Subjective Probabilities in Management Decision Making

An interesting interpretation of Bayes’ theorem has been developed in the context of

subjective probabilities. Suppose that an individual is interested in event B and forms a
subjective view of the probability that B will occur; in this context the probability P 1 B 2
is called a prior probability. If the individual then acquires an additional piece of infor-
mation—namely, that event A has occurred—this may cause a modification of the initial
judgment as to the likelihood of the occurrence of B. Since A is known to have happened,
the relevant probability for B is now the conditional probability of B, given A, and is
termed the posterior probability. Viewed in this way, Bayes’ theorem can be thought of
as a mechanism for updating a prior probability to a posterior probability when the in-
formation that A has occurred becomes available. The theorem then states that the up-
dating is accomplished through the multiplication of the prior probabilityP 1 B 2 by
P 1 A u B 2 >P 1 A 2 .
We know that people commonly form and subsequently modify subjective probability
assessments. For example, an important part of an auditor’s work is to determine whether
or not the account balances are correct. Before examining a particular account, the auditor
will have formed an opinion, based on previous audits, of the probability that there is an
error. However, if the balance is found to be substantially different from what might be
expected on the basis of the last few years’ figures, the auditor will believe that the prob-
ability of an error is higher and, therefore, give the account particularly close attention.
Here, the prior probability has been updated in the light of additional information.

Example 3.26 Auditing Business Records

(Bayes’ Theorem)
Based on an examination of past records of a corporation’s account balances, an auditor
finds that 15% have contained errors. Of those balances in error, 60% were regarded as
unusual values based on historical figures. Of all the account balances, 20% were un-
usual values. If the figure for a particular balance appears unusual on this basis, what is
the probability that it is in error?

Solution Let A1 be “error in account balance” and B1 be “unusual value based on

historical figures.” Then, from the available information,
P 1 A1 2 = 0.15 P 1 B1 2 = 0.20 P 1 B1 u A1 2 = 0.60
Using Bayes’ theorem,
P 1 B1 u A1 2 P 1 A1 2 1 0.60 2 1 0.15 2
P 1 A1 u B1 2 = = = 0.45
P 1 B1 2 0.20
Thus, given the information that the account balance appears unusual, the probability
that it is in error is modified from the prior 0.15 to the posterior 0.45.

EXERCISES

Basic Exercises 3.80 Given P 1 A1 2 = 0.50, P 1 B1 u A1 2 = 0.40, and

The following basic exercises use a sample space defined by P 1 B1 u A2 2 = 0.70, what is the probability of P 1 A1 u B2 2 ?
events A1, A2, B1, and B2. 3.81 Given P 1 A1 2 = 0.40, P 1 B1 u A1 2 = 0.60, and
3.78 Given P 1 A1 2 = 0.40, P 1 B1 u A1 2 = 0.60, and P 1 B1 u A2 2 = 0.70, what is the probability of P 1 A2 u B2 2 ?
P 1 B1 u A2 2 = 0.70, what is the probability of P 1 A1 u B1 2 ? 3.82 Given P 1 A1 2 = 0.60, P 1 B1 u A1 2 = 0.60, and
3.79 Given P 1 A1 2 = 0.80, P 1 B1 u A1 2 = 0.60, and P 1 B1 u A2 2 = 0.40, what is the probability of
P 1 B1 u A2 2 = 0.20, what is the probability of P 1 A1 u B1 2 ? P 1 A1 u B1 2 ?

