DSC 1371 Business Statistics

CHAPTER – 6: Probability Theory

Chapter Objectives:
From this chapter, it is expected to,
• Introduce the basic Concepts and Terms used in Probability Theory.
• Define the Probability Approaches.
• Explain Probability Rules, Joint and Marginal Probability, Conditional Probability,
Multiplication Rule of Probability, and Independence of Events to Solve the Probability
Problems.
• Explain the concepts of Total Probability Law, Tree Diagrams and Bayes’ Theorem to
solve the Probability Problems.

Learning outcomes:
After learning the chapter, the students should be able to,
 Explain basic Concepts, Terms and Probability Approaches used in probability theory
 Solve the Probability Problems using Probability Rules, Joint and Marginal
Probability, Conditional probability, Multiplicative Rule and Independence of Events.
 Apply the concepts of Total Probability Law, Tree Diagram and Bayes’ Theorem to
Solve the Probability Problems.
6.1 Introduction

Probability is a concept that most people understand naturally, since words such as
“chance”, “likelihood”, “possibility” and “proportion” (and indeed probability itself) are
used as part of everyday speech. For example, most of the following, which might be heard
in any business situation, are in fact statements of probability:

i. There is a 30% chance that this job will not be finished in time.
ii. There is every likelihood that the business will make a profit next year.
iii. Nine times out of ten he arrives late for his appointments.
iv. There is no possibility of delivering the goods before Tuesday.

All the above are expressions indicating a degree of uncertainty. A very important branch
of mathematics called the theory of probability provides a numerical measure of
uncertainty. The probability describes certainty by1, impossibility by 0 and the various
grades of uncertainties by fractions or decimals in between 0 and 1.

6.2 Definitions of terms used in probability theory

The terms, which are used in probability theory under different situations, are discussed
below.

6.2.1 Random Experiment

An experiment is any repeatable process from which an outcome, measurement or result is
obtained. When the outcomes cannot be predicted with certainty, then the experiment is a
random experiment.

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Examples 6.1:
i. Tossing of a coin.
ii. Throwing a dies
iii. Inspection of an item to determine whether it is defective or non-defective

6.2.2 Sample space and sample points

The set of all possible outcomes of a random experiment is called the sample space. It is
usually denoted by S. The elements of sample space are called sample points.

Example 6.2:
In a throwing of a die, the sample space is, S = {1, 2, 3, 4, 5, 6}
This experiment has 6 possible outcomes. Therefore, it has 6 sample points or 𝑛(𝑆) = 6.

6.2.3 Events
An Event is any collection of outcomes of an experiment: that is an event is any subset of
the sample space.

Example 6.3: Consider the above Example 6.2. If, A = Getting a number less than 3
Then, A = {1, 2}

6.2.3.1 Rules of Event Operations

Intersection of Events
Intersection of two events A and B results in another event containing all such elements that
are common to A and B and is denoted by 𝐴 ∩ 𝐵.

Union of events.
Union of two events A & B results in another event containing all elements, which belong
to A or to B or to both and is denoted by 𝐴 ∪ 𝐵.

Difference of two events

Difference of an event A from another event B denoted by 𝐴 ∖ 𝐵 is defined as the event
consisting of those elements of A which does not belong to B.

Compliment of an event
Compliment of an event A denoted by A is the event containing all the elements of S that
are not elements of A.

Example 6.4:
S = {1, 2, 3, 4, 5, 6} A = {1,3,5} B = {2,4,6} C = {1,2,6}

Find, (i) A  B (ii) 𝐴∪𝐵 (iii) 𝐴 ∖ 𝐵 (iv) 𝐴/

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6.2.3.2 Collectively Exhaustive Events

If A1, A2,…, An are events of sample space S and if 𝐴1 , 𝐴2 , … , 𝐴𝑛 = 𝑆 then 𝐴1 , 𝐴2 , … , 𝐴𝑛
are said to be collectively exhaustive events.

