Example 11 Winning Tickets

One thousand tickets are sold at $1 each for four prizes of $100,
$50, $25, and $10. After each prize drawing, the winning ticket is
then returned to the pool of tickets. What is the expected value if
you purchase two tickets?
Solution
The problem can be set up as follows:
Gain X $98 $48 $23 $8 -$2
Probability P(X) 2/1000 2/1000 2/1000 2/1000 992/1000

The Expected value

EX      X . PX 
2 2 2 2 992
 $98.  $48.  $23  $8  ($2).  $1.63.
1000 1000 1000 1000 1000
An Alternate solution is
2 2 2 2
E  X   $100.  $50.  $25  $10  $2  $1.63.
1000 1000 1000 1000

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 Example 12 Bond Investment
A financial adviser suggests that his client ‫ عميل‬select one of two
types of bonds ‫ سندات‬in which to invest $5000. Bond X pays a
return of 4% and has a default rate of 2%. Bond Y has 2.5%
return a default rate of 1%. Find the expected rate of return and
decide which bond would be a better investment. When the bond
defaults, the investor loses all the investment.
Solution
- The return on bond X is: $5000. 4% = $200.
The Expected value is
E  X   $200  0.98  $5000  0.02   $96.
- The return on bond Y is: $5000. 2.5% = $125.

The Expected value is

E  X   $125  0.99  $5000  0.001  $73.75.
Hence, bond X would be a better investment since the expected return is
higher.
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 Example 13
One thousand tickets are sold at $1 each for a color television
valued at $350. What is the expected value of the gain if you
purchase one ticket?

Solution
The problem can be set up as follows:

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 Example 14
A construction company wants to submit a bid ‫ تقديم عطاء‬for
remodeling a school. The research and planning needed to make
the bid cost $4000. If the bid were accepted, the company would
make $26,000. Would you advise the company to spend the
$4000 if the bid has only 20% probability of being accepted?
Explain your reasoning.

Solution

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 Example 15
A dairy farmer ‫ مزرعة مخصصة لمنتجات األلبان‬estimates for the next
year the farm’s cows ‫ بقرة‬will produce about 25,000 gallons of
milk. Because of variation in the market price of milk and cost
of feeding the cows, the profit per gallon may vary with the
probabilities given in the table below. Estimate the profit on the
25,000 gallons.

Solution

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 Exam Question
Table 1 gives the number of job applications processed at a small employment
agency during the past 100-day period.
Table 1: Number of Job Applications Processed during the Past 100-Day Period

Number of Job Applicants Number of Days Achieved

7 10
8 10
10 20
11 30
12 20
14 10
100

Determine the expected number of applications processed and the variance

and standard deviation.
Solution
To the extent that we believe that the experience of the past 100 days is
typical, we can find the relative frequency distribution and equate its
probability distribution. This and the other calculations to find E(X) and Var X
are shown in Table 2.
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Table 2: Calculations to Find the Expected Value and Variance

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 Notes on Discrete R.V.
• We notice that
– The discrete distributions are described by their Cumulative
Probability Fun CPFs;
– The CPFs are non-decreasing step functions;
– The CPFs only make jumps at points in the range of the
random variable.
– One can recover the respective mass functions using the
size of the jump;
– The expectation and the variance are computed using the
respective mass function;
– The calculation of probabilities, expectation and variance
involves summation.

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 Probability Distribution (model)
• A probability Distribution (model) for a random variable X is
a specified form of probability distribution that is assumed
to reflect the behavior of X.
• Probabilities are expressed in terms of unknown
parameters that are related to characteristics of the
population and the method of sampling
• In the following section we shall study some of theoretical
discrete probability distributions. Which figure most
prominently in statistical theory and its applications.
• Discrete Probability Distributions
 Bernoulli
 Binomial
 Poisson
 Geometric
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 Bernoulli Experiments
• A Bernoulli trial is an experiment with two outcomes:
S(Success) and F(Failure).
• P(S) = p , p = probability of “success”, and
• P(F) = q = (1  p), q = probability of “failure,

• Example: Tossing a coin.

– S and F are contextually defined.
– For a fair coin, p = q = 0.5.
• Example: Receiving a bit.
– Success is an error .
– Hence, p = 0.1, so q = 0.9.

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 Bernoulli Random Variables
• A Bernoulli random variable, X, is defined by:
– X = 1, if the outcome is Success,
– X = 0, if the outcome is Failure.

X 1 0
P(X) p q

Expectation and Variance of Bernoulli Random Variable

A direct computation yields
  1 p  0  (1  p)  p,
 2  12  p  02  (1  p)  p 2  p(1  p)  pq.
 Expected value = p; variance =pq= p(1 – p)

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 The Binomial Distribution
• A binomial random variable, X, represents the number of
Successes in n independent Bernoulli trials.
• Note that nk
P( X  k) Ck p (1  p)
n k
,
k  0,1, 2, ..., n.
Expectation and Variance of the Binomial RV
• For a binomial R.V. with parameters n and p we have
  np ,
  np (1  p )  npq .
2

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 The Binomial Distribution
A binomial Experiment: is a probability experiment that satisfies
the following requirements:
1. There must be a fixed number of trials.
2. Each trial can have only two outcomes or outcomes that can be
reduced to two outcomes. These outcomes can be considered as
either success or failure.
3. The outcomes of each trial must be independent of one another.
4. The probability of a success must remain the same for each trial.
The outcomes of a binomial Experiment and the corresponding
probabilities of these outcomes are called a binomial distribution.
Notation for the Binomial Distribution
n The number of trials X The number of successes in n trials
p The probability of success q The probability of a failure
Note that:
0 ≤ X ≤ n and X=0, 1, 2, 3, …,n . & p+q=1

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 Binomial Probability Formula
In a binomial experiment, the probability of exactly X successes in n
trials is
n!
P X   C n X
p q n X
 p X q n X
X
 n  X ! X !
Mean, Variance, and standard Deviation for the Binomial Distribution

For a variable that has the Binomial Distributions:

Mean: µ =n•p

Variance:  =n•p•q
2

Standard Deviation:  = n•p•q

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 Examples of the Binomial Distribution

Excel Function
• BINOM.DIST(number_s,
trials, probability_s,
cumulative)
 Example 16 Tossing Coins
A coin is tossed 3 times. Find the probability of getting exactly two
heads.
Solution
n=number of trials=3, X=number of success(Two heads)=2
P=Probability of success (Heads) in each trial=1/2, and
q= Probability of failure(tail) in each trial=1-1/2=1/2.
P(2 Heads)  P  X  2   C Xn p X q n  X
2 1
3! 1 1 3
 C23 p 2 q 32        0.375.
 3  2 !2!  2   2  8
Another solution by using sample space
The problem can be solved by looking at the sample space. There are three
ways to get two heads.
HHH, HHT, HTH, THH, TTH, THT, HTT, TTT.
The answer is 3/8, or 0.375 is the same answer obtained by using binomial
distribution.

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 Example 17 Tossing a Coin
A coin is tossed 4 times, find the mean, variance, and
standard deviation of the number of heads that will be
obtained.
Solution
n=4, P=1/2, and q= 1/2. then,
1
  n . p  4.  2,
2
1 1
  n . p .q  4. .  1,     1  1.
2 2

2 2
So when four coins are tossed many, many times, the
average of the number of heads that appear is 2, and the
standard deviation of the number of heads is 1.
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The previous problem can be solved by using the formulas
for expected value. The distribution is shown.

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