4

Introduction to
Probability
Business Statistics:
Communicating with Numbers, 4e

By Sanjiv Jaggia and Alison Kelly

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
2/12/23 consent of McGraw Hill.
4-1
Chapter 4 Learning Objectives (LOs)
LO 4.1 Describe fundamental probability
concepts.
LO 4.2 Apply the rules of probability.
LO 4.3 Calculate and interpret probabilities
from a contingency table.
LO 4.4 Apply the total probability rule and
Bayes’ theorem.
LO 4.5 Use a counting rule to calculate the
probability of an event.
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-2
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-2
 Introductory Case: 24/7 Fitness Center
Annual Membership
• A manager at 24/7 Fitness Center wants to develop a data-
driven strategy for selecting which new open house
attendees to contact.
• Data are available from 400 past open house attendees.

• Using the sample information:

a. Construct a contingency table and use it to calculate and interpret
relevant empirical probabilities concerning age and enrollment.
b. Use the empirical probabilities to develop a data-driven strategy for
selecting open house attendees.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-3

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-3
4.1 Fundamental Probability Concepts (1)
• Probability is simply the likelihood that something will happen under
uncertainty.
• A probability is a numerical value that measures the likelihood that an
event will occurs.
– The value is between zero (0) and one (1)
– 0 → indicates an event is quite unlikely to occur.
– 1 → indicates an event is almost certain to occur.
Probability as a Numerical Measure of the Likelihood of Occurrence

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-4

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-4
4.1 Fundamental Probability Concepts (1)
• An experiment is a process that leads to one of several
possible outcomes or generates well-defined outcomes.
– Actual outcome is not known with certainty before the
experiment begins
– Diversity of outcomes is due to uncertainty of the real world
• Example: Rolling a die Sample Space: S = {1, 2, 3, 4, 5, 6},
each sample point has 1/6 of chance of occurring

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-5

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-5
4.1 Fundamental Probability Concepts (2)
• Sample space for an experiment is the set of all experimental
outcomes.
– Denoted 𝑆
– Contains all possible outcomes of the experiment
• Examples:
– Sample space for Letter grades in a course: 𝑆 =
{𝐴, 𝐵+, 𝐵, 𝐶+, 𝐶, 𝐷+, 𝐷, 𝐹}
– Passing a course or not: 𝑆 = {𝑃, 𝐹}
• An event is a subset of the sample space.
– A simple event - if it contains a single outcome Ex. Getting
an A in a course
– May contain several outcomes of the experiment
• Example: a passing grade, 𝑝𝑎𝑠𝑠 = {𝐴, 𝐵, 𝐶, 𝐷}
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-6
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-6
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-7
 4.1 Fundamental Probability Concepts –
• Exhaustive eventsTypes of Event (3)
– All possible outcomes of an experiment belong to the events
– Include all outcomes in the sample space Ex: 𝑆 = {𝑃, 𝐹}
– P(A or B) = 1
• Mutually exclusive events
– The are events do not have any outcomes in common.
– The cannot occur at the same time.
– The events have no sample points in common.
– They are disjoint or not overlap. P (A and B) = 0
– The occurrence of one event precludes the occurrence of others
• Examples:
– Grades of A and B are not exhaustive events because they do not
include all feasible grades in the sample space. But, the events are
mutually exclusive.
– Pass and fail are exhaustive and mutually exclusive.
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-8
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-8
• Exhaustive event - a set of events are called
exhaustive events if at least one of them
necessarily occurs whenever the experiment
is performed.
• Mutually exclusive events are events that
can not happen at the same time. Examples
include: right and left hand turns, even and
odd numbers on a die, winning and losing a
game, or running and walking.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-9

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-9
 4.1 Fundamental Probability Concepts (4)
• We can define events based on one or more outcomes of the experiment
and also combine events to form new events.
• Venn Diagram - uses circles to show the relationships among things or
finite groups of things.
– Sample space S with a rectangle
– Two circles to represent the events A and B
• Union of two events
– Denoted 𝐴 ∪ 𝐵
– All outcomes in A or B (or both)
– The portion in the Venn diagram that is included in either A or B