Example 6.5: Suppose S = {1,2,3,4,5,6} and define three events A, B and C as follows;
A = {1,3,5}, B = {2,4,6} and C = {1,2,6}
Here,
A  B = S ,  A and B are collectively exhaustive events.
A  C = {1,2,3,5,6}  S ,  A and C are not collectively exhaustive events.

6.2.3.3 Mutually Exclusive Events

Events are said to be mutually exclusive or disjoint if two or more of them cannot occur
simultaneously in a single trial of an experiment. If A and B are mutually exclusive events,
then A  B = 

Examples 6.6: Suppose S = {1,2,3,4,5,6}and define three events A, B and C as follows.

A = {2,4,6}, B = {1,3,4}, C = {3,5}

A and B are not mutually exclusive. Because A  B   .

A and C are mutually exclusive. Because A  C =  .

6.2.3.4 Equally likely Events

The outcomes of a random experiment are said to be equally likely if after taking into
consideration all the relevant evidences there is no reason to expect one in preference to the
other.

Example 6.7: In throwing an unbiased die, all the six faces are equally likely to come.

6.2.4 Combinations
A combination is a selection of objects in any order. The number of combinations of n
objects taken r at a time will be denoted by n C r .

Example 6.8: Use the calculator to find the values of the followings.
(i) 10𝐶0 (ii) 10𝐶10 (iii) 10𝐶1 (iv) 10𝐶
4
6.3 Probability

6.3.1 Definitions of Probability

In this section we shall discuss three approaches to the definition and interpretation of
probability; Classical approach, relative frequency approach, and subjective approach.

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Classical approach
The classical approach of defining probability is the oldest and simplest. It originated in
eighteenth century in problems pertaining to game of chance, such as throwing of coins,
dice etc.

Definition
If a random experiment result in n mutually exclusive and equally likely outcomes and out
of which m one favourable to the occurrence of event A, then the probability of occurrence
of event A, usually denoted by P (A) is given by

Number of favourable cases n( A) m

P(A) = = =
Total number of equally likely cases n( S ) n
The classical approach is based an abstract reasoning. Classical probability is often called
a prior probability because if we keep, using examples of unbiased dice, fair coin etc. we
can state the answer in advance without rolling a die or tossing a coin etc.

The basic assumption underling the classical approach is that the outcomes are equally
likely. This requirement restricts the application of probability only to such experiment,
which gives rise to symmetrical outcomes. Therefore, this definition is different or
impossible to apply as soon as we divert from the fields of coins, dice, cards, and other
simple games of chance.

Example 6.9: A coin is tossed twice. What is the probability of getting?

a) Two heads? b) Two tails? c) A head and a tail?

The Relative Frequency Approach

Suppose that an event A occurs m times in n repetition of a random experiment. Then the
m m
ratio gives the relative frequency of the event A. The value which is approached by
n n
when n becomes infinity defined as the probability of occurrence of event A.

m
i.e., P(A) = n →
Lim

n
Theoretically, we can obtain the probability of an event as given by the above limit.
However, in practice we can only try to have a close estimate of P(A) based on large number
of observations. For practical convenience, the estimate of P(A) can be written as if it were
actually P(A) and the relative frequency definition of probability may be expressed as:
m
P(A) = . The probability obtained by above relative frequency definition is called a
n
posterior or empirical probability.

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Example 6.10: A computer shop tracks the daily sales of laptops computers in the last 25
days. The resulting data is:
Laptops sold 0 1 2 3 4 or more
Number of days 2 10 5 6 2

What is the probability that shop will sell:

(i) exactly one laptop on any given day?
(ii) less than two laptops on any given day?
(iii)more than three laptops on any given day?

Subjective approach
The Subjective probability is defined, as the probability assigned to an event by an
individual based on whatever evidence is available. Hence such probabilities are based on
the knowledge, past experience, beliefs of the person making the probability statements.

