Chapter 4

Probability

Chap 4-1
 Chapter Goals
After completing this chapter, you should be
able to:
n Explain basic probability concepts and definitions

n Use a Venn diagram or tree diagram to illustrate

simple probabilities
n Apply common rules of probability

n Compute conditional probabilities

n Determine whether events are statistically

independent
n Use Bayes’ Theorem for conditional probabilities

Chap 4-2
 Important Terms

n Random Experiment – a process leading to an

uncertain outcome
n Basic Outcome – a possible outcome of a
random experiment
n Sample Space – the collection of all possible
outcomes of a random experiment
n Event – any subset of basic outcomes from the
sample space

Chap 4-3
 Important Terms
(continued)

n Intersection of Events – If A and B are two

events in a sample space S, then the
intersection, A ∩ B, is the set of all outcomes in
S that belong to both A and B

A AÇ B B

Chap 4-4
 Important Terms
(continued)

n A and B are Mutually Exclusive Events if they

have no basic outcomes in common
n i.e., the set A ∩ B is empty

A B

Chap 4-5
 Important Terms
(continued)

n Union of Events – If A and B are two events in a

sample space S, then the union, A U B, is the
set of all outcomes in S that belong to either
A or B
S The entire shaded
area represents
A B AUB

Chap 4-6
 Important Terms
(continued)

n Events E1, E2, … Ek are Collectively Exhaustive

events if E1 U E2 U . . . U Ek = S
n i.e., the events completely cover the sample space

n The Complement of an event A is the set of all

basic outcomes in the sample space that do not
belong to A. The complement is denoted A
S
A
A

Chap 4-7
 Examples
Let the Sample Space be the collection of all
possible outcomes of rolling one die:

S = [1, 2, 3, 4, 5, 6]

Let A be the event “Number rolled is even”

Let B be the event “Number rolled is at least 4”
Then
A = [2, 4, 6] and B = [4, 5, 6]
Chap 4-8
 Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

Complements:
A = [1, 3, 5] B = [1, 2, 3]
Intersections:
A Ç B = [4, 6] A Ç B = [5]
Unions:
A È B = [2, 4, 5, 6]
A È A = [1, 2, 3, 4, 5, 6] = S
Chap 4-9
 Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

n Mutually exclusive:
n A and B are not mutually exclusive
n The outcomes 4 and 6 are common to both

n Collectively exhaustive:
n A and B are not collectively exhaustive
n A U B does not contain 1 or 3

Chap 4-10
 Probability

n Probability – the chance that 1 Certain

an uncertain event will occur
(always between 0 and 1)

0 ≤ P(A) ≤ 1 For any event A .5

0 Impossible

Chap 4-11
 Assessing Probability
n There are three approaches to assessing the
probability of an uncertain event:

1. classical probability
NA number of outcomes that satisfy the event
probability of event A = =
N total number of outcomes in the sample space

n Assumes all outcomes in the sample space are equally likely to

occur

Chap 4-12
 Counting sample Points

n Multiplication Rule (with replacement): if an

operation can be performed in n1 ways, and if for each
of these, a second operation can be performed in n2
ways, the the two operations can be performed in n1n2
ways.
n Without replacement (ordered): If only k positions are
to be filled with objects selected from n different objects,
k £ n, the number of possible ordered arrangements is
called Permutation.
n!
P =
k
n
( n - k )!
Chap 4-13
 Counting sample Points

n Without replacement (unordered): The number of

ways in which k objects can be selected without
replacement from n objects, when the order of selection
is disregarded, is
n!
C =
k

k !( n - k ) !
n

a combination of the n objects taken k at a time.