118 Chapter 3 Probability

Application Exercises their product mix, 10% of the processed chickens
3.83 A publisher sends advertising materials for an ac- weigh less than 3 pounds. Big Foods Ltd. produces
counting text to 80% of all professors teaching the chickens in cages using enriched food grains for
appropriate accounting course. Thirty percent of the rapid growth. They note that 20% of their processed
professors who received this material adopted the chickens weigh less than three poounds. Gigan-
book, as did 10% of the professors who did not receive tic Foods purchases 40% of its chickens from Free
the material. What is the probability that a professor Range Farms and mixes the products together with
who adopts the book has received the advertising no identification of the supplier. Suppose you pur-
material? chase a chicken that weighs more than three pounds.
3.84 A stock market analyst examined the prospects of What is the probability the chicken came from Free
the shares of a large number of corporations. When Range Farms? If you purchase 5 chickens, what is
the performance of these stocks was investigated one the probability that at least 3 came from Free Range
year later, it turned out that 25% performed much Farms?
better than the market average, 25%, much worse, 3.87 You are evaluating the player selection process used by
and the remaining 50%, about the same as the aver- a major league baseball team. The team gives a bonus
age. Forty percent of the stocks that turned out to do to 10% of the players that it signs to a contract, 30% of
much better than the market were rated good buys the players who were obtained through a trade, and
by the analyst, as were 20% of those that did about the remainder did not receive a bonus. Examination
as well as the market and 10% of those that did much of the player records for the past five years indicates
worse. What is the probability that a stock rated a that 40% of the players who were on the major league
good buy by the analyst performed much better than roster for at least one year received an initial signing
the average? bonus. In addition, 30% of the players on the major
3.85 The Watts New Lightbulb Corporation ships large league roster for at least one year did not receive an
consignments of lightbulbs to big industrial users. initial signing bonus. The remaining players were ob-
When the production process is functioning cor- tained from trades. For those players who were signed
rectly, which is 90% of the time, 10% of all bulbs and did not make the major league roster, 20% had re-
produced are defective. However, the process is ceived bonuses and 70% had not, with the remainder
susceptible to an occasional malfunction, leading to coming from trades. Of all players signed or obtained
a defective rate of 50%. If a defective bulb is found, in trades, 20% are on the major league roster for at least
what is the probability that the process is func- one year.
tioning correctly? If a nondefective bulb is found, a. What is the probability that a player who received
what is the probability that the process is operating a bonus is on the major league roster for at least
correctly? one year?
3.86 You are the meat products manager for Gigantic b. What is the probability that a player who did not
Foods, a large retail supermarket food distribu- receive a bonus is on the major league roster for at
tor who is studying the characteristics of its whole least one year?
chicken product mix. Chickens are purchased from c. Should a player insist on a signing bonus because
both Free Range Farms and Big Foods Ltd. Free this will increase his probability of being on the ma-
Range Farms produces chickens that are fed with jor league roster?
natural grains and grubs in open feeding areas. In

KEY WORDS

• addition rule of probabilities, 92 • event, 76 • permutations, 83

• basic outcomes, 75 • independent events, 105 • probability postulates, 87
• Bayes’ theorem, 114 • intersection, 76 • random experiment, 74
• Bayes’ theorem (alternative • joint probability, 76 • relative frequency probability, 86
statement), 115 • marginal probabilities, 103 • sample space, 75
• classical probability, 81 • multiplication rule of • solution steps for Bayes’
• collectively exhaustive, 78 probabilities, 94 theorem, 114
• combinations, 84 • mutually exclusive, 76 • statistical independence, 96
• complement, 78 • number of combinations, 82 • subjective probability, 87
• complement rule, 91 • odds, 106 • union, 77
• conditional probability, 93 • overinvolvement ratio, 107