• Example: the snowboarder’s medal sample space is defined as S = {gold,

silver, bronze, no medal}
• The following events were defined:
– A = {gold, silver, bronze}
– B = {silver, bronze, no medal}
– C = {no medal}
• Find A ∪ B and B ∪ C
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-10
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-10
 4.1 Fundamental Probability Concepts
SOLUTION
– A = {gold, silver, bronze}
– B = {silver, bronze, no medal}
– C = {no medal}
The union of A and B denotes all outcomes common to A or B.
• A ∪ B = {gold, silver, bronze, no medal}; no double
counting;
• B ∪ C = {silver, bronze, no medal}

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-11

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-11
4.1 Fundamental Probability Concepts (5)

• Intersection of two events

– Denoted 𝐴 ∩ 𝐵
– Event consisting of all outcomes in A and B
– The portion in the Venn diagram that is included in both
A and B, the overlap

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-12

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-12
 4.1 Fundamental Probability Concepts
• Example: the snowboarder’s medal sample space is defined
as S = {gold, silver, bronze, no medal}
• The following events were defined:
– A = {gold, silver, bronze}
– B = {silver, bronze, no medal}
– C = {no medal}
• Find A ∩ B and A ∩ C

SOLUTION:
The intersection of A and B denotes outcomes to A and B
• A ∩ B= {silver, bronze}
• A ∩ C= Ø; null or empty set
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-13
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-13
4.1 Fundamental Probability Concepts (6)

• Complement of an event A
– Denoted 𝐴!
– All outcomes in the sample space S that are not in A
– The portion in the Venn diagram that is everything in S that is
not included in A

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-14

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-14
 4.1 Fundamental Probability Concepts
• Example: the snowboarder’s medal sample space is defined
as S = {gold, silver, bronze, no medal}
• The following events were defined:
– A = {gold, silver, bronze}
– B = {silver, bronze, no medal}
– C = {no medal}
• Find Bc

• Solution:
The complement of B denotes all outcomes in S that are not in B
• Bc = {gold}

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-15

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-15
4.1 Assigning Probabilities
• Two defining properties of probability
1. The probability of an event A is a value between 0 and 1; that
is, 𝟎 ≤ 𝑷(𝑨) ≤ 𝟏.
2. The sum of the probabilities of any list of mutually exclusive
and exhaustive events equals 1.
• There are three types of probabilities.
– Subjective: calculated by drawing on personal and subjective
judgement
– Empirical: calculated as a relative frequency of occurrence
– Classical: based on logical analysis
• Empirical and classical probabilities do not vary, they
are often grouped as objective probabilities.
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-16
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-16
4.1 Assigning Probabilities
• Example: snowboarder’s subjective probabilities

• Construct a probability statement: P({no medal}) = 0.55, etc.

• Suppose Snowboarders wants to calculate probability to
earn a medal, so defining it as P(A)
• P(A) = P({gold}) + P({silver}) + P({bronze})
= 0.10 + 0.15 + 0.20 = 0.45

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-17

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-17
4.1 Assigning Probabilities
1. Calculate the probability that event B or event C occurs:
– A = {gold, silver, bronze}
– B = {silver, bronze, no medal}
– C = {no medal}
B ∪ C = {silver, bronze, no medal}
• P(B ∪ C) = P({silver}) + P({bronze}) + P({no medal})
= 0.15 + 0.20 + 0.55 = 0.90
2. Calculate the probability that event A and event C
• P(A ∩ C) = 0; there are no common outcomes in A and C
3. Calculate the complement of B
• P(Bc) = P({gold}) = 0.10

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-18

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-18
Example 2:
Tom and Judy make an offer to purchase a
house.

Possible outcomes: E1 = offer is accepted

E2 = offer is rejected
Judy’s Probability estimates
P(E1) = 0.8
P(E2) = 0.2
Tom’s probability estimates
P(E1) = 0.6
P(E2) = 0.4
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-19
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-19
4.1 Assigning Probabilities
• An empirical probability is calculated as a relative frequency
of occurrence (event occurs).
– Referencing data based on observation
– The experiment must be repeated a large number of times to be
accurate
• Example 1: frequency distribution for the ages of the richest
400 Americans.

