OP5205: BUSINESS STATISTICS(2 Credits)

Session 7-8 – Probability Distribution

Lecture Presentation | Dr. Sandeep Goyal / Dr. Piyush Kumar

 Highlights
• Basic Definitions - Events, Samples, Space, & Probabilities

• Basic Rules of Probability

• Conditional Probability

• Independence of Events

• Conditional Probability

• Bayes Theorem

Lecture Presentation | Dr. Sandeep Goyal / Piyush Kumar 2

Basic Definitions - Events, Samples, Space, & Probabilities
 Probability in Everyday Life
A Missed Pickup Is a Missed Opportunity: A bizarre sequence of events took place on the University of California campus
at Berkeley on October 20, 2003. An employee of the university took a package containing 30 applications by graduate
students at the university for the prestigious Fulbright Fellowship, administered by the U.S. Department of Education,
and dropped them at the Federal Express pickup box on campus. October 20 was the deadline the Department of
Education had set for posting by each university of all its applications for awards on behalf of its students.

But just that day, something that had never happened before took place. Because of a “computer glitch,” as Federal
Express later described it, there was no pickup by the company from its box on Sproul Plaza on the U.C. campus. When
the problem became apparent to the university, an employee sent an e-mail message late that night to the Department of
Education in Washington, apologizing for the mishap, which was not the University’s fault, and requesting an extension
of time for its students. The Department of Education refused. There ensued a long sequence of telephone calls, and the
Chancellor of the University, Robert M. Berdahl, flew to Washington to beg the authorities to allow his students to be
considered. The Department of Education refused.

At one point, one of the attorneys for the Department told the University that had the e-mail message not been sent,
everything would have been fine since FedEx would have shown the date of posting as October 20. But since the e-mail
message had been sent, the fate of the applications was sealed. Usually, 15 out of 30 applications from U.C. Berkeley result
in awards. But because of this unfortunate sequence of events, no Berkeley graduate students were to receive a Fulbright
Fellowship in 2004.
Source: Dean E. Murphy, “Missed Pickup Means a Missed Opportunity for 30 Seeking a Fellowship,” The New York Times, February 5, 2004, p. A14.

Probability affects everyone’s life everyday every time.

Uncertainty can be anything from 0.01% to 100%. Do we plan for that or do we always assume that nothing
will go wrong and do last minute acts.
- 1st issue here – very small chance that pickup can be missed by FedEx. Yet it happened. 2nd, very small chance that
university noticed that pickup was missed on the scheduled date and time and that led to email and virtually disaster for
the students. Finally, University held the submission of applications till the last day and thereby faced probability of things
going wrong. 4
Source: Complete Business Statistics (4e) (TMH)
 Olympic Games

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Source: https://indianexpress.com/article/explained/manu-bhaker-gun-manfunction-tokyo-olympics-morini-coach-ronak-pandit-7425981/
 What is Probability?
• Quantitative measure of uncertainty – a number that conveys the strength of our belief in the occurrence of an
uncertain event. Also known as Odds.
Increasing Likelihood of Occurrence

0 .5 1
Probability:

The event The occurrence The event

is very of the event is is almost
unlikely just as likely as certain
to occur. it is unlikely. to occur.

• Theory of Probability primarily developed by European mathematicians during late 16th till 18th century - Galileo
Galilei (1564–1642), Blaise Pascal (1623–1662), Pierre de Fermat (1601–1665), Abraham de Moivre (1667–
1754), and others.

• Usage: forms the basis for inferential statistics as well as for other fields that require quantitative assessments of
chance occurrences, such as quality control, management decision analysis, and areas in physics, biology,
engineering, and economics.

• Two Types – Objective (Classical) and Subjective (Personal) Probability

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Source: Complete Business Statistics (4e) (TMH)
 What is Probability?
• Objective Probability - based on symmetry of games of chance or similar situations with no personal
judgement – also based upon relative-frequency probability. It is also called classical probability. This
probability is based on the idea that certain occurrences are equally likely. Examples as follows.