Key Words 119

 CHAPTER EXERCISES AND APPLICATIONS
3.88 Suppose that you have an intelligent friend who has b. An event must be independent of its complement.
not studied probability. How would you explain to c. The probability of A, given B, must be at least
your friend the distinction between mutually exclu- as large as the probability of the intersection of
sive events and independent events? Illustrate your A and B.
answer with suitable examples. d. The probability of the intersection of two events
3.89 State, with evidence, whether each of the following cannot exceed the product of their individual
statements is true or false: probabilities.
e. The posterior probability of any event must be at
a. The complement of the union of two events is the
least as large as its prior probability.
intersection of their complements.
b. The sum of the probabilities of collectively exhaus- 3.95 Show that the probability of the union of events A and
tive events must equal 1. B can be written as follows:
c. The number of combinations of x objects cho- P1A < B2 = P1A2 + P1B2 31 - P1A u B2 4
sen from n is equal to the number of combina-
tions of 1 n - x 2 objects chosen from n, where 3.96 An insurance company estimated that 30% of all au-
1 … x … 1n - 12. tomobile accidents were partly caused by weather
d. If A and B are two events, the probability of A, conditions and that 20% of all automobile accidents
given B, is the same as the probability of B, given involved bodily injury. Further, of those accidents that
A, if the probability of A is the same as the prob- involved bodily injury, 40% were partly caused by
ability of B. weather conditions.
e. If an event and its complement are equally likely a. What is the probability that a randomly chosen
to occur, the probability of that event must be 0.5. accident both was partly caused by weather condi-
f. If A and B are independent, then A and B must be tions and involved bodily injury?
independent. b. Are the events “partly caused by weather condi-
g. If A and B are mutually exclusive, then A and B tions” and “involved bodily injury” independent?
must be mutually exclusive. c. If a randomly chosen accident was partly caused
3.90 Explain carefully the meaning of conditional probabil- by weather conditions, what is the probability that
ity. Why is this concept important in discussing the it involved bodily injury?
chance of an event’s occurrence? d. What is the probability that a randomly chosen
3.91 Bayes’ theorem is important because it provides a accident both was not partly caused by weather
rule for moving from a prior probability to a poste- conditions and did not involve bodily injury?
rior probability. Elaborate on this statement so that 3.97 A company places a rush order for wire of two thick-
it would be well understood by a fellow student who nesses. Consignments of each thickness are to be sent
has not yet studied probability. immediately when they are available. Previous expe-
3.92 State, with evidence, whether each of the following rience suggests that the probability is 0.8 that at least
statements is true or false: one of these consignments will arrive within a week. It
a. The probability of the union of two events cannot is also estimated that, if the thinner wire arrives within
be less than the probability of their intersection. a week, the probability is 0.4 that the thicker wire will
b. The probability of the union of two events can- also arrive within a week. Further, it is estimated that,
not be more than the sum of their individual if the thicker wire arrives within a week, the probabil-
probabilities. ity is 0.6 that the thinner wire will also arrive within a
c. The probability of the intersection of two events week.
cannot be greater than either of their individual a. What is the probability that the thicker wire will
probabilities. arrive within a week?
d. An event and its complement are mutually exclusive. b. What is the probability that the thinner wire will
e. The individual probabilities of a pair of events can- arrive within a week?
not sum to more than 1. c. What is the probability that both consignments
f. If two events are mutually exclusive, they must will arrive within a week?
also be collectively exhaustive.
3.98 Staff, Inc., a management consulting company, is sur-
g. If two events are collectively exhaustive, they must
veying the personnel of Acme Ltd. It determined that
also be mutually exclusive.
35% of the analysts have an MBA and that 40% of all
3.93 Distinguish among joint probability, marginal prob- analysts are over age 35. Further, of those who have an
ability, and conditional probability. Provide some ex- MBA, 30% are over age 35.
amples to make the distinctions clear.
3.94 State, with evidence, whether each of the following a. What is the probability that a randomly chosen
claims is true or false: analyst both has an MBA and also is over age 35?
b. What is the probability that a randomly chosen
a. The conditional probability of A, given B, must be analyst who is over age 35 has an MBA?
at least as large as the probability of A.

