Statistics with Economics and

Business Applications

Chapter 3 Probability and Discrete Probability

Distributions

Experiment, Event, Sample space, Probability, Counting rules,

Conditional probability, Bayes’s rule, random variables, mean,
variance 5E Note 4
 Review
I. What’s in last lecture?
Descriptive Statistics – Numerical Measures.
Chapter 2.

II. What's in this and the next two lectures?

Experiment, Event, Sample space, Probability,
Counting rules, Conditional probability,
Bayes’s rule, random variables, mean, variance.
Read Chapter 3.
5E Note 4
 Descriptive and Inferential Statistics

Statistics can be broken into two basic types:

• Descriptive Statistics (Chapter 2):
We have already learnt this topic
• Inferential Statistics (Chapters 7-13):
Methods that making decisions or predictions
about a population based on sampled data.
• What are Chapters 3-6?
Probability
5E Note 4
 Why Learn Probability?
• Nothing in life is certain. In everything we do, we
gauge the chances of successful outcomes, from
business to medicine to the weather
• A probability provides a quantitative description of
the chances or likelihoods associated with various
outcomes
• It provides a bridge between descriptive and
inferential statistics
Probability
Population Sample
Statistics
5E Note 4
 Probabilistic vs Statistical Reasoning
• Suppose I know exactly the proportions of
car makes in California. Then I can find the
probability that the first car I see in the
street is a Ford. This is probabilistic
reasoning as I know the population and
predict the sample
• Now suppose that I do not know the
proportions of car makes in California, but
would like to estimate them. I observe a
random sample of cars in the street and then
I have an estimate of the proportions of the
population. This is statistical reasoning
5E Note 4
 What is Probability?
• In Chapters 2, we used graphs and
numerical measures to describe data sets
which were usually samples.
• We measured “how often” using
Relative frequency = f/n
• As n gets larger,
Sample Population
And “How often”
= Relative frequency Probability
Note 5 of 5E
 Basic Concepts
• An experiment is the process by which
an observation (or measurement) is
obtained.
• An event is an outcome of an experiment,
usually denoted by a capital letter.
– The basic element to which probability
is applied
– When an experiment is performed, a
particular event either happens, or it
doesn’t!
Note 5 of 5E
Experiments and Events
• Experiment: Record an age
– A: person is 30 years old
– B: person is older than 65
• Experiment: Toss a die
– A: observe an odd number
– B: observe a number greater than 2

Note 5 of 5E
 Basic Concepts
• Two events are mutually exclusive if,
when one event occurs, the other cannot,
and vice versa.
•Experiment: Toss a die Not Mutually
–A: observe an odd number Exclusive

–B: observe a number greater than 2

–C: observe a 6 B and C?
Mutually
–D: observe a 3 Exclusive B and D?
Note 5 of 5E
 Basic Concepts
• An event that cannot be decomposed is called
a simple event.
• Denoted by E with a subscript.
• Each simple event will be assigned a
probability, measuring “how often” it occurs.
• The set of all simple events of an experiment is
called the sample space, S.

Note 5 of 5E
 Example
• The die toss:
• Simple events: Sample space:
1 E1
S ={E1, E2, E3, E4, E5, E6}
2 E2
S
3 E3 •E1 •E3
4 E4 •E5
5 E5 •E2 •E4 •E6
6 E6
Note 5 of 5E
 Basic Concepts
• An event is a collection of one or more
simple events.
S
•E1 •E3
•The die toss: A •E5
–A: an odd number B
–B: a number > 2 •E2 •E4 •E6

A ={E1, E3, E5}

B ={E3, E4, E5, E6}
Note 5 of 5E
 The Probability
of an Event
• The probability of an event A measures “how
often” A will occur. We write P(A).
• Suppose that an experiment is performed n
times. The relative frequency for an event A is
Number of times A occurs f

n n
• If we let n get infinitely large,
f
P ( A)  lim
n n
Note 5 of 5E
 The Probability
of an Event
• P(A) must be between 0 and 1.
– If event A can never occur, P(A) = 0.
If event A always occurs when the
experiment is performed, P(A) =1.
• The sum of the probabilities for all
simple events in S equals 1.
• The probability of an event A is found
by adding the probabilities of all the
simple events contained in A. Note 5 of 5E
 Finding Probabilities
• Probabilities can be found using
– Estimates from empirical studies
– Common sense estimates based on
equally likely events.
• Examples:
–Toss a fair coin. P(Head) = 1/2
– Suppose that 10% of the U.S. population has
red hair. Then for a person selected at random,
P(Red hair) = .10 Note 5 of 5E
 Using Simple Events
• The probability of an event A is equal to
the sum of the probabilities of the simple
events contained in A
• If the simple events in an experiment are
equally likely, you can calculate

nA number of simple events in A

P( A)  
N total number of simple events
Note 5 of 5E
 Example 1
Toss a fair coin twice. What is the probability
of observing at least one head?