– What is the probability that the individual is at least 50 but less than
60?
– What is the probability that the individual is younger than 60?
– What is the probability that the individual is at least 80?
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-20
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-20
4.1 Assigning Probabilities
• Example continued

• What is the probability that the individual is at least 50 but less than 60?
67
𝑃 𝐶 = = 0.1675
400
• What is the probability that the individual is younger than 60?
13 + 24 + 67
𝑃 𝐴∪𝐵∪𝐶 = = 0.26
400
• What is the probability that the individual is at least 80?
55 + 11
𝑃 𝐹∪𝐺 = = 0.17
400

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-21

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-21
Example 2: Waiting time in the X-ray department for a local
hospital. Consider a study of waiting times in the X-ray
department for a local hospital. A clerk recorded the
number of patients waiting for service at 9:00 A.M on 20
successive days and obtained the following results:

Each probability assignment is

given by dividing the frequency
(number of days) by the total
frequency (total number of
days).
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-22
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-22
4.1 Assigning Probabilities
• A classical probability is based on logical analysis
rather than observation.
– A narrow range of well-defined problems, games of chance
– Based on assumptions that all the outcomes are equally likely
– Computed as number of outcomes belonging to an event
divided by total number of outcomes
• According to the law of large numbers, the empirical
probability approaches the classical probability if the
experiment is run a very large number of times.
• Example: heads on a coin
– Flip a coin 10 times, heads may not show up 5 times
– Flip a coin a large number of times, heads will show up about half of the
time

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-23

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-23
4.1 Assigning Probabilities
• Example: suppose our experiment consists of rolling a six-
sided die
• 𝑆 = {1, 2, 3, 4, 5, 6}
• Here we recognize that each outcome is likely equal, so with
6 possible outcomes, each outcome has 1/6 chance to
occurs.
• What is the probability that we roll a 2?
𝑃 2 = !⁄" = 0.17
• What is the probability that we roll a 2 or 5?
𝑃 2 + 𝑃 5 = 196 + 196 = 193
• What is the probability that we roll an even number?
𝑃 2 + 𝑃 4 + 𝑃 6 = 196 + 196 + 196 = 192

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-24

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-24
 EXERCISES 4.1

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-25

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-25
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-26
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-27
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-28
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-29
 BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-30
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-30
 4.2 Rules of Probability (1)
• Complement rule
– Follows from one of the defining properties of
probability: 𝑃 𝐴 + 𝑃 𝐴, = 1
– The sum of probabilities assigned to simple
events in a sample space must equal
– Rearrange: 𝑷 𝑨𝒄 = 𝟏 − 𝑷(𝑨)

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-31

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-31
 4.2 Rules of Probability (2)

• Example: 37% of female and 30% of male open

house attendees will purchase a membership.
What is the probability that a randomly selected
female will not purchase a membership?
• Define A as the event that a randomly selected
female will purchase a membership.
• 𝑃 𝐴 = 0.37
• 𝑃 𝐴) = 1 − 𝑃 𝐴 = 1 − 0.37 = 0.63
• Male? 𝑃 𝐵 = 0.30 ; 𝑃 𝐵) = 1 − 𝑃 𝐵 = 1 −
0.30 = 0.70
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-32
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-32
 4.2 Rules of Probability (3)
• Addition rule
– Used to find the probability of the union of two events
– The probability that A or B occurs, or that at least one of these
events occurs
– 𝐏 𝐀∪𝑩 =𝐏 𝑨 +𝐏 𝑩 −𝐏 𝐀∩𝑩

• 𝑃 𝐴 ∩ 𝐵 is double-counted in both 𝑃 𝐴 and 𝑃 𝐵

• 𝑃 𝐴 ∩ 𝐵 is referred to as the joint probability

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-33

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-33
 4.2 Rules of Probability (4)

• Example: Anthony feels that he has a 75% chance

of getting an A in Statistics and a 55% chance of
getting an A in Managerial Economics. He also
believes he has a 40% chance of getting an A in
both classes.
a. What is the probability that he gets an A in at
least one of these courses?
b. What is the probability that he does not get an A
in either of these courses?