120 Chapter 3 Probability

 c. What is the probability that a randomly chosen b. What is the probability that a randomly chosen
analyst has an MBA or is over age 35? employee will have graduate training?
d. What is the probability that a randomly chosen c. What is the probability that a randomly chosen
analyst who is over age 35 does not have an employee who has graduate training is a man?
MBA? d. Are gender and level of education of employees in
e. Are the events MBA and over age 35 independent? this corporation statistically independent?
f. Are the events MBA and over age 35 mutually e. What is the probability that a randomly chosen
exclusive? employee who has not had graduate training is
g. Are the events MBA and over age 35 collectively a woman?
exhaustive? 3.102 A large corporation organized a ballot for all its work-
3.99 In a campus restaurant it was found that 35% of all ers on a new bonus plan. It was found that 65% of all
customers order vegetarian meals and that 50% of all night-shift workers favored the plan and that 40%
customers are students. Further, 25% of all customers of all female workers favored the plan. Also, 50% of
who are students order vegetarian meals. all employees are night-shift workers and 30% of all
employees are women. Finally, 20% of all night-shift
a. What is the probability that a randomly chosen
workers are women.
customer both is a student and orders a vegetarian
meal? a. What is the probability that a randomly chosen
b. If a randomly chosen customer orders a vegetarian employee is a woman in favor of the plan?
meal, what is the probability that the customer is a b. What is the probability that a randomly chosen
student? employee is either a woman or a night-shift worker
c. What is the probability that a randomly chosen (or both)?
customer both does not order a vegetarian meal c. Is employee gender independent of whether the
and is not a student? night shift is worked?
d. Are the events “customer orders a vegetarian d. What is the probability that a female employee is a
meal” and “customer is a student” independent? night-shift worker?
e. Are the events “customer orders a vegetarian e. If 50% of all male employees favor the plan, what
meal” and “customer is a student” mutually is the probability that a randomly chosen em-
exclusive? ployee both does not work the night shift and does
f. Are the events “customer orders a vegetarian not favor the plan?
meal” and “customer is a student” collectively 3.103 A jury of 12 members is to be selected from a panel
exhaustive? consisting of 8 men and 8 women.
3.100 It is known that 20% of all farms in a state exceed 160
a. How many different jury selections are possible?
acres and that 60% of all farms in that state are owned
b. If the choice is made randomly, what is the prob-
by persons over 50 years old. Of all farms in the state
ability that a majority of the jury members will be
exceeding 160 acres, 55% are owned by persons over
men?
50 years old.
3.104 A consignment of 12 electronic components contains 1
a. What is the probability that a randomly chosen component that is faulty. Two components are chosen
farm in this state both exceeds 160 acres and is randomly from this consignment for testing.
owned by a person over 50 years old?
b. What is the probability that a farm in this state a. How many different combinations of 2 compo-
either is bigger than 160 acres or is owned by a nents could be chosen?
person over 50 years old (or both)? b. What is the probability that the faulty component
c. What is the probability that a farm in this state, will be chosen for testing?
owned by a person over 50 years old, exceeds 160 3.105 Tiger Funds Ltd. operates a number of mutual funds
acres? in high technology and in financial sectors. Hussein
d. Are size of farm and age of owner in this state sta- Roberts is a fund manager who runs a major fund
tistically independent? that includes a wide variety of technology stocks. As
3.101 In a large corporation, 80% of the employees are men fund manager he decides which stocks should be pur-
and 20% are women. The highest levels of education chased for the mutual fund. The compensation plan
obtained by the employees are graduate training for for fund managers includes a first-year bonus for each
10% of the men, undergraduate training for 30% of the stock purchased by the manager that gains more than
men, and high school training for 60% of the men. The 10% in the first six months it is held. Of those stocks
highest levels of education obtained are also graduate that the company holds, 40% are up in value after be-
training for 15% of the women, undergraduate train- ing held for two years. In reviewing the performance
ing for 40% of the women, and high school training for of Mr. Roberts, they found that he received a first-year
45% of the women. bonus for 60% of the stocks that he purchased that
were up after two years. He also received a first-year
a. What is the probability that a randomly chosen bonus for 40% of the stocks he purchased that were
employee will be a man with only a high school not up after two years.
education?