Chap 4-14
 Counting the Possible Outcomes

n Use the Combinations formula to determine the

number of combinations of n things taken k at a
time

n!
C =n
k
k! (n - k)!
n where
n n! = n(n-1)(n-2)…(1)
n 0! = 1 by definition

Chap 4-15
 Assessing Probability
Three approaches (continued)
2. relative frequency probability
nA number of events in the population that satisfy event A
probability of event A = =
n total number of events in the population

n the limit of the proportion of times that an event A occurs in a large

number of trials, n

3. subjective probability
an individual opinion or belief about the probability of occurrence

Chap 4-16
 Probability Postulates

1. If A is any event in the sample space S, then

0 £ P(A) £ 1

2. Let A be an event in S, and let Oi denote the basic

outcomes. Then
P(A) = å P(Oi )
A

(the notation means that the summation is over all the basic outcomes in A)

3. P(S) = 1

Chap 4-17
 Probability Rules

n The Complement rule:

P(A) = 1- P(A) i.e., P(A) + P(A) = 1

n The Addition rule:

n The probability of the union of two events is

P(A È B) = P(A) + P(B) - P(A Ç B)

Chap 4-18
 A Probability Table

Probabilities and joint probabilities for two events A

and B are summarized in this table:

B B

A P(A Ç B) P(A Ç B ) P(A)

A P(A Ç B) P(A Ç B ) P(A)

P(B) P( B ) P(S) = 1.0

Chap 4-19
 Addition Rule Example

Consider a standard deck of 52 cards, with four suits:

♥♣♦♠
Let event A = card is an Ace
Let event B = card is from a red suit

Chap 4-20
 Addition Rule Example
(continued)

P(Red U Ace) = P(Red) + P(Ace) - P(Red ∩ Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Chap 4-21
 Addition Rule Example

n A survey of 1000 people determines that 80%

like walking and 60% like biking, and all like at
least one of the two activities. What is the
probability that a randomly chosen person in
this survey likes biking but not walking?

Chap 4-22
 Conditional Probability
n A conditional probability is the probability of one
event, given that another event has occurred:

P(A Ç B) The conditional

P(A | B) = probability of A given
P(B) that B has occurred

P(A Ç B) The conditional

P(B | A) = probability of B given
P(A) that A has occurred

Chap 4-23
 Conditional Probability Example

n Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player
(CD). 20% of the cars have both.

n What is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD | AC)

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-24
 Conditional Probability Example
(continued)
n Of the cars on a used car lot, 70% have air conditioning
(AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD Ç AC) .2
P(CD | AC) = = = .2857
P(AC) .7
Chap 4-25
 Conditional Probability Example
(continued)
n Given AC, we only consider the top row (70% of the cars). Of these,
20% have a CD player. 20% of 70% is 28.57%.

CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD Ç AC) .2
P(CD | AC) = = = .2857
P(AC) .7

Chap 4-26
 Multiplication Rule

n Multiplication rule for two events A and B:

P(A Ç B) = P(A | B) P(B)

n also

P(A Ç B) = P(B | A) P(A)

Chap 4-27
 Multiplication Rule Example
P(Red ∩ Ace) = P(Red| Ace)P(Ace)
æ 2 öæ 4 ö 2
= ç ÷ç ÷ =
è 4 øè 52 ø 52
number of cards that are red and ace 2
= =
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Chap 4-28
 Statistical Independence
n Two events are statistically independent
if and only if:
P(A Ç B) = P(A) P(B)
n Events A and B are independent when the probability of one
event is not affected by the other event
n If A and B are independent, then

P(A | B) = P(A) if P(B)>0

P(B | A) = P(B) if P(A)>0

Chap 4-29
 Statistical Independence Example
n Of the cars on a used car lot, 70% have air conditioning
(AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

n Are the events AC and CD statistically independent?

Chap 4-30
 Statistical Independence Example
(continued)
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(AC ∩ CD) = 0.2

P(AC) = 0.7
P(AC)P(CD) = (0.7)(0.4) = 0.28
P(CD) = 0.4

P(AC ∩ CD) = 0.2 ≠ P(AC)P(CD) = 0.28

So the two events are not statistically independent
Chap 4-31
 Statistical Independence Example
(continued)

n Suppose that a fair six-sided die is tossed. We define

the following events:
A = “the number of tossed is even”
B = “the number of tossed is £ 3”
C = “the number of tossed is a 1 or 2”
D = “the number of tossed doesn’t start with the letter ‘f’
or ‘t’”
a) Find P(B|A), P(B|C) and P(A|C).
b) Check the independent of events A and B, B and C, A
and C; A and D.

