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Statistics for Business

and Economics
Anderson Sweeney Williams
Slides by
John Loucks
St. Edward’s University

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Chapter 6
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Continuous Probability Distributions

 Uniform Probability Distribution
 Normal Probability Distribution
 Normal Approximation of Binomial Probabilities
 Exponential Probability Distribution
f (x) Exponential
Uniform
f (x)
f (x)
Normal

x
x
x

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Continuous Probability Distributions

 A continuous random variable can assume any value

in an interval on the real line or in a collection of
intervals.
 It is not possible to talk about the probability of the
random variable assuming a particular value.
 Instead, we talk about the probability of the random
variable assuming a value within a given interval.

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Continuous Probability Distributions

 The probability of the random variable assuming a

value within some given interval from x1 to x2 is
defined to be the area under the graph of the
probability density function between x1 and x2.

f (x) Exponential
Uniform
f (x)

f (x)
Normal

x
x x1 xx12 x2
x1 x2
x
x1 x2
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Uniform Probability Distribution

 A random variable is uniformly distributed

whenever the probability is proportional to the
interval’s length.
 The uniform probability density function is:

f (x) = 1/(b – a) for a < x < b

=0 elsewhere

where: a = smallest value the variable can assume

b = largest value the variable can assume

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Uniform Probability Distribution

 Expected Value of x

E(x) = (a + b)/2

 Variance of x

Var(x) = (b - a)2/12

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Uniform Probability Distribution

 Example: Slater's Buffet

Slater customers are charged for the amount of
salad they take. Sampling suggests that the amount
of salad taken is uniformly distributed between 5
ounces and 15 ounces.

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Uniform Probability Distribution

 Uniform Probability Density Function

f(x) = 1/10 for 5 < x < 15

=0 elsewhere

where:
x = salad plate filling weight

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Uniform Probability Distribution

 Expected Value of x

E(x) = (a + b)/2
= (5 + 15)/2
= 10

 Variance of x

Var(x) = (b - a)2/12
= (15 – 5)2/12
= 8.33

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Uniform Probability Distribution

 Uniform Probability Distribution

for Salad Plate Filling Weight

f(x)

1/10

x
0 5 10 15
Salad Weight (oz.)

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Uniform Probability Distribution

What is the probability that a customer

will take between 12 and 15 ounces of salad?

f(x)

P(12 < x < 15) = 1/10(3) = .3

1/10

x
0 5 10 12 15
Salad Weight (oz.)

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Area as a Measure of Probability

 The area under the graph of f(x) and probability are

identical.
 This is valid for all continuous random variables.
 The probability that x takes on a value between some
lower value x1 and some higher value x2 can be found
by computing the area under the graph of f(x) over
the interval from x1 to x2.

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Normal Probability Distribution

 The normal probability distribution is the most

important distribution for describing a continuous
random variable.
 It is widely used in statistical inference.
 It has been used in a wide variety of applications
including:
• Heights of people • Test scores
• Rainfall amounts • Scientific measurements
 Abraham de Moivre, a French mathematician,
published The Doctrine of Chances in 1733.
 He derived the normal distribution.

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Normal Probability Distribution

 Normal Probability Density Function

1 - ( x - µ )2 /2s 2
f (x) = e
s 2p

where:
µ = mean
s = standard deviation
p = 3.14159
e = 2.71828

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Normal Probability Distribution

 Characteristics

The distribution is symmetric; its skewness

measure is zero.

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Normal Probability Distribution

 Characteristics

The entire family of normal probability

distributions is defined by its mean µ and its
standard deviation s .

Standard Deviation s

x
Mean µ

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Normal Probability Distribution

 Characteristics

The highest point on the normal curve is at the

mean, which is also the median and mode.

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Normal Probability Distribution

 Characteristics

The mean can be any numerical value: negative,

zero, or positive.

x
-10 0 25

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Normal Probability Distribution

 Characteristics

The standard deviation determines the width of the

curve: larger values result in wider, flatter curves.

s = 15

s = 25

x
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Normal Probability Distribution

 Characteristics

Probabilities for the normal random variable are

given by areas under the curve. The total area
under the curve is 1 (.5 to the left of the mean and
.5 to the right).

.5 .5
x

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Normal Probability Distribution

 Characteristics (basis for the empirical rule)

68.26% of values of a normal random variable

are within +/- 1 standard deviation of its mean.

95.44% of values of a normal random variable

are within +/- 2 standard deviations of its mean.

99.72% of values of a normal random variable

are within +/- 3 standard deviations of its mean.

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Normal Probability Distribution

 Characteristics (basis for the empirical rule)

99.72%
95.44%
68.26%

x
µ µ + 3s
µ – 3s µ – 1s µ + 1s
µ – 2s µ + 2s
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Standard Normal Probability Distribution

 Characteristics

A random variable having a normal distribution

with a mean of 0 and a standard deviation of 1 is
said to have a standard normal probability
distribution.

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Standard Normal Probability Distribution

 Characteristics

The letter z is used to designate the standard

normal random variable.

s=1

z
0

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Standard Normal Probability Distribution

 Converting to the Standard Normal Distribution

x-µ
z=
s

We can think of z as a measure of the number of

standard deviations x is from µ.

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Standard Normal Probability Distribution

 Example: Pep Zone

Pep Zone sells auto parts and supplies including
a popular multi-grade motor oil. When the stock of
this oil drops to 20 gallons, a replenishment order is
placed.
The store manager is concerned that sales are
being lost due to stockouts while waiting for a
replenishment order.

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Standard Normal Probability Distribution

 Example: Pep Zone

It has been determined that demand during
replenishment lead-time is normally distributed
with a mean of 15 gallons and a standard deviation
of 6 gallons.
The manager would like to know the probability
of a stockout during replenishment lead-time. In
other words, what is the probability that demand
during lead-time will exceed 20 gallons?