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-34

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-34
 4.2 Rules of Probability (5)
• Let 𝑃 𝐴# correspond to the probability of getting an A in
Statistics, 𝑃 𝐴# = 0.75
• Let 𝑃 𝐴$ correspond to the probability of getting an A in
Managerial Economics, 𝑃 𝐴$ = 0.55.
• Also, 𝑃 𝐴# ∩ 𝐴$ = 0.4
a. 𝑃 𝐴# ∪ 𝐴$ = 𝑃 𝐴# + 𝑃 𝐴$ − 𝑃 𝐴# ∩ 𝐴$
= 0.75 + 0.55 − 0.40
= 0.90
b. The probability that he does not receive an A in either of
these two courses is the complement of the union
– That is, 𝑃 𝐴! ∪ 𝐴" #
– Using the complement rule we have
𝑃 𝐴! ∪ 𝐴" # = 1 − 𝑃 𝐴! ∪ 𝐴" = 1 − 0.90 = 0.10

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-35

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-35
 4.2 Rules of Probability (6)
• For mutually exclusive events A and B, the
probability of their intersection is zero 𝑃 𝐴 ∩ 𝐵 = 0.

A B

S
• There is no double counting
• 𝑃 𝐴∪𝐵 =𝑃 𝐴 +𝑃 𝐵

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-36

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-36
 Conditional probability

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-37

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-37
 4.2 Rules of Probability (7)
• Suppose the probability that a recent business college
graduate finds a suitable job is 0.80.
– Let A represent finding a job, 𝑃 𝐴 = 0.80.
– This is not conditional on another event, so it is an unconditional
probability.
• The probability of finding a suitable job is 0.90 if the recent
business graduate has prior work experience.
– Let B represent prior work experience, 𝑃 𝐴|𝐵 = 0.90.
– The probability of an event is conditional on the occurrence of
another event, so it is a conditional probability.
• The probability of finding a suitable job increases from
0.80 to 0.90 when conditioned on prior work experience.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-38

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-38
 4.2 Rules of Probability (8)

• The conditional probability, 𝑃 𝐴 𝐵 , is greater

than the unconditional probability 𝑃(𝐴) when
B exerts a positive influence on A.
• The conditional probability, 𝑃 𝐴 𝐵 , is less
than the unconditional probability 𝑃(𝐴) when
B exerts a negative influence on A.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-39

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-39
 4.2 Rules of Probability (9)
• Let two events A and B each have a positive probability
of occurring.
• The conditional probability that A occurs given that B
𝑷(𝑨∩𝑩)
has occurred is derived as 𝑷 𝑨 𝑩 = .
𝑷(𝑩)
• Because 𝑃 𝐴 𝐵 is conditional on B (B has occurred),
the sample space reduces to B.
• 𝑃 𝐴 𝐵 is the 𝐴 ∩ 𝐵 portion in the Venn diagram that is
included in 𝐵.

+(,∩-)
• Similarly, 𝑃 𝐵 𝐴 = +(,)
.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-40

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-40
 4.2 Rules of Probability (10)

• Example: An economist predicts a 60%

chance that country A will perform poorly
and a 25% chance that country B will
perform poorly. There is also a 16% chance
that both countries will perform poorly.
• What is the probability that country A
performs poorly given that country B
performs poorly?

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-41

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-41
 4.2 Rules of Probability (11)
• Let A represent the event that country A performs poorly, 𝑃 𝐴 =
0.60.
• Let B represent the event that country B performs poorly, 𝑃 𝐵 =
0.25.
• The probability that country A performs poorly and country B
performs poorly is 𝑃 𝐴 ∩ 𝐵 = 0.16.
• The probability that country A performs poorly given country B
"($∩&) (.*+
performs poorly is 𝑃 𝐴|𝐵 = = = 0.64.
"(&) (.,-
• The conditional probability is greater than the unconditional
probability, so country B performing poorly exerts a positive
influence on country A performing poorly from 60%-64%.
"($∩&) (.*+
• 𝑃 𝐵|𝐴 = = = 0.27.
"($) (.+(
• The probability that country B performs poorly increases from
25% - 27%, when conditioned on country A performing poorly.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-42

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-42
 4.2 Rules of Probability (12)
• MULTIPLICATION RULE
• We can find the joint probability as the product of
probabilities using the conditional probability formula; this is
the multiplication rule.
• The joint probability of events A and B is derived as
𝑷 𝑨∩𝑩 =𝑷 𝑨 𝑩 𝑷 𝑩 .