Chapter Exercises and Applications 121

 What is the probability that a stock will be up after two He also finds that, of all contacts for which no sale is
years given that Mr. Roberts received a first-year bonus? made, 50% already own life insurance policies. Fur-
3.106 Of 100 patients with a certain disease, 10 were chosen thermore, 40% of all contacts result in sales. What is
at random to undergo a drug treatment that increases the probability that a sale will be made to a contact
the cure rate from 50% for those not given the treat- who already owns a policy?
ment to 75% for those given the drug treatment. 3.111 A professor finds that she awards a final grade of A
to 20% of her students. Of those who obtain a final
a. What is the probability that a randomly chosen
grade of A, 70% obtained an A on the midterm ex-
patient both was cured and was given the drug
amination. Also, 10% of the students who failed to
treatment?
obtain a final grade of A earned an A on the midterm
b. What is the probability that a patient who was
exam. What is the probability that a student with an
cured had been given the drug treatment?
A on the midterm examination will obtain a final
c. What is the probability that a specific group
grade of A?
of 10 patients was chosen to undergo the drug
3.112 The accompanying table shows, for 1,000 forecasts
treatment? (Leave your answer in terms of
of earnings per share made by financial analysts, the
factorials.)
numbers of forecasts and outcomes in particular cat-
3.107 Subscriptions to a particular magazine are classified egories (compared with the previous year).
as gift, previous renewal, direct mail, and subscription
service. In January 8% of expiring subscriptions were Forecast
gifts; 41%, previous renewal; 6%, direct mail; and About the
45%, subscription service. The percentages of renew- Outcome Improvement Same Worse
als in these four categories were 81%, 79%, 60%, and Improvement 210 82 66
21%, respectively. In February of the same year, 10% About the same 106 153 75
of expiring subscriptions were gift; 57%, previous re- Worse 75 84 149
newal; 24%, direct mail; and 9%, subscription service.
The percentages of renewals were 80%, 76%, 51%, and
14%, respectively. a. Find the probability that if the forecast is for a
worse performance in earnings, this outcome will
a. Find the probability that a randomly chosen sub- result.
scription expiring in January was renewed. b. If the forecast is for an improvement in earnings,
b. Find the probability that a randomly chosen sub- find the probability that this outcome fails to
scription expiring in February was renewed. result.
c. Verify that the probability in part (b) that is higher
3.113 A dean has found that 62% of entering freshmen
than that in part (a). Do you believe that the edi-
and 78% of community college transfers eventually
tors of this magazine should view the change from
graduate. Of all entering students, 73% are entering
January to February as a positive or negative
freshmen and the remainder are community college
development?
transfers.
3.108 The Customs Inspection agency at international air-
ports has developed a traveler profiling system (TPS) a. What is the probability that a randomly chosen
to detect passengers who are trying to bring more li- entering student is an entering freshman who will
quor into the country than is allowed by present regu- eventually graduate?
lations. Long-term studies indicate that 20% of the b. Find the probability that a randomly chosen enter-
passengers are carrying more liquor than is allowed. ing student will eventually graduate.
Tests on the new TPS scheme has shown that of those c. What is the probability that a randomly chosen
carrying illegal amounts of liquor, 80% will be iden- entering student either is an entering freshman or
tified and subject to complete luggage search. In ad- will eventually graduate (or both)?
dition 20% of those not carrying illegal amounts of d. Are the events “eventually graduates” and “en-
liquor will also be identified by TPS and subject to a ters as community college transfer” statistically
complete luggage search. independent?
If a passenger is identified by TPS, what is the prob- 3.114 A market-research group specializes in providing as-
ability that the passenger is carrying an illegal amount sessments of the prospects of sites for new children’s
of liquor? Comment on the value of this system. toy stores in shopping centers. The group assesses pros-
3.109 In a large city, 8% of the inhabitants have contracted pects as good, fair, or poor. The records of assessments
a particular disease. A test for this disease is positive made by this group were examined, and it was found
in 80% of people who have the disease and is negative that for all stores that had annual sales over $1,000,000,
in 80% of people who do not have the disease. What is the assessments were good for 70%, fair for 20%, and
the probability that a person for whom the test result poor for 10%. For all stores that turned out to be un-
is positive has the disease? successful, the assessments were good for 20%, fair for
3.110 A life insurance salesman finds that, of all the sales he 30%, and poor for 50%. It is known that 60% of new
makes, 70% are to people who already own policies. clothing stores are successful and 40% are unsuccessful.