Example 1: Rolling a dice and probability of getting anything from 1 to 6. Each number has equal probability of
getting selected. Probability will be 1/6 for each digit as we increase the dice rolls.
Example 2: Rolling a coin and getting head or tail. Proportion of heads will reach 0.5 as we roll the coin large
number of times.
Example 3: 20 out of 1,000 consumers given a taste test for a new soup like the taste, then we say that the
probability that a given consumer will like the soup is 20/1,000 = 0.02

• Subjective Probability - involves personal judgment, information, intuition, and other subjective evaluation
criteria. Examples as follows.
Example 1: Physician assessing the patient recovery

Example 2: Company doing the valuation of the company to be taken over.

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Source: Complete Business Statistics (4e) (TMH)
 Probability Basics - Sets
• Set is a collection of elements

• Empty Set implies no element. Intersection of Disjoint Sets leads to Empty Set. Denoted by

• Universal Set implies set having everything. Denoted by S

• The complement of set A is the set containing all the elements in the universal set S that are not
members of set A. We denote the complement of A by

• A Venn diagram is a schematic drawing of sets that demonstrates the relationships between
different sets. In a Venn diagram, sets are shown as circles, or other closed figures, within a
rectangle corresponding to the universal set, S.

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 Probability Basics - Sets

9
Source: Complete Business Statistics (4e) (TMH)
 Probability Basics – Experiment, Sample Space and Event
• Experiment – Process that leads to one or several possible outcomes. Outcome of an experiment
is observation or measurement.
• Drawing a card from deck of cards. Getting King of Diamonds is an outcome of experiment.

• Sample Space – Universal Set (S) comprising all possible outcomes of an experiments. In playing
cards, sample size is 52 cards if one card need to be picked at any point in time.
• A single outcome of an experiment is called a basic outcome or an elementary event

• Event – Subset of a sample space. Set of basic outcomes. Event occurs implies experiment
giving rise to a basic outcome belonging to the event.
• For example, the event “an ace is drawn out of a deck of cards” is the set of the four aces
within the sample space consisting of all 52 cards. This event occurs whenever one of the
four aces (the basic outcomes) is drawn.

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 Probability Basics – Stages of Experiment - Examples
• Coin toss example for two times

• Student exam scores: MST: P or F EST: P or F

• If an experiment consists of a sequence of k steps in which there are n1 possible results for the first
step, n2 possible results for the second step, and so on, then the total number of experimental
outcomes is given by (n1)(n2) . . . (nk).

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Probability Basics – Union and Intersection

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 Example 1
Take an event - An ace is drawn from a deck of cards. Sample space is 52 cards. All the cards have equal
probability of getting accepted.
a) What is the probability of getting Ace when picking one card from a deck of 52 cards.
b) What is the probability of picking up a Ace of Heart?

Answer:
a) 4/52 = 1/13
Since a deck has 4 aces and 52 cards, the size of A is 4 and the size of the sample space is 52. Therefore,
the probability of A is equal to 4/52.

b) 1/52. Ace of Heart is 1 and total number of cards are 52.

Alternative Explanation: (1/13) * (13/52)
P(Heart) = 13/52; P(Ace) = 4/52
P(Ace & Heart) = (4/52) * (13/52) = 1/52

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 Example 2
Roulette is a popular casino game. As the game is played in Las Vegas or Atlantic City, the roulette wheel has
36 numbers, 1 through 36, and the number 0 as well as the number 00 (double zero). What is the probability
of winning on a single number that you bet?

Answer: 1/38 => n(A) is 1; n(S) is 36+2

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Basic Rules of Probabilities
 Probability - Basic Rules
• Measure of Uncertainty. Numerical measure of the likelihood of event A taking place.

• Rule 1: Range of Values (between 0 to 1).

Example: P=0 for picking blue card in deck of 52 cards

• How do you interpret. Odds of 1 to 1, Odds of 1 to 2, Odds of 2 to 1?