• Example: A manager believes that 14% of consumers will

respond positively to the firm’s social media. Also, 24% of
those who respond positively will be come loyal customers.
• What is the probability that the next recipient of their social
media campaign will react positively and become a loyal
customer?
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-43
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-43
 4.2 Rules of Probability (13)

• Example continued
• Let R represent the event that a consumer who
responds positively to a social media campaign, so
𝑃 𝑅 = 0.14.
• Let L represent the event that a consumer is loyal, so
𝑃 𝐿|𝑅 = 0.24.
• The probability that a consumer responds positively to
a social media campaign and is loyal is given by
𝑃 𝑅 ∩ 𝐿 = 𝑃 𝐿 𝑅 𝑃 𝑅 = 0.24×0.14 = 0.0336.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-44

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-44
 4.2 Rules of Probability (14)

• INDEPENDENT versus DEPENDENT EVENT

• Two events are independent if the occurrence of one
event does not affect the probability of the occurrence
of the other event.
• Events are considered dependent if the occurrence of
one is related to the probability of the occurrence
of the other event.
• Two events, A and B, are independent if
– 𝑃 𝐴 𝐵 = 𝑃(𝐴) or, equivalently,
– 𝑃 𝐴∩𝐵 =𝑃 𝐴 𝑃 𝐵 .

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-45

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-45
 4.2 Rules of Probability (15)

• Example: Suppose that for a given year there is

a 2% chance that your desktop computer will
crash and a 6% chance that your laptop
computer will crash.
• Moreover, there is a 0.12% chance that both
computers will crash.
• Is the reliability of the two computers
independent of each other?

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-46

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-46
 4.2 Rules of Probability (16)
• Example continued
• Let D represent the outcome that your desktop
crashes, 𝑃 𝐷 = 0.02
• Let L represent the outcome that your laptop
crashes, 𝑃 𝐿 = 0.06
• The joint probability is 𝑃(𝐷 ∩ 𝐿) = 0.0012
;(=∩>) @.@@AB
• Calculate 𝑃 𝐷 𝐿 = = = 0.02
;(>) @.@C
• So, 𝑃 𝐷 𝐿 = 𝑃 𝐷 . If your laptop crashes, it does
not alter the probability that your desktop also
crashes
• The reliability of the two computers is independent

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-47

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-47
 EXERCISES 4.2

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-48

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-48
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-49
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-50
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-51
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-52
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-53
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-54
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-55
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-56
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-57
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-58
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-59
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-60
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-61
 Review

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-62

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-62
4.3 Contingency Tables and Probabilities (1)
• A contingency table is useful when examining
the relationship between two categorical
variables.
• It shows the frequencies for two categorical
variables, x and y.
• Each cell represents a mutually exclusive
combination of the pair of x and y values.
• We can estimate an empirical probability by
calculating the relative frequency to the
occurrence of the event.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-63

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-63
4.3 Contingency Tables and Probabilities (2)
• Example: enrollment and age group from the introductory case

a. What is the probability that a randomly selected attendee

enrolls in the fitness center?
b. What is the probability that a randomly selected attendee is
over 50 years old?
c. What is the probability that a randomly selected attendee
enrolls in the fitness center and is over 50 years old?
d. What is the probability that an attendee enrolls in the fitness
center, given the attendee is over 50 years old?

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-64

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-64
4.3 Contingency Tables and Probabilities (3)
• Example continued

• Let E denote the event of enrolling in the fitness center.

• Let O denote the event of being over 50 years old.
a. What is the probability that a randomly selected attendee
enrolls in the fitness center?
140
𝑃 𝐸 = = 0.35
400
b. What is the probability that a randomly selected attendee is
over 50 years old?
132
𝑃 𝑂 = = 0.33
400
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-65
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-65
4.3 Contingency Tables and Probabilities (4)
• Example continued

c. What is the probability that a randomly selected attendee

enrolls in the fitness center and is over 50 years old?
44
𝑃 𝐸∩𝑂 = = 0.11
400
d. What is the probability that an attendee enrolls in the
fitness center, given the attendee is over 50 years old?
44
𝑃 𝐸𝑂 = = 0.33
132
"(.∩/) (.**
𝑃 𝐸𝑂 = = = 0.33
"(/) (.00

