Statistics for

Business and Economics

7th Edition

Chapter 3

Probability

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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-
 Chapter Goals
After completing this chapter, you should be
able to:
 Explain basic probability concepts and definitions
 Use a Venn diagram or tree diagram to illustrate
simple probabilities
 Apply common rules of probability
 Compute conditional probabilities
 Determine whether events are statistically
independent
 Use Bayes’ Theorem for conditional probabilities
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 3.1
Important Terms

 Random Experiment – a process leading to an

uncertain outcome
 Basic Outcome – a possible outcome of a
random experiment
 Sample Space – the collection of all possible
outcomes of a random experiment
 Event – any subset of basic outcomes from the
sample space

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 Important Terms
(continued)

 Intersection of Events – If A and B are two

events in a sample space S, then the
intersection, A ∩ B, is the set of all outcomes in
S that belong to both A and B

A AB B

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 Important Terms
(continued)

 A and B are Mutually Exclusive Events if they

have no basic outcomes in common
 i.e., the set A ∩ B is empty

A B

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 Important Terms
(continued)

 Union of Events – If A and B are two events in a

sample space S, then the union, A U B, is the
set of all outcomes in S that belong to either
A or B
S The entire shaded
area represents
A B AUB

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 Important Terms
(continued)

 Events E1, E2, … Ek are Collectively Exhaustive

events if E1 U E2 U ...U Ek = S
 i.e., the events completely cover the sample space

 The Complement of an event A is the set of all

basic outcomes in the sample space that do not
belong to A. The complement is denoted A
S
A
A
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 Examples
Let the Sample Space be the collection of
all possible outcomes of rolling one die:

S = [1, 2, 3, 4, 5, 6]

Let A be the event “Number rolled is even”

Let B be the event “Number rolled is at least 4”
Then
A = [2, 4, 6] and B = [4, 5, 6]
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 Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

Complements:
A =[1, 3, 5] B =[1, 2, 3]
Intersections:
A Ç B =[4, 6] A Ç B =[5]
Unions:
A È B =[2, 4, 5, 6]
A È A =[1, 2, 3, 4, 5, 6] =S
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 Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

 Mutually exclusive:
 A and B are not mutually exclusive
 The outcomes 4 and 6 are common to both

 Collectively exhaustive:
 A and B are not collectively exhaustive
 A U B does not contain 1 or 3

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 3.2
Probability

 Probability – the chance that 1 Certain

an uncertain event will occur
(always between 0 and 1)

0 ≤ P(A)≤ 1 For any event A .5

0 Impossible
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 Assessing Probability
 There are three approaches to assessing the
probability of an uncertain event:

1.classical probability
NA number of outcomes that satisfy the event
probability of event A = =
N total number of outcomes in the sample space

 Assumes all outcomes in the sample space are equally likely to

occur

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 Counting the Possible Outcomes

 Use the Combinations formula to determine the

number of combinations of n things taken kat a
time

n!
C = n
k
k! (n - k)!
 where
 n!= n(n-1)(n-2)… (1)
 0!= 1 by definition

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 Assessing Probability
Three approaches (continued)
2.relative frequency probability
nA number of events in the population that satisfy event A
probability of event A = =
n total number of events in the population

 the limit of the proportion of times that an event A occurs in a large

number of trials, n

3.subj
ective probability
an individual opinion or belief about the probability of occurrence

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 Probability Postulates

1. If A is any event in the sample space S, then

0 £ P(A) £ 1

2. Let A be an event in S, and let Oi denote the basic

outcomes.Then
P(A) =å P(Oi )
A

(the notation means that the summation is over all the basic outcomes in A)

3.P(S)= 1

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 3.3
Probability Rules

 The Complement rule:

P(A) =1- P(A) i.e., P(A) +P(A) =1

 The Addition rule:

 The probability of the union of two events is

P(A È B) =P(A) +P(B) - P(A Ç B)

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 A Probability Table

Probabilities and joint probabilities for two

events A and B are summarized in this table:

B B

A P(A Ç B) P(A Ç B ) P(A)

A P(A Ç B) P(A Ç B ) P(A)

P(B) P( B ) P(S) =1.0

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 Addition Rule Example

Consider a standard deck of 52 cards, with four

suits: ♥ ♣ ♦♠
Let event A = card is an Ace
Let event B = card is from a red suit

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 Addition Rule Example
(continued)

P(Red U Ace)= P(Red)+ P(Ace)- P(Red ∩ Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

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 Conditional Probability
 A conditional probability is the probability of one
event, given that another event has occurred:
The conditional
P(A Ç B)
P(A | B) = probability of A
P(B) given that B has
occurred

P(A Ç B) The conditional

P(B | A) = probability of B
P(A) given that A has
occurred

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 Conditional Probability Example

 Of the cars on a used car lot, 70% have air

conditioning (AC)and 40% have a CD player
(CD). 20% of the cars have both.

 W hat is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD |AC)

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 Conditional Probability Example
(continued)
 Of the cars on a used car lot, 70% have air
conditioning (AC)and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD Ç AC) .2
P(CD | AC) = = =.2857
P(AC) .7
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 Conditional Probability Example
(continued)
 Given AC, we only consider the top row (70% of the cars). Of
these, 20% have a CD player. 20% of 70% is 28.57% .

CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD Ç AC) .2
P(CD | AC) = = =.2857
P(AC) .7
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 Multiplication Rule

 Multiplication rule for two events A and B:

P(A Ç B) =P(A | B) P(B)

 also

P(A Ç B) =P(B | A) P(A)

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 Multiplication Rule Example
P(Red ∩ Ace)= P(Red|Ace)P(Ace)
æ2 öæ4 ö 2
=ç ÷ç ÷=
è 4 øè52 ø 52
number of cards that are red and ace 2
= =
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
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 Statistical Independence
 Two events are statistically independent
if and only if:
P(A Ç B) =P(A) P(B)
 Events A and B are independent when the probability of one
event is not affected by the other event
 If A and B are independent, then

P(A | B) =P(A) if P(B)>0

P(B | A) =P(B) if P(A)>0

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 Statistical Independence Example
 Of the cars on a used car lot, 70% have air
conditioning (AC)and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

 Are the events AC and CD statistically independent?

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 Statistical Independence Example
(continued)
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(AC ∩ CD)= 0.2

P(AC)= 0.7
P(AC)P(CD)= (0.7)(0.4)= 0.28
P(CD)= 0.4

P(AC ∩ CD)= 0.2 ≠ P(AC)P(CD)= 0.28

So the two events are not statistically independent
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 3.4
Bivariate Probabilities
Outcomes for bivariate events:

B1 B2 ... Bk

A1 P(A1B1) P(A1B2) ... P(A1Bk)

A2 P(A2B1) P(A2B2) ... P(A2Bk)

. . . . .
. . . . .
. . . . .

Ah P(AhB1) P(AhB2) ... P(AhBk)

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 Joint and
Marginal Probabilities

 The probability of a j
oint event, A ∩ B:
number of outcomes satisfying A and B
P(A Ç B) =
total number of elementary outcomes

 Computing a marginal probability:

P(A) =P(A Ç B1 ) +P(A Ç B 2 ) +L +P(A Ç Bk )

 W here B1, B2, … , Bk are kmutually exclusive and
collectively exhaustive events
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 Marginal Probability Example

P(Ace)
2 2 4
=P(Ace Ç Red) +P(Ace Ç Black) = + =
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
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 Using a Tree Diagram
.2
H as .7 P(AC ∩ CD)= .2
Given AC or CD
no AC: P(A
C)=
.7 Doe
s P(AC ∩ CD)= .5
Ha not .5
sA
C have
CD .7
All
Cars
Do .2
e
not s H as .3
h av P(A CD P(AC ∩ CD)= .2
eA C)=
C .3
Doe
s
not .1 P(AC ∩ CD)= .1
have
CD
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.3 32
Ch. 3-
 Odds

 The odds in favor of a particular event are

given by the ratio of the probability of the
event divided by the probability of its
complement
 The odds in favor of A are

P(A) P(A)
odds = =
1- P(A) P(A)

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 Odds:Example
 Calculate the probability of winning if the odds
of winning are 3 to 1:
3 P(A)
odds = =
1 1- P(A)

 Now multiply both sides by 1 – P(A)and solve for P(A):

3 x (1-P(A))= P(A)
3 – 3P(A)= P(A)
3 = 4P(A)
P(A)= 0.75
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 Overinvolvement Ratio
 The probability of event A1 conditional on event B1
divided by the probability of A1 conditional on activity B2
is defined as the overinvolvement ratio:
P(A 1 | B1 )
P(A 1 | B 2 )

 An overinvolvement ratio greater than 1 implies that

event A1 increases the conditional odds ration in favor
of B1:
P(B1 | A 1 ) P(B1 )
>
P(B 2 | A 1 ) P(B 2 )

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 3.5
Bayes’ Theorem
P(A | E i )P(E i )
P(E i | A) =
P(A)
P(A | E i )P(E i )
=
P(A | E 1 )P(E 1 ) +P(A | E 2 )P(E 2 ) +K +P(A | E k )P(E k )

 where:
Ei = ith event of kmutually exclusive and collectively
exhaustive events
A = new event that might impact P(Ei)

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 Bayes’ Theorem Example

 A drilling company has estimated a 40%

chance of striking oil for their new well.
 A detailed test has been scheduled for more
information.Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
 Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?
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 Bayes’Theorem Example
(continued)

 Let S = successful well

U = unsuccessful well
 P(S)= .4 , P(U)= .6 (prior probabilities)
 Define the detailed test event as D
 Conditional probabilities:
P(D|S)= .6 P(D|U)= .2
 Goal is to find P(S|D)

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 Bayes’Theorem Example
(continued)

Apply Bayes’Theorem:
P(D | S)P(S)
P(S | D) =
P(D | S)P(S) +P(D | U)P(U)
(.6)(.4)
=
(.6)(.4) + (.2)(.6)
.24
= =.667
.24 +.12

So the revised probability of success (from the original estimate of .4),

given that this well has been scheduled for a detailed test, is .667
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 Chapter Summary

 Defined basic probability concepts

 Sample spaces and events, intersection and union
of events, mutually exclusive and collectively
exhaustive events, complements
 Examined basic probability rules
 Complement rule, addition rule, multiplication rule
 Defined conditional, j
oint, and marginal probabilities
 Reviewed odds and the overinvolvement ratio
 Defined statistical independence
 Discussed Bayes’ theorem
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