P(x > 20) = ?

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Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 1: Convert x to the standard normal distribution.

z = (x - µ)/s
= (20 - 15)/6
= .83

Step 2: Find the area under the standard normal

curve to the left of z = .83.

see next slide

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Standard Normal Probability Distribution

 Cumulative Probability Table for

the Standard Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z < .83)

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Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 3: Compute the area under the standard normal

curve to the right of z = .83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

Probability
of a stockout P(x > 20)

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Standard Normal Probability Distribution

 Solving for the Stockout Probability

Area = 1 - .7967
Area = .7967
= .2033

z
0 .83

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Standard Normal Probability Distribution

 Standard Normal Probability Distribution

If the manager of Pep Zone wants the probability
of a stockout during replenishment lead-time to be
no more than .05, what should the reorder point be?
---------------------------------------------------------------
(Hint: Given a probability, we can use the standard
normal table in an inverse fashion to find the
corresponding z value.)

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Standard Normal Probability Distribution

 Solving for the Reorder Point

Area = .9500

Area = .0500

z
0 z.05

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Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 1: Find the z-value that cuts off an area of .05

in the right tail of the standard normal
distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 We
.9693look up.9706
.9699
the.9756
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 complement
.9761 .9767
. . . . . . . . of the
. tail. area .
(1 - .05 = .95)
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Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 2: Convert z.05 to the corresponding value of x.

x = µ + z.05s
= 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probability

of a stockout during leadtime at (slightly less than) .05.

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Normal Probability Distribution

 Solving for the Reorder Point

Probability of no
Probability of a
stockout during
stockout during
replenishment
replenishment
lead-time = .95
lead-time = .05

x
15 24.87

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Standard Normal Probability Distribution

 Solving for the Reorder Point

By raising the reorder point from 20 gallons to
25 gallons on hand, the probability of a stockout
decreases from about .20 to .05.
This is a significant decrease in the chance that
Pep Zone will be out of stock and unable to meet a
customer’s desire to make a purchase.

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Normal Approximation of Binomial Probabilities

When the number of trials, n, becomes large,

evaluating the binomial probability function by hand
or with a calculator is difficult.

The normal probability distribution provides an

easy-to-use approximation of binomial probabilities
where np > 5 and n(1 - p) > 5.

In the definition of the normal curve, set

µ = np and s = np (1 - p )

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Normal Approximation of Binomial Probabilities

Add and subtract a continuity correction factor

because a continuous distribution is being used to
approximate a discrete distribution.

For example, P(x = 12) for the discrete binomial

probability distribution is approximated by
P(11.5 < x < 12.5) for the continuous normal
distribution.

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Normal Approximation of Binomial Probabilities

 Example
Suppose that a company has a history of making
errors in 10% of its invoices. A sample of 100
invoices has been taken, and we want to compute
the probability that 12 invoices contain errors.
In this case, we want to find the binomial
probability of 12 successes in 100 trials. So, we set:
µ = np = 100(.1) = 10
s = np (1 - p ) = [100(.1)(.9)] ½ = 3

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Normal Approximation of Binomial Probabilities

 Normal Approximation to a Binomial Probability

Distribution with n = 100 and p = .1

s=3
P(11.5 < x < 12.5)
(Probability
of 12 Errors)

x
µ = 10 12.5
11.5
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Normal Approximation of Binomial Probabilities

 Normal Approximation to a Binomial Probability

Distribution with n = 100 and p = .1

P(x < 12.5) = .7967

x
10 12.5

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Normal Approximation of Binomial Probabilities

 Normal Approximation to a Binomial Probability

Distribution with n = 100 and p = .1

P(x < 11.5) = .6915

x
10
11.5
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Normal Approximation of Binomial Probabilities

 The Normal Approximation to the Probability

of 12 Successes in 100 Trials is .1052

P(x = 12)
= .7967 - .6915
= .1052

x
10 12.5
11.5
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Exponential Probability Distribution

 The exponential probability distribution is useful in

describing the time it takes to complete a task.
 The exponential random variables can be used to
describe:
•Time between vehicle arrivals at a toll booth
•Time required to complete a questionnaire
•Distance between major defects in a highway
 In waiting line applications, the exponential
distribution is often used for service times.

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Exponential Probability Distribution

 A property of the exponential distribution is that the

mean and standard deviation are equal.
 The exponential distribution is skewed to the right.
Its skewness measure is 2.

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Exponential Probability Distribution

 Density Function

1
f ( x) = e - x / µ for x > 0
µ

where: µ = expected or mean

e = 2.71828

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Exponential Probability Distribution

 Cumulative Probabilities

P ( x £ x0 ) = 1 - e - xo / µ

where:
x0 = some specific value of x

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Exponential Probability Distribution

 Example: Al’s Full-Service Pump

The time between arrivals of cars at Al’s full-
service gas pump follows an exponential probability
distribution with a mean time between arrivals of 3
minutes. Al would like to know the probability that
the time between two successive arrivals will be 2
minutes or less.

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Exponential Probability Distribution

 Example: Al’s Full-Service Pump

f(x)

.4 P(x < 2) = 1 - 2.71828-2/3 = 1 - .5134 = .4866

.3
.2
.1
x
0 1 2 3 4 5 6 7 8 9 10
Time Between Successive Arrivals (mins.)

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Relationship between the Poisson

Watermark

and Exponential Distributions

The Poisson distribution

provides an appropriate description
of the number of occurrences
per interval

The exponential distribution

provides an appropriate description
of the length of the interval
between occurrences

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End of Chapter 6

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