• ½, 1/3, 2/3 (in terms of probability)

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 Probability - Basic Rules
• Rule 2: The Rule of Complements

Example:
1/ P(rain today) = 0.4, P(n rain today) = 1 – P(rain today) = 0.6
2/ P(ace) = 4/52; P(no ace) = 1 – 4/52 = 48/52

• Rule 3: The Rule of Unions

Joint Probability

Example:
1/ P(Ace or Heart) = P(Ace) + P(Heart) – P(Ace & Heart) = 16/52
2/ P(Job 1) is 40%, P(Job 2) is 50%, P(Job 1 & Job 2) is 30%. What is the probability of getting atleast
one of these two jobs = 0.4 + 0.5 – 0.3 = 0.6
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 Probability - Basic Rules
• Rule 4: Mutually Exclusive Events
Also known as Disjoint events having no intersection. Probability of intersection is zero.

Example:
1/ What is the probability of getting multiple of 2 in the single throw of dice?
Ans: 1/2

2/ What is the probability of drawing either a heart or spade or club from the deck of cards?
Ans: 3/4

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 Example 1
Following are age and sex data for 20 midlevel managers at a service company:

34 F, 49 M, 27 M, 63 F, 33 F, 29 F, 45 M, 46 M, 30 F, 39 M, 42 M, 30 F, 48 M, 35 F, 32 F, 37 F, 48 F, 50
M, 48 F, 61 F.

A manager must be chosen at random to serve on a companywide committee that deals with personnel
problems.

a) What is the probability that the chosen manager will be either a woman or over 50 years old or both?
Solve both directly from the data and by using the law of unions.

b) What is the probability that the chosen manager will be under 30?

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 Example 1 - Solution
Following are age and sex data for 20 midlevel managers at a service Age Gender Age Gender
34 F
company: 63 F
27 M
29 F
33 F 30 F
29 F
34 F, 49 M, 27 M, 63 F, 33 F, 29 F, 45 M, 46 M, 30 F, 39 M, 42 M, 30 30 F
30 F
32 F
F, 48 M, 35 F, 32 F, 37 F, 48 F, 50 M, 48 F, 61 F. 30 F 33 F
35 F 34 F
32 F 35 F
A manager must be chosen at random to serve on a companywide 37 F 37 F
48 F
committee that deals with personnel problems. 48 F
39 M
42 M
61 F 45 M
49 M
a) What is the probability that the chosen manager will be either a 27 M
46 M
48 F
woman or over 50 years old or both? Solve both directly from the 45 M 48 F
46 M
data and by using the law of unions. 39 M
48 M
49 M
42 M 50 M
48 M
b) What is the probability that the chosen manager will be under 30? 50 M
61 F
63 F

a) P(women) + P(>50) - P(women & >50) = 12/20 + 2/20 - 2/20 = 12/20

b) P(<30) = 2/20

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 Example 2
Q. 3.) A machine produces components for use in cellular phones. At any given time, the machine may
be in one, and only one, of three states: operational, out of control, or down. From experience with this
machine, a quality control engineer knows that the probability that the machine is out of control at any
moment is 0.02, and the probability that it is down is 0.015.

a. What is the relationship between the two events “machine is out of control” and “machine is
down”?

b. When the machine is either out of control or down, a repair person must be called. What is the
probability that a repair person must be called right now?

c. Unless the machine is down, it can be used to produce a single item. What is the probability that the
machine can be used to produce a single component right now? What is the relationship between this
event and the event “machine is down”?

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 Example 2 - Solution
Q. 3.) A machine produces components for use in cellular phones. At any given time, the machine may
be in one, and only one, of three states: operational, out of control, or down. From experience with this
machine, a quality control engineer knows that the probability that the machine is out of control at any
moment is 0.02, and the probability that it is down is 0.015.

a. What is the relationship between the two events “machine is out of control” and “machine is
down”?

b. When the machine is either out of control or down, a repair person must be called. What is the
probability that a repair person must be called right now?

c. Unless the machine is down, it can be used to produce a single item. What is the probability that the
machine can be used to produce a single component right now? What is the relationship between this
event and the event “machine is down”?

a) Mutually Exclusive

b) 0.02 + 0.015 = 0.35, mutually exclusive

c) 1 – P(down) = 1 – 0.015 = 0.985, complements

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 Events - Types
Conditional Probability

Independence of Events

Mutually Exclusive Events

Collectively Exhaustive Events

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1. Conditional Events - Probability
 Conditional Probability
• Conditional probability in the scenario of event A implies that probability of event A is conditional
upon the occurrence of event B. In this example, event A may be the event that the stock will go up
tomorrow, and event B may be a favorable quarterly report.