122 Chapter 3 Probability

 a. For a randomly chosen store, what is the probabil- the neighborhood of the crime were wearing gloves
ity that prospects will be assessed as good? around the time of the crime.
b. If prospects for a store are assessed as good, what a. Based on the fact that Sally was wearing gloves,
is the probability that it will be successful? what is the probability that Sally actually commit-
c. Are the events “prospects assessed as good” ted the crime?
and “store is successful” statistically independent? b. If you charged her with the crime, do you think
d. Suppose that five stores are chosen at random. a jury would convict her based on the glove evi-
What is the probability that at least one of them dence? Explain why or why not.
will be successful?
3.119 You are responsible for detecting the source of the er-
3.115 A restaurant manager classifies customers as regu- ror when a computer system fails. From your analysis
lar, occasional, or new, and finds that of all custom- you know that the source of error is the disk drive,
ers 50%, 40%, and 10%, respectively, fall into these the computer memory, or the operating system. You
categories. The manager found that wine was or- know that 50% of the errors are disk drive errors, 30%
dered by 70% of the regular customers, by 50% of are computer memory errors, and the remainder are
the occasional customers, and by 30% of the new operating system errors. From the component perfor-
customers. mance standards, you know that when a disk drive
a. What is the probability that a randomly chosen error occurs, the probability of failure is 0.60; when a
customer orders wine? computer memory error occurs, the probability of fail-
b. If wine is ordered, what is the probability that the ure is 0.7; and when an operating system error occurs,
person ordering is a regular customer? the probability of failure is 0.3. Given the information
c. If wine is ordered, what is the probability that the from the component performance standards, what is
person ordering is an occasional customer? the probability of a disk drive error, given that a failure
3.116 A record-store owner assesses customers entering the occurred?
store as high school age, college age, or older, and 3.120 After meeting with the regional sales managers, Lauretta
finds that of all customers 30%, 50%, and 20%, respec- Anderson, president of Cowpie Computers, Inc., you
tively, fall into these categories. The owner also found find that she believes that the probability that sales will
that purchases were made by 20% of high school age grow by 10% in the next year is 0.70. After coming to
customers, by 60% of college age customers, and by this conclusion, she receives a report that John Cadariu
80% of older customers. of Minihard Software, Inc., has just announced a new
operating system that will be available for customers
a. What is the probability that a randomly in 8 months. From past history she knows that in situ-
chosen customer entering the store will make a ations where growth has eventually occurred, new op-
purchase? erating systems have been announced 30% of the time.
b. If a randomly chosen customer makes a purchase, However, in situations where growth has not eventually
what is the probability that this customer is high occurred, new operating systems have been announced
school age? 10% of the time. Based on all these facts, what is the
3.117 Note that this exercise represents a completely probability that sales will grow by 10%?
imaginary situation. Suppose that a statistics class 3.121 Sally Firefly purchases hardwood lumber for a cus-
contained exactly 8 men and 8 women. You have dis- tom furniture-building shop. She uses three suppliers,
covered that the teacher decided to assign 5 Fs on an Northern Hardwoods, Mountain Top, and Spring Val-
exam by randomly selecting names from a hat. He ley. Lumber is classified as either clear or has defects,
concluded that this would be easier than actually which includes 20% of the pile. A recent analysis of
grading all those papers and that his students are all the defect lumber pile showed that 30% came from
equally skilled in statistics—but someone has to get Northern Hardwoods and 50% came from Mountain
an F. What is the probability that all 5 Fs were given Top. Analysis of the clear pile indicates that 40% came
to male students? from Northern and 40% came from Spring Valley.
3.118 A robbery has been committed and McGuff, the What is the percent of clear lumber from each of the
crime-fighting dog, has been called in to investigate. three suppliers? What is the percent of lumber from
He discovers that Sally Coldhands was seen wearing each of the three suppliers?
gloves in the neighborhood shortly after the crime, 3.122 Robert Smith uses either regular plowing or minimal
and, thus, he concludes that she should be arrested. plowing to prepare the cornfields on his Minnesota
From past experience you know that 50% of the peo- farm. Regular plowing was used for 40% of the field
ple that McGuff says should be arrested for robbery acreage. Analysis after the crop was harvested showed
are actually guilty. Before making the arrest, you that 50% of the high-yield acres were from minimal-
order some additional investigation. From a large plowing fields and 40% of the low yield fields were
population of convicted robbers, you find that 60% from fields with regular plowing. What is the prob-
wore gloves at the time of the crime and continued ability of a high yield if regular plowing is used? What
to wear them for an interval after the crime. Fur- is the probability that a field with high yield had been
ther investigation reveals that 80% of the people in prepared using regular plowing?