1st Coin 2nd Coin Ei P(Ei)

H HH 1/4 P(at least 1 head)
H
T HT 1/4 = P(E1) + P(E2) + P(E3)
H TH 1/4 = 1/4 + 1/4 + 1/4 = 3/4
T 1/4
T TT

Note 5 of 5E
 Example 2
A bowl contains three M&Ms®, one red, one
blue and one green. A child selects two M&Ms
at random. What is the probability that at least
one is red?
1st M&M 2nd M&M Ei P(Ei)
m RB
m 1/6
m RG
1/6 P(at least 1 red)
m BR
m 1/6 = P(RB) + P(BR)+ P(RG)
m + P(GR)
BG
1/6
m = 4/6 = 2/3
m GB
1/6
m GR
1/6 Note 5 of 5E
 Example 3
The sample space of throwing a pair of dice is

Note 5 of 5E
 Example 3
Event Simple events Probability

Dice add to 3 (1,2),(2,1) 2/36

Dice add to 6 (1,5),(2,4),(3,3), 5/36
(4,2),(5,1)
Red die show 1 (1,1),(1,2),(1,3), 6/36
(1,4),(1,5),(1,6)
Green die show 1 (1,1),(2,1),(3,1), 6/36
(4,1),(5,1),(6,1)
Note 5 of 5E
 Counting Rules
• Sample space of throwing 3 dice has
216 entries, sample space of throwing
4 dice has 1296 entries, …
• At some point, we have to stop listing
and start thinking …
• We need some counting rules

Note 5 of 5E
 The mn Rule
• If an experiment is performed in two stages,
with m ways to accomplish the first stage and
n ways to accomplish the second stage, then
there are mn ways to accomplish the
experiment.
• This rule is easily extended to k stages, with
the number of ways equal to
n1 n2 n3 … nk
Example: Toss two coins. The total number of
simple events is:
22=4
Note 5 of 5E
 Examples m
m
Example: Toss three coins. The total number of
simple events is: 222=8
Example: Toss two dice. The total number of
simple events is: 6  6 = 36
Example: Toss three dice. The total number of
simple events is: 6  6  6 = 216

Example: Two M&Ms are drawn from a dish

containing two red and two blue candies. The total
number of simple events is:
4  3 = 12 Note 5 of 5E
 Permutations
• The number of ways you can arrange
n distinct objects, taking them r at a time
is Prn  n!
(n  r )!
where n! n(n  1)( n  2)...( 2)(1) and 0! 1.
Example: How many 3-digit lock combinations
can we make from the numbers 1, 2, 3, and 4?
4!
The order of the choice is
important!
P   4(3)( 2)  24
3
4

1! Note 5 of 5E
 Examples
Example: A lock consists of five parts and
can be assembled in any order. A quality
control engineer wants to test each order for
efficiency of assembly. How many orders are
there?
The order of the choice is
important!
5!
P   5(4)(3)( 2)(1)  120
5
5

0!
Note 5 of 5E
 Combinations
• The number of distinct combinations of n
distinct objects that can be formed,
taking them r at a time is n n!
Cr 
r!(n  r )!
Example: Three members of a 5-person committee must
be chosen to form a subcommittee. How many different
subcommittees could be formed?
5! 5(4)(3)( 2)1 5(4)
The order of C 
5
   10
3!(5  3)! 3(2)(1)( 2)1 (2)1
3
the choice is
not important! Note 5 of 5E
 Example m
m m
m mm
• A box contains six M&Ms®, four red
and two green. A child selects two M&Ms at
random. What is the probability that exactly
one is red? 2!
C 
6 6! 6(5)
  15
2
C1  2
The order of 2 1!1!
2!4! 2(1)
the choice is ways to choose
not important! ways to choose 2 M & Ms.
1 green M & M.
4!
C 
1
4
4 4  2 =8 ways to
1!3! choose 1 red and 1 P(exactly one
ways to choose green M&M. red) = 8/15
1 red M & M.
Note 5 of 5E
 Example
A deck of cards consists of 52 cards, 13 "kinds"
each of four suits (spades, hearts, diamonds, and
clubs). The 13 kinds are Ace (A), 2, 3, 4, 5, 6, 7,
8, 9, 10, Jack (J), Queen (Q), King (K). In many
poker games, each player is dealt five cards from
a well shuffled deck.
52! 52(51)(50)( 49)48
There are C 52
   2,598,960
5!(52  5)!
5
5(4)(3)( 2)1
possible hands
Note 5 of 5E
 Event Relations
The beauty of using events, rather than simple events, is
that we can combine events to make other events using
logical operations: and, or and not.
The union of two events, A and B, is the event that
either A or B or both occur when the experiment is
performed. We write
A B

A B A B

Note 5 of 5E
 Event Relations
The intersection of two events, A and B, is
the event that both A and B occur when the
experiment is performed. We write A B.
S

A B A B

• If two events A and B are mutually

exclusive, then P(A B) = 0.
Note 5 of 5E
 Event Relations
The complement of an event A consists of
all outcomes of the experiment that do not
result in event A. We write AC.