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 Example 3
• As part of a drive to modernize the economy, the government of an eastern European country is
pushing for starting 100 new projects in computer development and telecommunications. Two U.S.
giants, IBM and AT&T, have signed contracts for these projects: 40 projects for IBM and 60 for
AT&T. Of the IBM projects, 30 are in the computer area and 10 are in telecommunications; of the
AT&T projects, 40 are in telecommunications and 20 are in computer areas. Given that a randomly
chosen project is in telecommunications, what is the probability that it is undertaken by IBM?

Answer = 0.2

Hint: If we see this directly from the fact that there are 50 telecommunications projects and 10 of them
are by IBM. This confirms the definition of conditional probability in an intuitive sense.

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 Example 3 - Solution
• As part of a drive to modernize the economy, the government of an eastern European country is
pushing for starting 100 new projects in computer development and telecommunications. Two U.S.
giants, IBM and AT&T, have signed contracts for these projects: 40 projects for IBM and 60 for
AT&T. Of the IBM projects, 30 are in the computer area and 10 are in telecommunications; of the
AT&T projects, 40 are in telecommunications and 20 are in computer areas. Given that a randomly
chosen project is in telecommunications, what is the probability that it is undertaken by IBM?

Answer = 0.2

Hint: If we see this directly from the fact that there are 50 telecommunications projects and 10 of them
are by IBM. This confirms the definition of conditional probability in an intuitive sense.

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Contingency Table – Complementary Scenarios for Events

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 Example 4
A consulting firm is bidding for two jobs, one with each of two large multinational corporations. The
company executives estimate that the probability of obtaining the consulting job with firm A, event A, is
0.45. The executives also feel that if the company should get the job with firm A, then there is a 0.90
probability that firm B will also give the company the consulting job. What are the company’s chances
of getting both jobs?

Answer = 0.405

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 Example 4 - Solution
A consulting firm is bidding for two jobs, one with each of two large multinational corporations. The
company executives estimate that the probability of obtaining the consulting job with firm A, event A, is
0.45. The executives also feel that if the company should get the job with firm A, then there is a 0.90
probability that firm B will also give the company the consulting job. What are the company’s chances
of getting both jobs?

Answer = 0.405

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 Example 5
Twenty-one percent of the executives in a large advertising firm are at the top salary level. It is further
known that 40% of all the executives at the firm are women. Also, 6.4% of all executives are women
and are at the top salary level. Recently, a question arose among executives at the firm as to whether
there is any evidence of salary inequity. Assuming that some statistical considerations (explained in
later chapters) are met, do the percentages reported above provide any evidence of salary inequity?

Answer = 0.16 versus 0.2, Salary Inequity exists.

Approach: To solve this problem, we pose it in terms of probabilities and ask whether the probability
that a randomly chosen executive will be at the top salary level is approximately equal to the probability
that the executive will be at the top salary level given the executive is a woman. To answer, we need to
compute the probability that the executive will be at the top level given the executive is a woman.
Defining T as the event of a top salary and W as the event that an executive is a woman.

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 Example 5 - Solution
Twenty-one percent of the executives in a large advertising firm are at the top salary level. It is further
known that 40% of all the executives at the firm are women. Also, 6.4% of all executives are women
and are at the top salary level. Recently, a question arose among executives at the firm as to whether
there is any evidence of salary inequity. Assuming that some statistical considerations (explained in
later chapters) are met, do the percentages reported above provide any evidence of salary inequity?

Approach: To answer, we need to compute the probability that the executive will be at the top level
given the executive is a woman.