Subjective probability assignments are frequently found when events occur only once or at
most a very few times. Say that it is your job to interview and select a new social services
caseworker. You have narrowed your choice to three people. Each has an attractive
appearance, a high level of energy, abounding self-confidence, a record of past
accomplishments and a state of mind that seems to welcome challenges. What are the
chances each will relate to clients successfully? Answering this question and choosing
among the three will require you to assign a subjective probability to each person’s
potential.

Main shortcoming of this approach is that two reasonable people faced with the same
evidence could easily come up with quite different subjective probabilities for the same
event.

Probability rules
Rule 1: If is the empty set, then P() = 0
Rule 2: If 𝐴/ is the complement of an event A then 𝑃(𝐴/ ) = 1 − 𝑃(𝐴)
Rule 3: If A and B are any two events then,
𝑃(𝐴\𝐵) = 𝑃(𝐴) − 𝑃(𝐴 ∩ 𝐵) or 𝑃(𝐴 ∩ 𝐵 / ) = 𝑃(𝐴) − 𝑃(𝐴 ∩ 𝐵)
Rule 4: If A and B are any two events, then,
P(AB) = P(A) + P(B) – P(A  B); This theorem is called addition law of
probability.

Example 6.11: The results of an examination conducted in two parts I and II for 200
candidates were recorded as follows.

80 have passed in part I; and 60 have passed in part II; and 72 have failed in both part I and
Part II. If out of these one candidate is selected at random, find the following probabilities
using probability rules.
Probability that the candidate has;
a. Passed in both part I and II,
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b. Failed only in part I and (iii) Failed only in one of the parts.

Exercises:
1. If P (A) = 0.37, P(B) = 0.22, and P(AUB) = 0.43, find the probability that
i. neither A nor B will occur
ii. both A and B will occur
iii. Only A will occur.

2. A box contains 5 red, 4 black and 6 white balls.

i. If a ball is drawn at random, find the probability that the ball is,
(a) White. (b) Black.

ii. If three balls are drawn at random, find the probabilities that,
a. All are white (b) Two are black and one red
(c)At least one is white (d) One of each colour

6.3.2 Joint Probability

Joint probability is defined as the probability of joint occurrence of two or more events. In
our discussion of the addition rule, we used Pr(A  B), the probability that both events A
and B will occur.

Example 6.12:
Suppose all employees of a company were asked whether they are in favour or against for
hiring a consultant paying a higher salary. Following table gives a two-way classification
of responses of these 100 employees.
In Favour (I) Against (A)
Male (M) 15 45
Female (F) 4 36

If an employee is chosen at random find,

i. P(M  I) (ii) P(M  A) (iii) P(F  I) (iv) P(F  A)

6.3.3 Marginal Probability

In addition to joint probabilities just mentioned above, further probabilities can be determined such
as that a randomly chosen person is a male, is a female is in favour of hiring a consultant, or is
against of hiring a consultant. These probabilities are called marginal probabilities or
unconditional probabilities.

Example 6.13: Consider the Example 6.12 and find the following probabilities.
i. P(M) (ii) P(A)

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6.3.4 Conditional Probability

Let A be any event, where P(A)>0. The probability that an event B occurs subject to the
condition that A has already occurred is known as the conditional Probability of occurrence
of the event B on the assumption that event A has already occurred and is denoted,
P( A  B)
P(B/A) =
P( A)
Example 6.14: Consider the Example 6.12 and find the following probabilities.
i. P(M/I) (ii) P(A/F)

Multiplication Rule of Probability

Cross multiplying the equation for conditional probability, we can obtain the multiplicative
rule.
i. 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴) × 𝑃(𝐵/𝐴)
𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴) × 𝑃(𝐵/𝐴) = 𝑃(𝐵) × 𝑃(𝐴/𝐵)
ii. 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐵) × 𝑃(𝐴/𝐵)

Independence of two events

When events A and B have no influence on one another, we say that events A and B are
independent. If the events A and B are independent, the probability of occurrence of any
one of them does not depend upon that of the other.

