Managerial Statistics

Session 04

Prof. Amol S. Dhaigude

Slide 1
Recap Session 03

Slide 2
Warm-up Exercises

Slide 3
 1. Nuts and Bolts

In a Nut and bolt factory , machine A, B and C

manufacture 25 per cent, 35 per cent and 40
per cent of the total output, respectively. Of
the total of their output, 5, 4 and 2 per cent
are defective bolts. A bolt is drawn at random
and is found to be defective. What is the
probability that it was manufactured by
machine A, B or C.

Slide 4
 2. Rains and Marriage

Marie is getting married tomorrow, at an

outdoor ceremony in the desert. In recent
years, it has rained only 5 days each year.
Unfortunately, the weatherman has predicted
rain for tomorrow. When it actually rains, the
weatherman correctly forecasts rain 90% of
the time. When it doesn't rain, he incorrectly
forecasts rain 10% of the time. What is the
probability that it will rain on the day of
Marie's wedding?
Slide 5
 Discrete Probability Distributions
Session 04-06

Random Variables
Discrete Probability Distributions
Expected Value and Variance
Bivariate Distributions, Covariance,
and Financial Portfolios
Binomial Probability .40

Distribution .30

Poisson Probability .20

Distribution .10

Hypergeometric Probability
0 1 2 3 4
Distribution

Slide 6
 Random Variables

A random variable is a numerical description of the

outcome of an experiment.

A discrete random variable may assume either a

finite number of values or an infinite sequence of
values.

A continuous random variable may assume any

numerical value in an interval or collection of
intervals.

Slide 7
 Discrete Random Variable
with a Finite Number of Values
Example: JSL Appliances

Let x = number of TVs sold at the store in one day,

where x can take on 5 values (0, 1, 2, 3, 4)

We can count the TVs sold, and there is a finite

upper limit on the number that might be sold (which
is the number of TVs in stock).

Slide 8
 Discrete Random Variable
with an Infinite Sequence of Values
Example: JSL Appliances

Let x = number of customers arriving in one day,

where x can take on the values 0, 1, 2, . . .

We can count the customers arriving, but there is

no finite upper limit on the number that might arrive.

Slide 9
 Random Variables

Question Random Variable x Type

Family x = Number of dependents Discrete

size reported on tax return

Distance from x = Distance in miles from Continuous

home to store home to the store site
Own dog x = 1 if own no pet; Discrete
or cat = 2 if own dog(s) only;
= 3 if own cat(s) only;
= 4 if own dog(s) and cat(s)

Slide 10
 Discrete Probability Distributions

The probability distribution for a random variable

describes how probabilities are distributed over
the values of the random variable.

We can describe a discrete probability distribution

with a table, graph, or formula.

Slide 11
 Discrete Probability Distributions

Two types of discrete probability distributions will

be introduced.

First type: uses the rules of assigning probabilities

to experimental outcomes to determine probabilities
for each value of the random variable.

Second type: uses a special mathematical formula

to compute the probabilities for each value of the
random variable.

Slide 12
 Discrete Probability Distributions

The probability distribution is defined by a

probability function, denoted by f(x), that provides
the probability for each value of the random variable.

The required conditions for a discrete probability

function are:
f(x) > 0

f(x) = 1

Slide 13
 Discrete Probability Distributions

There are three methods for assign probabilities to

random variables: the classical method, the subjective
method, and the relative frequency method.

The use of the relative frequency method to develop

discrete probability distributions leads to what is
called an empirical discrete distribution.
example
on next
slide

Slide 14
 Discrete Probability Distributions

Example: JSL Appliances

• Using past data on TV sales, …
• a tabular representation of the probability
distribution for TV sales was developed.
Number 80/200
Units Sold of Days x f(x)
0 80 0 .40
1 50 1 .25
2 40 2 .20
3 10 3 .05
4 20 4 .10
200 1.00
Slide 15
 Discrete Probability Distributions

Example: JSL Appliances

Graphical
.50 representation
of probability
.40 distribution
Probability

.30
.20
.10

0 1 2 3 4
Values of Random Variable x (TV sales)

Slide 16
 Discrete Probability Distributions

In addition to tables and graphs, a formula that

gives the probability function, f(x), for every value
of x is often used to describe the probability
distributions.

Several discrete probability distributions specified

by formulas are the discrete-uniform, binomial,
Poisson, and hypergeometric distributions.