Top Other Exe Total

W 6.4 33.6 40

M 14.6 45.4 60
21 79 100

Explanation
Since 0.16 is smaller than 0.21, we may conclude (subject to statistical considerations) that salary
inequity does exist at the firm, because an executive is less likely to make a top salary if she is a
woman
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2. Independence of Events
 Independent Events
• Exercise 1, 2 and Example 1 were more or less dependent events having a specific approach
towards problem solving.

• Independent Events – Two Events A & B are independent of each other, if the following three
conditions hold good:

• Equation 1 & 2 implies that knowledge of A or B does not indicate or tell anything about the other B
or A as both are independent of each other. For example: Dice and Coin
• Equation 3 implies product rule for independent events. Probability of joint occurrence of A & B is
simply the product of their probabilities.

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 Example 6
The probability that a consumer will be exposed to an advertisement for a certain product by seeing a
commercial on television is 0.04. The probability that the consumer will be exposed to the product by
seeing an advertisement on a billboard is 0.06. The two events, being exposed to the commercial and
being exposed to the billboard ad, are assumed to be independent.
(a) What is the probability that the consumer will be exposed to both advertisements?
(b) What is the probability that he or she will be exposed to at least one of the ads?
Answer: 0.0024 & 0.0976

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 Example 6 - Solution
The probability that a consumer will be exposed to an advertisement for a certain product by seeing a
commercial on television is 0.04. The probability that the consumer will be exposed to the product by
seeing an advertisement on a billboard is 0.06. The two events, being exposed to the commercial and
being exposed to the billboard ad, are assumed to be independent.
(a) What is the probability that the consumer will be exposed to both advertisements?
(b) What is the probability that he or she will be exposed to at least one of the ads?
Answer: 0.0024 & 0.0976

(a) Since the two events are independent, the probability of the intersection of the two (i.e., being
exposed to both ads) is

(b)We note that being exposed to at least one of the advertisements is, by definition, the union of the
two events, and so the rule for union applies.

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 Product Rules for Independent Events
• Much of statistics involves random sampling from some population.
• Scenarios for Independent Events:
• Sample randomly from a large population,
• Sample randomly with replacement from a population of any size
• For example, In an urn containing 10 balls, 3 of them red and the rest blue. Random sampling of
one red ball at a time with replacement will lead to same probability of getting red ball (3/10)
because the second draw does not “remember” that the first ball was red.
• Sampling with replacement in this way ensures independence of the elements.
• The same holds for random sampling without replacement (i.e., without returning each element to
the population before the next draw) if the population is relatively large in comparison with the size
of the sample. Unless otherwise specified, we will assume random sampling from a large
population. Random sampling from a large population implies independence.

Intersection Rule: The probability of the intersection of several independent events is just the product
of the separate probabilities.
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 Example 7
The rate of defects in corks of wine bottles is very high, 75%.
a) Assuming independence, if four bottles are opened, what is the probability that all four corks are
defective?
b) What is the probability that at least one of the four corks is defective?

Answer: 0.316; 0.99609

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 Example 7- Solution
The rate of defects in corks of wine bottles is very high, 75%.
a) Assuming independence, if four bottles are opened, what is the probability that all four corks are
defective?
b) What is the probability that at least one of the four corks is defective?

Answer: 0.316; 0.99609

(a) Since bottles are randomly selected , so that signifies independence

P(all 4 are defective) = P (first cork is defective) X P(second cork is defective) X P(third cork is
defective) X P(fourth cork is defective) = 0.75 X 0.75 X 0.75 X 0.75 = 0.316

(b) 1 - P(none are defective) = 1 - 0.25 X 0.25 X 0.25 X 0.25 = 0.99609.

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 Example 8
In the developing world, a woman’s odds of dying from problems related to pregnancy are 1 in 51.
Three women (assumed a random sample) in a developing country are pregnant. What is the
probability that at least one will die?