If A and B are independent then, P(B/A) = P(B) and P(A/B) =P(A)

Now substituting P(B) for P(B/A) in the multiplication rule of probability,
𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴) × 𝑃(𝐵)

Therefore, events A and B are independent if 𝑃(𝐴 ∩ 𝐵) = 𝑃(𝐴) × 𝑃(𝐵); otherwise, they
are dependent.

Example 6.15: If P(A) = 0.6, P(B) = 0.3 and P(A  B) = 0.72, find
a. P(A/B) (ii) P(A   B) (iii) P (A  B ) and State whether A and B are independent.

Example 6.16: In an examination 40% of the students are failed in Mathematics, 25% of
the students are failed in Economics and 15% are failed in both Mathematics & Economics.
A student is selected at random.
a. What is the probability that the student has failed in Mathematics, if it is known that
he has failed Economics?
b. What is the probability he has failed only in Mathematics?
c. What is the probability he has failed in one of the subjects?

Example 6.17: An article made up of three parts A, B & C manufactured by a company.

The probabilities of those components being defective are respectively 0.03, 0.02 and 0.05.
What is the probability that assemble article will be defective.

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Exercises:
1. Let A and B be the two possible outcomes of an experiment and suppose
P(A) = 0.4, P(B) = p, and P(AUB) = 0.8. Find p such that A and B are independent.

2. In the quality control department, every inspected item is marked as either good (G) or
bad (B). The quality control engineers also determine if the on-line inspectors accepted
the item (A) or rejected it (R). In order to see whether a trainee is doing an acceptable
job as a product inspector, the trainee is told to inspect a shipment of 1000 items.
Supervisor then carefully inspects the items. Suppose that the supervisor determines
that 800 of the items are good and 200 are defective. If the trainee rejects 40 of the
good items and accept 6 of the defective items, find the following probabilities

i. P(G) ii. P(B) iii. P(R/G) iv. P(R/B)

v. P(G/R) vi. P(G/A) vii. P(A) viii. P(R)

3. A manager has two assistants and he bases his decisions on information, supplied
independently by each of them. The probability that he makes a mistake in his thinking
is 0.05. The probability that an assistant gives wrong information is 0.2. Assuming that
the mistakes made by the manger are independent of the information given by the
assistants, find the probability that he reaches a wrong decision.
4. A mathematical problem is given to four students A, B, C, and D whose chance of
solving it are 1/3, 2/5, 1/2, and 2/3 respectively. If all of them try independently, find
the probability that the problem will be solved.

6.3.5 Total Probability Law

If A1, A2, A3, …, An are mutually exclusive and exhaustive events, where Ai > 0 for all
i =1, 2, …, n and if B is any random event.
𝑛
Then;
𝑃(𝐵) = ∑ 𝑃(𝐴𝑖 ) × 𝑃(𝐵/𝐴𝑖 )
𝑖=0

A1 A2 Ai
Proof

B
An

Diagram for proof of total Probability Law

By the multiplication rule; 𝑃(𝑨𝒊 ∩ 𝑩) = 𝑷(𝑨𝒊 ) × 𝑃(𝐵/𝐴𝑖 ) ; i = 1,2 , …, n.
𝑃(𝑩) = 𝑷(𝐴1 ) × 𝑃(𝐵/𝐴1 ) + 𝑃(𝑨2 ) × 𝑃(𝐵/𝐴2 ) + ⋯ + 𝑃(𝑨𝑛 ) × 𝑃(𝐵/𝐴𝑛 )
𝑃(𝐵) = ∑𝑛𝑖=1 𝑃(𝑨𝑖 ) × 𝑃(𝐵/𝐴𝑖 )

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Example 6.18:
i. Three boxes B1, B2 and B3 contain light bulbs. B1 contains 15 bulbs of which 3 are
defective, B2 contain 8 bulbs of which 1 is defective and B3 contains 12 bulbs of which
2 are defective. A bulb is drowning at random from any one box. What is the probability
that the bulb is defective?

ii. Three machines A, B, and C produced 20%, 50%, and 30% of the total number of items
of a factory. The defective percentages of output of these machines are 4%, 2%, and
3%. If an item is selected at random, find the probability that the item is defective.