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-66

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-66
4.3 Contingency Tables and Probabilities (5)
• A more convenient way of calculating relevant
probabilities is to convert the contingency table to a
joint probability table.
• Divide the frequency in each cell by the number
of outcomes.
• The values in the margins of the table represent
unconditional probabilities also referred to as
marginal probabilities.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-67

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-67
 Exercises 4.3

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-68

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-68
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-69
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-70
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-71
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-72
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-73
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-74
 EXERCISE 4.3. 35
a. P(F) = 0.145+0.105+0.045 = 0.295
b. P(H) = 0.335 + 0.145 = 0.48
c. P(H I F) = 0.145 / 0.295 = 0.4915
d. P(M I W) = 0.165 / 0.21 = 0.7857
e. NOT INDEPENDENT = 0.7857 IS NOT
EQUAL 0.705

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-75

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-75
 36.
MAJOR Y N TOTAL
BUSINESS (B) 20 100 120
NON BUS ( BC) 48 102 150
TOTAL 68 202 270

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-76

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-76
 36.
b. P(NIB) = 100/120
c. P(Y) = 68/270
d. P(BIY) = 20/68 ; P(Bc IY) = 48/68

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-77

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-77
 37.

Global Warning Democrat Republican Total

Y 280 120 400
N 120 280 400
Total 400 400 800

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-78

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-78
 40.
America: P(L I M) = P(L)
P(L I M) = 210 / (210 + 290 )= 0.42
P(L) = (210 + 370) / 1200 = 0.48
NOT INDEPENDENT
EUROPE : P(L I M) = 150 / (150+150) = 0.50
P(L) = (150 + 310)/800 = 0.58
NOT INDEPENDENT
ASIA: 120 / (120+80) = 0.60
P(L) = (120+180)/500 = 0.60
INDEPENDENT

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-79

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-79
 4.4 The Total Probability Rule and Bayes’
Theorem (2)
• TOTAL PROBABILITY RULE – use for breaking computation of a
probability into distinct cases.
• The total probability rule expresses the probability of an event, 𝐴, in
terms of probabilities of the intersection of 𝐴 with any mutually
exclusive and exhaustive events.
• The total probability rule based on two events, 𝐵 and 𝐵! , is given by
𝑷 𝑨 = 𝑷 𝑨 ∩ 𝑩 + 𝑷 𝑨 ∩ 𝑩𝒄 .

• We can also use the multiplication rule to obtain the joint

probabilities P A ∩ 𝐵 = 𝑃 𝐴|𝐵 𝑃 𝐵 𝑎𝑛𝑑 𝑃 𝐴 ∩ 𝐵! =𝑃 𝐴|𝐵! 𝑃 𝐵! .

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-80

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-80
 4.4 The Total Probability Rule and Bayes’
Theorem (3)
• BAYES’ THEOREM is a procedure for updating probabilities based
on new information (evidence); it uses the total probability rule.
• The original probability is an unconditional probability called a
prior probability, in the sense that it reflects only what we know
before the arrival of new information.
• On the basis of new information, we update the prior probability to
arrive at a conditional probability called a posterior probability.
• The posterior probability 𝑃 𝐵|𝐴 can be found using the
information on the prior probability 𝑃 𝐵 along with conditional
probabilities as
"($∩&) "($∩&) "($|&)"(&)
𝑃 𝐵|𝐴 = = = .
"($) " $∩& 2"($∩&! ) " $|& "(&)2" $|&! "(&! )

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-81

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-81
4.4 The Total Probability Rule and Bayes’
Theorem (4)
• Example: In a lie-detector test, an individual is asked to answer a
series of questions while connected to a polygraph (lie detector).
• This instrument measures and records several physiological
responses of the individual on the basis that false answers will
produce distinctive measurements.
• Assume that 99% of the individuals who go in for a polygraph test
tell the truth.
• These tests are considered to be 95% reliable.
• In other words, there is a 95% chance that the test will detect a lie if
an individual actually lies.
• Let there also be a 0.5% chance that the test erroneously detects a
lie even when the individual is telling the truth.
• An individual has just taken a polygraph test and the test has
detected a lie. What is the probability that the individual was actually
telling the truth?