Slide 17
Discrete Uniform Probability Distribution

The discrete uniform probability distribution is the

simplest example of a discrete probability
distribution given by a formula.

The discrete uniform probability function is

f(x) = 1/n the values of the

random variable
are equally likely
where:
n = the number of values the random
variable may assume

Slide 18
 Expected Value

The expected value, or mean, of a random variable

is a measure of its central location.
E(x) =  = xf(x)

The expected value is a weighted average of the

values the random variable may assume. The
weights are the probabilities.

The expected value does not have to be a value the

random variable can assume.

Slide 19
 Variance and Standard Deviation

The variance summarizes the variability in the

values of a random variable.

Var(x) =  2 = (x - )2f(x)

The variance is a weighted average of the squared

deviations of a random variable from its mean.
The weights are the probabilities.

The standard deviation, , is defined as the

positive square root of the variance.

Slide 20
 Expected Value
Example: JSL Appliances

x f(x) xf(x)
0 .40 .00
1 .25 .25
2 .20 .40
3 .05 .15
4 .10 .40
E(x) = 1.20

expected number of
TVs sold in a day

Slide 21
 Variance
Example: JSL Appliances

x x- (x - )2 f(x) (x - )2f(x)

0 -1.2 1.44 .40 .576
1 -0.2 0.04 .25 .010
2 0.8 0.64 .20 .128
3 1.8 3.24 .05 .162 TVs
4 2.8 7.84 .10 .784 squared
Variance of daily sales =  2 = 1.660
Standard deviation of daily sales = 1.2884 TVs

Slide 22
 Bivariate Distributions

A probability distribution involving two random

variables is called a bivariate probability distribution.

Each outcome of a bivariate experiment consists of

two values, one for each random variable.
Example: rolling a pair of dice

When dealing with bivariate probability distributions,

we are often interested in the relationship between
the random variables.

Slide 23
A Bivariate Discrete Probability Distribution
Example 1: A company conducted an experiment of
observing a day of its operations and recording
number of cars sold at Gen. and Sar. Dealerships. The
crosstabulation below shows the data for 300 days.

Sar. Dealership (y)

Gen.
Dealership (x) 0 1 2 3 4 5 Total

0 21 30 24 9 2 0 86

1 21 36 33 18 2 1 111

2 9 42 9 12 3 2 77

3 3 9 6 3 5 0 26

Total 54 117 72 42 12 3 300

Slide 24
 Bivariate Empirical Prob Distribution

Sar. Dealership (y)

Gen. Dealership
(x) 0 1 2 3 4 5 Total

0 0.0700 0.1000 0.0800 0.0300 0.0067 0.0000 0.2867

1 0.0700 0.1200 0.1100 0.0600 0.0067 0.0033 0.3700

2 0.0300 0.1400 0.0300 0.0400 0.0100 0.0067 0.2567

3 0.0100 0.0300 0.0200 0.0100 0.0167 0.0000 0.0867

Total 0.18 0.39 0.24 0.14 0.04 0.01 1

Slide 25
 A Bivariate Discrete Probability Distribution
◼ Covariance for Random Variables x and y

Varxy = [Var(x + y) – Var(x) – Var(y)]/2

Slide 26
Variance x

X f(x) xf(x) x-E(X) (x-E(x))^2 f(x)* (x-E(x)^2

0 0.2867 0 -1.1433 1.3072 0.3747

1 0.3700 0.37 -0.1433 0.0205 0.0076

2 0.2567 0.5133 0.8567 0.7339 0.1884

3 0.0867 0.26 1.8567 3.4472 0.2988

E (x) = 1.1433 Var (x) = 0.8695

S.D. of x = 0.8695 = 𝟎. 𝟗𝟑𝟐𝟓

Slide 27
Variance y

y f(y) yf(y) y-E(y) (y-E(y))^2 f(y)* (x-E(y)^2

0 0.18 0 -1.5000 2.2500 0.4050

1 0.39 0.39 -0.5000 0.2500 0.0975

2 0.24 0.48 0.5000 0.2500 0.0600

3 0.14 0.42 1.5000 2.2500 0.3150

4 0.04 0.16 2.5000 6.2500 0.2500

5 0.01 0.05 3.5000 12.2500 0.1225

E (y) = 1.5000 Var (y) = 1.2500

S.D. of y = 1.25 = 𝟏. 𝟏𝟏𝟖𝟎 Slide 28

Variance (x + y)