Chap 4-32
 Bivariate Probabilities
Outcomes for bivariate events:

B1 B2 ... Bk

A1 P(A1ÇB1) P(A1ÇB2) ... P(A1ÇBk)

A2 P(A2ÇB1) P(A2ÇB2) ... P(A2ÇBk)

. . . . .
. . . . .
. . . . .

Ah P(AhÇB1) P(AhÇB2) ... P(AhÇBk)

Chap 4-33
 Joint and
Marginal Probabilities

n The probability of a joint event, A ∩ B:

number of outcomes satisfying A and B
P(A Ç B) =
total number of elementary outcomes

n Computing a marginal probability:

P(A) = P(A Ç B1 ) + P(A Ç B 2 ) +  + P(A Ç Bk )

n Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

Chap 4-34
 Marginal Probability Example

P(Ace)
2 2 4
= P(Ace Ç Red) + P(Ace Ç Black) = + =
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 4-35
 Using a Tree Diagram
.2
D .7 P(AC ∩ CD) = .2
Given AC or H as
C
no AC: .7
C )= D oe
P(A s
h a ve n o t . 5 P(AC ∩ CD) = .5
A C CD
H as
.7
All
Cars
Do .2
e
h a v s n ot .3
eA P(A C D P(AC ∩ CD) = .2
C H as
C)=
.3
D oe
s
h a ve n o t . 1 P(AC ∩ CD) = .1
CD
.3 Chap 4-36
 The law of total Probability

n Two - event case:

P( A) = P( B) P( A | B) + P( B ) P( A | B )

n More than two events

P( A) = P( B1 ) P( A | B1 ) + P( B2 ) P( A | B2 ) +…+ P( Bn ) P( A | Bn )
n
= å P( B ) P( A | B )
i =1
i i

where there are n events in the partition: Bi, i =

1,…, n.
Chap 4-37
 Example

n An analyst believes the stock market has a

0.75 probability of going up in the next year if
the economy should do well, and a 0.30
probability of going up if the economy should
not do well during the year. The analyst futher
believes there is a 0.80 probability that the
economy will do well in the coming year. What
is the probability that the stock market will go
up next year (using the analyst’s assessments)?

Chap 4-38
 Bayes’ Theorem
P(A | E i )P(E i )
P(E i | A) =
P(A)
P(A | E i )P(E i )
=
P(A | E 1 )P(E 1 ) + P(A | E 2 )P(E 2 ) +  + P(A | E k )P(E k )

n where:
Ei = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Ei)

Chap 4-39
 Bayes’ Theorem Example

n A drilling company has estimated a 40%

chance of striking oil for their new well.
n A detailed test has been scheduled for more
information. Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
n Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

Chap 4-40
 Bayes’ Theorem Example
(continued)

n Let S = successful well

U = unsuccessful well
n P(S) = .4 , P(U) = .6 (prior probabilities)
n Define the detailed test event as D
n Conditional probabilities:
P(D|S) = .6 P(D|U) = .2
n Goal is to find P(S|D)

Chap 4-41
 Bayes’ Theorem Example
(continued)

Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) =
P(D | S)P(S) + P(D | U)P(U)
(.6)(.4)
=
(.6)(.4) + (.2)(.6)
.24
= = .667
.24 + .12
So the revised probability of success (from the original estimate of .4),
given that this well has been scheduled for a detailed test, is .667

Chap 4-42
 Example

n A test for a disease correctly diagnoses a

diseased person as having the disease with
probability 0.85. The test incorrectly diagnoses
someone without the disease as having the
disease with probability 0.01. If 1% of the
people in a population have the disease, what
is the chance that a person from this population
who tests positive for the disease actually has
the disease?

Chap 4-43
 Chapter Summary

n Defined basic probability concepts

n Sample spaces and events, intersection and union of events,
mutually exclusive and collectively exhaustive events,
complements
n Examined basic probability rules
n Complement rule, addition rule, multiplication rule
n Defined conditional, joint, and marginal probabilities
n Reviewed odds and the overinvolvement ratio
n Defined statistical independence
n Discussed Bayes’ theorem

Chap 4-44