S
AC

Note 5 of 5E
 Example
Select a student from the classroom and
record his/her hair color and gender.
– A: student has brown hair
– B: student is female
– C: student is male Mutually exclusive; B = C C

What is the relationship between events B and C?

•AC: Student does not have brown hair
•BC: Student is both male and female = 
•BC: Student is either male and female = all students = S
Note 5 of 5E
 Calculating Probabilities for
Unions and Complements
• There are special rules that will allow you to
calculate probabilities for composite events.
• The Additive Rule for Unions:
• For any two events, A and B, the probability
of their union, P(A B), is

P( A  B)  P( A)  P( B)  P( A  B)
A B

Note 5 of 5E
Example: Additive Rule
Example: Suppose that there were 120
students in the classroom, and that they
could be classified as follows:
A: brown hair Brown Not Brown
P(A) = 50/120 Male 20 40
B: female Female 30 30
P(B) = 60/120
P(AB) = P(A) + P(B) – P(AB)
= 50/120 + 60/120 - 30/120
= 80/120 = 2/3 Check: P(AB)
= (20 + 30 + 30)/120
Note 5 of 5E
 Example: Two Dice
A: red die show 1
B: green die show 1

P(AB) = P(A) + P(B) – P(AB)

= 6/36 + 6/36 – 1/36
= 11/36
Note 5 of 5E
 A Special Case
When two events A and B are
mutually exclusive, P(AB) = 0
and P(AB) = P(A) + P(B).
A: male with brown hair Brown Not Brown
P(A) = 20/120 Male 20 40
B: female with brown hair Female 30 30
P(B) = 30/120
A and B are mutually P(AB) = P(A) + P(B)
= 20/120 + 30/120
exclusive, so that
= 50/120
Note 5 of 5E
 Example: Two Dice

A: dice add to 3
B: dice add to 6

A and B are mutually P(AB) = P(A) + P(B)

= 2/36 + 5/36
exclusive, so that
= 7/36
Note 5 of 5E
 Calculating Probabilities AC
A
for Complements
• We know that for any event A:
– P(A AC) = 0
• Since either A or AC must occur,
P(A AC) =1
• so that P(A AC) = P(A)+ P(AC) = 1

P(AC) = 1 – P(A)
Note 5 of 5E
 Example
Select a student at random from
the classroom. Define:
A: male Brown Not Brown
P(A) = 60/120 Male 20 40
B: female Female 30 30
P(B) = ?

A and B are P(B) = 1- P(A)

complementary, so that = 1- 60/120 = 60/120
Note 5 of 5E
 Calculating Probabilities for
Intersections
In the previous example, we found P(A  B)
directly from the table. Sometimes this is
impractical or impossible. The rule for calculating
P(A  B) depends on the idea of independent
and dependent events.
Two events, A and B, are said to be
independent if the occurrence or
nonoccurrence of one of the events does
not change the probability of the
occurrence of the other event. Note 5 of 5E
 Conditional Probabilities
The probability that A occurs, given
that event B has occurred is called
the conditional probability of A
given B and is defined as
P( A  B)
P( A | B)  if P( B)  0
P( B)

“given”
Note 5 of 5E
 Example 1
Toss a fair coin twice. Define
– A: head on second toss
– B: head on first toss
P(A|B) = ½
HH
1/4 P(A|not B) = ½
HT 1/4
P(A) does not A and B are
TH 1/4
change, whether independent!
1/4 B happens or
TT
not…
Note 5 of 5E
 Example 3: Two Dice
Toss a pair of fair dice. Define
– A: red die show 1
– B: green die show 1

P(A|B) = P(A and B)/P(B)

=1/36/1/6=1/6=P(A)

P(A) does not

change, whether A and B are
B happens or independent!
not… Note 5 of 5E
 Defining Independence
• We can redefine independence in terms
of conditional probabilities:
Two events A and B are independent if and
only if
P(A|B) = P(A) or P(B|A) = P(B)
Otherwise, they are dependent.
• Once you’ve decided whether or not two
events are independent, you can use the
following rule to calculate their
intersection. Note 5 of 5E
 The Multiplicative Rule for
Intersections
• For any two events, A and B, the
probability that both A and B occur is
P(A B) = P(A) P(B given that A occurred)
= P(A)P(B|A)

• If the events A and B are independent, then

the probability that both A and B occur is
P(A B) = P(A) P(B)
Note 5 of 5E