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-82

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-82
4.4 The Total Probability Rule and Bayes’
Theorem (5)
• Example continued
• Let D and T correspond to the events that the polygraph
detects a lie and that an individual is telling the truth,
𝑃 𝑇 = 0.99 and 𝑃 𝑇 . = 0.01.
• We formulate 𝑃 𝐷|𝑇 . = 0.95 and 𝑃 𝐷|𝑇 = 0.005.
• We can use Bayes’ theorem to find
𝑃(𝐷|𝑇)𝑃(𝑇)
𝑃 𝑇|𝐷 =
𝑃 𝐷|𝑇 𝑃(𝑇) + 𝑃 𝐷|𝑇 , 𝑃(𝑇 , )
@.@@D∗@.FF
= @.@@D∗@[email protected]∗@.@A = 0.34256

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-83

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-83
4.4 The Total Probability Rule and Bayes’
Theorem (6)
• Example continued
• We can also use the below table to help solve the problem
systematically.

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-84

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-84
 4.4 Extention of The Total Probability Rule
and Bayes’ Theorem (7)
• We can extend the analysis to include an n mutually
exclusive and exhaustive events 𝐵A , 𝐵B , ⋯ , 𝐵H .

;(J∩K! ) ;(J∩K! )
𝑃 𝐵I |𝐴 = =
;(J) ; J∩K" G; J∩K# G⋯G;(J∩K$ )

𝑃(𝐴|𝐵/ )𝑃(𝐵/ )
𝑃 𝐵/ |𝐴 =
𝑃 𝐴|𝐵! 𝑃 𝐵! + 𝑃 𝐴|𝐵0 𝑃 𝐵0 + ⋯ + 𝑃 𝐴|𝐵1 𝑃 𝐵1

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-85

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-85
4.4 The Total Probability Rule and Bayes’
Theorem (8)
• Example: Scott Myers is a security analyst for a
telecommunications firm called Webtalk.
– Although he is optimistic about the firm’s future, he is concerned that its
stock price will be considerably affected by the condition of credit flow in
the economy.
– He believes that the probability is 0.20 that credit flow will improve
significantly, 0.50 that it will improve only marginally, and 0.30 that it will
not improve at all.
– He also estimates that the probability that the stock price of Webtalk will
go up is 0.90 with significant improvement in credit flow in the economy,
0.40 with marginal improvement in credit flow in the economy, and 0.10
with no improvement in credit flow in the economy.
• Based on Scott’s estimates, what is the probability that the stock
price of Webtalk goes up?
• If we know that the stock price of Webtalk has gone up, what is
the probability that credit flow in the economy has improved
significantly?

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-86

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-86
4.4 The Total Probability Rule and Bayes’
Theorem (9)
• Example continued

• Use the multiplication rule to get the joint probabilities, e.g.

𝑃 𝐺 ∩ 𝑆 = 𝑃 𝐺 𝑆 𝑃 𝑆 = 0.20 ∗ 0.90 = 0.18
• Then find 𝑃 G = 𝑃 𝐺 ∩ 𝑆 + 𝑃 𝐺 ∩ 𝑀 + 𝑃 𝐺 ∩ 𝑁 = 0.41
+(2∩#) +(2∩#)
• Lastly, 𝑃 𝑆 𝐺 = +(2)
= + 2∩# 3+ 2∩$ 3+ 2∩4
= 0.4390

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-87

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-87
 Exercises 4.4

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-88

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-88
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-89
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-90
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-91
Prior Prob Conditional Prob Joint P Posterior Prob
P(T) = 0.5 P(FIT) = 0.10 0.05 P(TIF) = 0.20
P(Tc) = 0.5 P(FITC)= 0.40 0.2 0.8
Total = 1 TOTAL = 0.25 1

𝑷 𝑭 = 𝑷 𝑭 ∩ 𝑻 + 𝑷 𝑭 ∩ 𝑻𝒄

P(T I F) = P(F int T) / P(T) P(Tc)