s f(s) sf(s) s-E(s) (s-E(s))^2 f(s)* (x-E(s)^2

0 0.07 0 -2.6432 6.9865 0.4891
1 0.17 0.17 -1.6432 2.7001 0.4590
2 0.23 0.46 -0.6432 0.4137 0.0952
3 0.29 0.87 0.3568 0.1273 0.0369
4 0.1267 0.5068 1.3568 1.8409 0.2332
5 0.0667 0.3335 2.3568 5.5545 0.3705
6 0.0233 0.1398 3.3568 11.2681 0.2625
7 0.0233 0.1631 4.3568 18.9817 0.4423
8 0 0 5.3568 28.6953 0.0000
E(s) = 2.6432 Var (s) = 2.3887

Slide 29
 A Bivariate Discrete Probability Distribution
◼ Covariance for Random Variables x and y

Varxy = [Var(x + y) – Var(x) – Var(y)]/2

Varxy = [2.39 – 0.87 – 1.25]/2 = 0.1350

◼ Covariance of .1350 What does it mean?

Slide 30
 A Bivariate Discrete Probability Distribution
◼ Correlation Between Variables x and y
 xy
 xy =
 x y

= .1350/ .8696 ∗ ( 1.25)

= .1295
◼ Correlation coefficient of .1295. What does it mean?

Slide 31
A Bivariate Discrete Probability Distribution
Example 2: A company asked 200 of its employees
how they rated their benefit package and job
satisfaction. The crosstabulation below shows the
ratings data.

Benefits Job Satisfaction (y)

Package (x) 1 2 3 Total
1 28 26 4 58
2 22 42 34 98
3 2 10 32 44

Total 52 78 70 200

Slide 32
A Bivariate Discrete Probability Distribution

The bivariate empirical discrete probabilities for

benefits rating and job satisfaction are shown below.

Benefits Job Satisfaction (y)

Package (x) 1 2 3 Total
1 .14 .13 .02 .29
2 .11 .21 .17 .49
3 .01 .05 .16 .22
Total .26 .39 .35 1.00

Slide 33
A Bivariate Discrete Probability Distribution
Expected Value and Variance for Benefits Package, x

x f(x) xf(x) x - E(x) (x - E(x))2 (x - E(x))2f(x)

1 0.29 0.29 -0.93 0.8649 0.250821

2 0.49 0.98 0.07 0.0049 0.002401

3 0.22 0.66 1.07 1.1449 0.251878

E(x) = 1.93 Var(x) = 0.505100

Slide 34
A Bivariate Discrete Probability Distribution
Expected Value and Variance for Job Satisfaction, y

y f(y) yf(y) y - E(y) (y - E(y))2 (y - E(y))2f(y)

1 0.26 0.26 -1.09 1.1881 0.308906

2 0.39 0.78 -0.09 0.0081 0.003159

3 0.35 1.05 0.91 0.8281 0.289835

E(y) = 2.09 Var(y) = 0.601900

Slide 35
 A Bivariate Discrete Probability Distribution
◼ Expected Value and Variance for Bivariate Distrib.

s f(s) sf(s) s - E(s) (s - E(s))2 (s - E(s))2f(s)

2 0.14 0.28 -2.02 4.0804 0.571256

3 0.24 0.72 -1.02 1.0404 0.249696
4 0.24 0.96 -0.02 0.0004 0.000960
5 0.22 1.10 0.98 0.9604 0.211376
6 0.16 0.96 1.98 3.9204 0.627264
E(s) = 4.02 Var(s) = 1.660552

Slide 36
 A Bivariate Discrete Probability Distribution
◼ Covariance for Random Variables x and y

Varxy = [Var(x + y) – Var(x) – Var(y)]/2

Varxy = [1.660552 – 0.5051 – 0.6019]/2 = 0.276776

Slide 37
 A Bivariate Discrete Probability Distribution
◼ Correlation Between Variables x and y
 xy
 xy =
 x y

x = 0.5051 = 0.7107038

 y = 0.6019 = 0.7758221
 xy = 0.276776 = 0.526095

0.526095
 xy = = 0.954
0.7107038(0.7758221)

Slide 38
End of Session 04

Questions & Answers

Slide 39