Chapter 4
Chapter 4
Statistics for
Business and Economics (13e)
Anderson, Sweeney, Williams, Camm, Cochran
© 2017 Cengage Learning
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 1
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Statistics for Business and Economics (13e)
Chapter 4
Introduction to Probability
• Random Experiments, Counting Rules, and Assigning Probabilities
• Events and Their Probability
• Some Basic Relationships of Probability
• Conditional Probability
• Bayes’ Theorem
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 2
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Statistics for Business and Economics (13e)
Uncertainties
• Managers often base their decisions on an analysis of uncertainties such
as the following:
• What are the chances that sales will decrease if we increase prices?
• What is the likelihood a new assembly method will increase
productivity?
• What are the odds that a new investment will be profitable?
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 3
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Probability
• Probability is a numerical measure of the likelihood that an event will
occur.
• Probability values are always assigned on a scale from 0 to 1.
• A probability near zero indicates an event is quite unlikely to occur.
• A probability near one indicates an event is almost certain to occur.
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Statistics for Business and Economics (13e)
Probability: 0 .5 1
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 6
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 7
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 8
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 9
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 10
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 11
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Tree Diagram
• Example: Bradley Investments
Markley Oil Collins Mining Experimental
(Stage 1) (Stage 2) Outcomes
Gain 8 (10, 8) Gain $18,000
(10, -2) Gain $8,000
Gain 10 Lose 2
Gain 8 (5, 8) Gain $13,000
Lose 2 (5, -2) Gain $3,000
Gain 5
Gain 8 (0, 8) Gain $8,000
0
(0, -2) Lose $2,000
Lose 20 Lose 2
Gain 8 (-20, 8) Lose $12,000
Lose 2 (-20, -2) Lose $22,000
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Statistics for Business and Economics (13e)
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Statistics for Business and Economics (13e)
𝑁 𝑁 𝑁!
𝑃 = 𝑛! =
𝑛 𝑛 𝑁−𝑛 !
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Statistics for Business and Economics (13e)
Assigning Probabilities
• Basic Requirements for Assigning Probabilities
1. The probability assigned to each experimental outcome must be
between 0 and 1, inclusively.
0 < P(Ei) < 1 for all i
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Statistics for Business and Economics (13e)
Assigning Probabilities
• Basic Requirements for Assigning Probabilities
2. The sum of the probabilities for all experimental outcomes must equal 1.
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 16
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Assigning Probabilities
• Classical Method
Assigning probabilities based on the assumption of equally likely
outcomes
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Statistics for Business and Economics (13e)
Classical Method
• Example: Rolling a Die
If an experiment has n possible outcomes, the classical method would
assign a probability of 1/n to each outcome.
Experiment: Rolling a die
Sample Space: S = {1, 2, 3, 4, 5, 6}
Probabilities: Each sample point has a 1/6 chance of occurring
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 18
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 19
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Number of Number
Polishers Rented of Days Probability
0 4 .10 = 4/40
1 6 .15
2 18 .45
3 10 .25
4 2 .05
40 1.00
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Statistics for Business and Economics (13e)
Subjective Method
• When economic conditions or a company’s circumstances change rapidly it
might be inappropriate to assign probabilities based solely on historical data.
• We can use any data available as well as our experience and intuition, but
ultimately a probability value should express our degree of belief that the
experimental outcome will occur.
• The best probability estimates often are obtained by combining the estimates
from the classical or relative frequency approach with the subjective estimate.
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 21
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Subjective Method
• Example: Bradley Investments
An analyst made the following probability estimates.
Experimental Outcome Net Gain or Loss Probability
(10, 8) $18,000 Gain .20
(10, -2) $8,000 Gain .08
(5, 8) $13,000 Gain .16
(5, -2) $3,000 Gain .26
(0, 8) $8,000 Gain .10
(0, -2) $2,000 Loss .12
(-20, 8) $12,000 Loss .02
(-20, -2) $22,000 Loss .06
1.00
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 23
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 24
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 25
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 26
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Complement of an Event
• The complement of event A is defined to be the event consisting of all
sample points that are not in A.
• The complement of A is denoted by Ac.
Sample
Event A Ac Space S
Venn Diagram
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Statistics for Business and Economics (13e)
Sample
Event A Event B Space S
Venn Diagram
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 29
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Sample
Event A Event B Space S
Venn Diagram
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 31
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Addition Law
• The addition law provides a way to compute the probability of event A, or
B, or both A and B occurring.
• The law is written as:
P(A B) = P(A) + P(B) - P(A B)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 32
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Statistics for Business and Economics (13e)
Addition Law
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M C = Markley Oil Profitable or Collins Mining Profitable
We know: P(M) = .70, P(C) = .48, P(M C) = .36
Thus: P(M C) = P(M) + P(C) - P(M C)
= .70 + .48 - .36
= .82
(This result is the same as that obtained earlier
using the definition of the probability of an event.)
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Statistics for Business and Economics (13e)
Sample
Event A Event B Space S
Venn Diagram
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 35
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Statistics for Business and Economics (13e)
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 36
otherwise on a password-protected website or school-approved learning management system for classroom use.
Statistics for Business and Economics (13e)
Conditional Probability
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
P(C|M) = Collins Mining Profitable given Markley Oil Profitable
We know: P(M C) = .36, P(M) = .70
𝑃(𝐶∩𝑀) .36
Thus: 𝑃 𝐶 𝑀 = 𝑃(𝑀)
=
.70
= .5143
© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or 37
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Statistics for Business and Economics (13e)
Multiplication Law
• The multiplication law provides a way to compute the probability of the
intersection of two events.
• The law is written as:
P(A B) = P(B)P(A|B)
or
P(A B) = P(A)P(B|A)
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Statistics for Business and Economics (13e)
Multiplication Law
• Example: Bradley Investments
Event M = Markley Oil Profitable
Event C = Collins Mining Profitable
M C = Markley Oil Profitable and Collins Mining Profitable
We know: P(M) = .70, P(C|M) = .5143
Thus: P(M C) = P(M)P(M|C)
= (.70)(.5143)
= .36
(This result is the same as that obtained earlier
using the definition of the probability of an event.)
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Statistics for Business and Economics (13e)
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Statistics for Business and Economics (13e)
Independent Events
• If the probability of event A is not changed by the existence of event B,
we would say that events A and B are independent.
• Two events A and B are independent if:
P(A|B) = P(A) or P(B|A) = P(B)
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Statistics for Business and Economics (13e)
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Statistics for Business and Economics (13e)
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Statistics for Business and Economics (13e)
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Statistics for Business and Economics (13e)
End of Chapter 4
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