Answer: 0.0577

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 Example 8 - Solution
In the developing world, a woman’s odds of dying from problems related to pregnancy are 1 in 51.
Three women (assumed a random sample) in a developing country are pregnant. What is the
probability that at least one will die?
Independent events due to random sample.

Answer: 0.0577

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 Example 9
A marketing research firm is interested in interviewing a consumer who fits certain qualifications, for
example, use of a certain product. The firm knows that 10% of the public in a certain area use the
product and would thus qualify to be interviewed. The company selects a random sample of 10 people
from the population as a whole. What is the probability that at least 1 of these 10 people qualifies to be
interviewed?

Answer: 0.6513

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 Example 9 - Solution
A marketing research firm is interested in interviewing a consumer who fits certain qualifications, for
example, use of a certain product. The firm knows that 10% of the public in a certain area use the
product and would thus qualify to be interviewed. The company selects a random sample of 10 people
from the population as a whole. What is the probability that at least 1 of these 10 people qualifies to be
interviewed?

Answer: 0.6513

First, we note that if a sample is drawn at random, then the event that any one of the items in the
sample fits the qualifications is independent of the other items in the sample.
Let Qi, where i = 1, 2, . . . , 10, be the event that person i qualifies.

Probability that at least 1 of the 10 people will qualify is the probability of the union of the 10 events Qi
(i = 1, . . . , 10). We are thus looking for P(Q1 U Q2 U…… U Q10).
Now, since 10% of the people qualify, the probability that person i does not qualify, or , is equal to 0.90
for each i = 1, . . . , 10. Therefore, the required probability is equal to 1 - (0.9)(0.9)…..(0.9) (10 times),
or 1 - (0.9)^10 = 0.6513.

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3. Mutually Exclusive Events
 Independent versus Exclusive Events
• Be sure that you understand the difference between independent events and mutually exclusive
events.
• When two events are mutually exclusive, they are not independent. In fact, they are
dependent events in the sense that if one happens, the other one cannot happen. The
probability of the intersection of two mutually exclusive events is equal to zero. Head and Tail

• The probability of the intersection of two independent events is not zero; it is equal to the
product of the probabilities of the separate events. Random choice of 2 balls in large sample.

What are Mutually Exclusive Events?

• When the sets corresponding to two events are disjoint (i.e., have no intersection), the two events
are called mutually exclusive.

• For mutually exclusive events, the probability of the intersection of the events is zero.

Examples:
• Being male and being female are mutually exclusive events
• Heads and tails in a coin toss are mutually exclusive events
• Getting an Ace and Getting a King are mutually exclusive events
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 Mutually Exclusive Events
• When the sets corresponding to two events are disjoint (i.e., have no intersection), the two events
are called mutually exclusive.

• For mutually exclusive events, the probability of the intersection of the events is zero.

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4. Collectively Exhaustive Events
 Collectively Exhaustive Events
• A set of events is collectively exhaustive if one of the events must occur.
✓ Is getting a Head or a Tail collectively exhaustive?
✓ Is getting an Ace or a King, collectively exhaustive?

Mutually Exclusive Events versus Collectively Exhaustive Events

• Being male and being female are mutually exclusive and collectively
exhaustive events.

• Heads and tails in a coin toss are mutually exclusive events and collectively exhaustive events.

• Getting an Even or Getting an Odd number when you roll a dice.

• Passing or Failing in an exam.

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 Example 10
Let A, B, C be three mutually exclusive and exhaustive events such that
P(B) = 1.5 P(A)
P(C) = 0.5 P(B).
Find the probability of A.

Answer: 0.308

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 Example 10 - Solution
Let A, B, C be three mutually exclusive and exhaustive events such that
P(B) = 1.5 P(A)
P(C) = 0.5 P(B).
Find the probability of A.

Answer: 0.308

Let P(A) = p.
Then, P(B) = 1.5p & P(C) = 0.75p

Since, A,B,C are mutually exclusive and exhaustive events.

Therefore: P(A) + P(B) + P(C) = 1
So, p + 1.5p + 0.75p = 1
p = 0.30769

So, P(A) = 0.308

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Thank You!