14 .3415

A2 .3 .9 .27 .6585
1.0 P(B) = .41 1.0000
.14/.41