6.3.6 Tree Diagrams

When there are various stages in an experiment we can use a tree diagram to represent the
sample space. Each branch in a tree diagram shows the possible outcomes that may occur
at a particular stage. We can use tree diagrams to solve probability problems.

To obtain the probabilities associated with each sample point in the sample space; we
multiply the probabilities along the branches leading to that probability.

Example 6.19: Consider the example (i) given under Example 6.18. In this example there
are two stages in the experiment, first, the selecting a box, then drawing a bulb which is
either Defective (D) or Non-Defective (ND). Tree diagram for this problem is shown
below.
Stage I Stage II
3 D
15

12
15 ND
B1
1 D
8
7
B2 8
ND
2
B3 D
12
10
12
ND

Tree Diagram for example

with three boxes with bulbs

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In the above tree diagram, there are three paths, which lead to a defective bulb. (B1, D), (B2,
D), (B3, D), the sum of the probabilities of these paths gives the required probability.
(Probability that selected bulb is defective).

2 1
Example 6.20: A coin, weighted so that P(H) = and P(T) = , is tossed. If heads appear,
3 3
then a number is selected at random from the numbers 1 to 9; if tails appears, then a number
is selected at random from the numbers 1 through 5. Find the probability p that an even
number is selected.

6.3.7 Bayes’ Theorem

Conditional Probability takes into accounts information about the occurrence of one event
to predict the probability of another event. This concept can be extended to revise
probabilities based on new information and to determine the probability that a particular
effect was due to a specific cause. The procedure for revising these probabilities is known
as “Bayes’ Theorem”.

If A1, A2, … , An are mutually exclusive events whose union is the sample space S, where
P(A)  0 for all i = 1,…, n, and if B is any random event (for which P(B)  0), thus for all
i,
P( B / Ai ) P( Ai )
P( Ai / B) =
P( B)
P( B / Ai ) P( Ai )
P ( Ai / B ) =
P( A1 ) P( B / A1 ) + P( B / A2 ) P( A2 ) + .... + P( A / B) P( An )

Example 6.21: Three boxes B1, B2 and B3 contain light bulbs. B1 contains 15 bulbs of
which 3 are defective, B2 contain 8 bulbs of which 1 is defective and B3 contains 12 bulbs
of which 2 are defective. If a randomly selected bulb is defective, determine the probability
that it has been chosen from the second box (B2).

Exercises:
1. After the production of machine components, they are given a quality grade of A, B or
C. Quality grade A was given to 70% of the components, B grade to 18% of the
components and C grade to 12% of the components. However, it was noticed that 2%
of the A grade components failed to function properly. Likewise, 10% of B grade
components failed and 18% of C grade components failed. If a randomly selected
component failed to function properly, determine the probability that it had received a
grade B.

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2. Two groups of candidates are competing for the position of the board of Directors of a
company. The probabilities that the first and the second groups will win are 0.6 and 0.4
respectively. If the first group wins, the probability of introducing a new product is 0.4
and corresponding probability if the second group wins is 0.75.

i. What is the probability that the new product will be introduced?

ii. lf the product was introduced what is the probability that the first group won?

3. The probability that a reader of a sports magazine is a male given that the reader is at
least 35 years old is 0.30. The probability that a reader is male, given that the reader is
under 35 years is 0.65. If 75% of the readers are under 35 years.

(i) Find the probability that a randomly chosen reader is a male.

(ii) Find the probability that a randomly chosen reader is under 35 years, if it is given
that the reader is a female.

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