P F ∩ 𝑇 = 𝑃 𝐹|𝑇 𝑃 𝑇 𝑎𝑛𝑑 𝑃 𝐹 ∩ 𝑇 # =𝑃 𝐴|𝐵 # 𝑃 𝐵 #

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-92

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-92
45.
A. P(F I TC) = .40; P(F I T) = 0.10 ; P(T)
=0.50
• 𝑷 𝑭 = 𝑷 𝑭 ∩ 𝑻 + 𝑷 𝑭 ∩ 𝑻𝒄 .
• 𝑃 𝐹 = 𝑃 𝐹|𝑇 𝑃 𝑇 + 𝑃 𝐹|𝑇 " 𝑃 𝑇 "
• ( 0.10 *0.50 )+ (0.40 * 0.50)
• 0.25

• B. P(TIF) = 𝑷 𝑭 ∩ 𝑻 / 𝑷(𝑭) = 0.05/ 0.25 =

0.2
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-93
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-93
4.6
Prior Prob Cond prob Joint Prob Post Prob
P(D) = 0.20 P(NID) = 0.70 .2*.7 =0.14 .14/.26 = 0.54
P(Dc) =0.80 P(NIDC) = 0.15 .8*.15 = 0.12 0.12/.26 = 0.46
Total = 1 0.26 1

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-94

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-94
 Exercise 4.4
• 4.6
• P(D) = 0.20
• P(NID) = 0.70
• P(NIDC)=0.15
• P(N) = 0.70 *.20 + 0.15*.80 = 0.26
• P(DIN) = 0.70 * .2 / 0.26 = 0.54

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-95

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-95
47. P(D I S ) = 0.98
• P(D I SC) = 0.01
• P(SC )= 0.95
A. P(D INT S) = 0.98(1-0.95)= 0.049
B. P(D INT SC) = 0.0095
C. P(SC I D) = 0.1624

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-96

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-96
 4.5 Counting Rules (1)
• In several areas of statistics, e.g. the binomial distribution,
calculating probabilities involves defining and counting
outcomes.
– Factorials
– Combinations
– Permutations
• The number of ways to assign every member of a group of
size n to n slots is calculated using the factorial formula.
𝑛! = 𝑛× 𝑛 − 1 × 𝑛 − 2 × 𝑛 − 3 × ⋯×1
• By definition 0! = 1
• This gives the number of arrangements of the n items
• We apply the factorial when there no groups

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-97

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-97
 4.5 Counting Rules (2)
• Example: a little-league coach has nine
players on his team and has to assign each
of the players to one of the nine positions. In
how many ways can the assignments be
made?
• The first player may be assigned to nine
positions.
– Then eight remain for the second player
• Then seven for the third player and so on
• 𝑛 = 9 so 9! = 9×8×7× ⋯×1 = 362,880

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-98

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-98
 4.5 Counting Rules (3)
• The combination formula applies to two groups of
predetermined size.
• The order of the arrangement does not matter.
• The number of ways to choose x objects from a
total of n objects, where the order does not
matters, is calculated using the combination
formula.
𝑛 𝑛!
𝑛𝐶𝑥 = 𝑥 =
𝑛 − 𝑥 ! 𝑥!

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-99

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-99
 4.5 Counting Rules (4)

• Example: the little-league coach recruits 3 more

players, now his team totals 12.
• How many ways can the coach select nine players
from the 12-player roster?
12 12!
12𝐶9 = = = 220
9 12 − 9 ! 9!
• This places 9 players on the field with no concern
for position.
• What is the probability that the coach selects a
particular line up? 1/220 – 0.0045
BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-100
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-100
 4.5 Counting Rules (5)
• The permutation formula applies to two groups of
predetermined size.
• The order of the arrangement matters.
• Look for a specific reference to the order being
important.
• The number of ways to choose x objects from a
total of n objects, where the order does matter, is
calculated using the combination formula.
𝑛!
𝑛𝑃𝑥 =
𝑛−𝑥 !

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-101

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-101
 4.5 Counting Rules (6)

• Example: the little-league coach recognizes that

the nine positions are different.
• How many ways can the coach assign his 12-
player roster to the 9 different positions?
12!
12𝑃9 = = 79,833,600
12 − 9 !
• There is a big different between the number of
combinations and permutations!

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-102

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-102
 Exercise 4.5

BUSINESS STATISTICS: COMMUNICATING WITH NUMBERS, 4e | Jaggia, Kelly 4-103

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution withoutofthe
McGraw Hill. consent of McGraw Hill.
prior written 4-103
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-104
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw Hill.
4-105