Chapter Exercises and Applications 123

Appendix: Unions and Intersections
of Events
The Venn diagrams in Figures 3.10, 3.11, and 3.12 illustrate three results involving unions
and intersections of events.

Result 1
Let A and B be two events. Then the events A > B and A > B are mutually exclusive,
and their union is B, as illustrated in the Venn diagram in Figure 3.10. Clearly,
1A > B2 < 1A > B2 = B (3.16)

Figure 3.10 Venn Diagram for Result 1: 1 A > B 2 < 1 A > B 2 = B

S

A B

A>B A>B

Result 2
Let A and B be two events. The events A and A > B are mutually exclusive, and
their union is A < B, as illustrated in the Venn diagram in Figure 3.11—that is,
A < 1A > B2 = A < B (3.17)

Figure 3.11 Venn Diagram for Result 2: A < 1 A > B 2 = A < B

A B

A A>B

Result 3
Let E1, E2, . . . , EK be K mutually exclusive and collectively exhaustive events,
and let A be some other event. Then the K events E 1 > A, E 2 > A, g, E K > A are
mutually exclusive, and their union is A—that is,
1 E1 > A 2 < 1 E2 > A 2 < g < 1 EK > A 2 = A (3.18)

We can better understand the third statement by examining the Venn diagram in Fig-
ure 3.12. The large rectangle indicates the entire sample space and is divided into smaller
rectangles depicting K mutually exclusive and collectively exhaustive events E1, E2, . . . ,
EK. The event A is represented by the closed figure. We see that the events composed of
the intersection of A and each of the E events are indeed mutually exclusive and that their
union is simply the event A. We can, therefore, write the following:
1 E1 > A 2 < 1 E2 > A 2 < g < 1 EK > A 2 = A

124 Chapter 3 Probability

Figure 3.12 E1 E2 E3 E4 E5 ............... EK
Venn Diagram for
Result 3 A E1 >A E2 >A E3 >A E4 >A E5 >A ............... EK >A

Example 3.27 Single Die (Results 1 and 2)

Consider a die-rolling experiment with A = 3 2, 4, 6 4 and B = 3 4, 5, 6 4 . Show the
following:
a. 1 A > B 2 < 1 A > B 2 = B
b. A < 1 A > B 2 = A < B

Solution We know that

A = 3 1, 3, 5 4
It follows that
A > B = 3 4, 6 4 and A > B = 3 5 4
a. Then, A > B and A > B are mutually exclusive, and their union is B = 3 4, 5, 6 4 —
that is,
1 A > B 2 < 1 A > B 2 = 3 4, 5, 6 4 = B
b. Also, A and A > B are mutually exclusive, and their union is
A < 1 A > B 2 = 3 2, 4, 5, 6 4 = A < B

Example 3.28 Single Die (Result 3)

Consider a die-rolling experiment with events A, E1, E2, and E3 given by the following:
A = 3 2, 4, 6 4 E 1 = 3 1, 2 4 E 2 = 3 3, 4 4 E 3 = 3 5, 6 4
Show that E 1 > A, E 2 > A, and E 3 > A are mutually exclusive and that their union is A.
Solution First, we notice that E1, E2, and E3 are mutually exclusive and collectively
exhaustive. Then,
E1 > A = 3 2 4 E2 > A = 3 4 4 E3 > A = 3 6 4
Clearly, these three events are mutually exclusive, and their union is as follows:
1 E 1 > A 2 < 1 E 2 > A 2 < 1 E 3 > A 2 = 3 2, 4, 6 4 = A

REFERENCES

1. Bayes, T. 1958. Essay Towards Solving a Problem in the Doctrine of Chance. Biometrika 45:
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3. Carlson, W. L., and B. Thorne. 1997. Applied Statistical Methods for Business and Economics. Upper
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4. Taleb, N. N. 2005. Fooled by Randomness. New York: Random House.

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