Basic Business Statistics

12th Edition

Chapter 4

Basic Probability

Chap 4-1
 Learning Objectives

In this chapter, you learn:

 Basic probability concepts

 Conditional probability
 To use Bayes’ Theorem to revise probabilities
 Various counting rules

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chap 4-2
 Basic Probability Concepts

 Probability – the chance that an uncertain event

will occur (always between 0 and 1)

 Impossible Event – an event that has no

chance of occurring (probability = 0)

 Certain Event – an event that is sure to occur

(probability = 1)

Chap 4-3
 Assessing Probability

There are three approaches to assessing the

probability of an uncertain event:
1. a priori -- based on prior knowledge of the process
X number of ways the event can occur
probability of occurrence  
Assuming
T total number of elementary outcomes
all
outcomes 2. empirical probability -- based on observed data
are equally
likely number of ways the event can occur
probability of occurrence 
total number of elementary outcomes
3. subjective probability

based on a combination of an individual’s past experience,

personal opinion, and analysis of a particular situation

Chap 4-4
 Example of a priori probability

When randomly selecting a day from the year 2010

what is the probability the day is in January?

X number of days in January

Probabilit y of Day In January  
T total number of days in 2010

X 31 days in January 31
 
T 365 days in 2010 365
Chap 4-5
 Example of empirical probability

Find the probability of selecting a male taking statistics

from the population described in the following table:

Taking Stats Not Taking Total

Stats
Male 84 145 229
Female 76 134 210
Total 160 279 439

number of males taking stats 84

Probability of male taking stats    0.191
total number of people 439

Chap 4-6
 Events

Each possible outcome of a variable is an event.

 Simple event
 An event described by a single characteristic
 e.g., A day in January from all days in 2010
 Joint event
 An event described by two or more characteristics
 e.g. A day in January that is also a Wednesday from all days in 2010
 Complement of an event A (denoted A’)
 All events that are not part of event A
 e.g., All days from 2010 that are not in January

Chap 4-7
 Sample Space
The Sample Space is the collection of all
possible events
e.g. All 6 faces of a die:

e.g. All 52 cards of a bridge deck:

Chap 4-8
 Visualizing Events

 Contingency Tables -- For All Days in 2010

Jan. Not Jan. Total

Wed. 4 48 52
Not Wed. 27 286 313

Total 31 334 365

 Decision Trees Total

4 Number
Sample Of
Space 27 Sample
All Days Space
In 2010 Outcomes
48

286
Chap 4-9
 Definition: Simple Probability

 Simple Probability refers to the probability of a

simple event.
 ex. P(Jan.)
 ex. P(Wed.)
Jan. Not Jan. Total
P(Wed.) = 52 / 365
Wed. 4 48 52
Not Wed. 27 286 313

Total 31 334 365

P(Jan.) = 31 / 365
Chap 4-10
 Definition: Joint Probability
 Joint Probability refers to the probability of an
occurrence of two or more events (joint event).
 ex. P(Jan. and Wed.)
 ex. P(Not Jan. and Not Wed.)

Jan. Not Jan. Total

P(Not Jan. and Not Wed.)
Wed. 4 48 52
= 286 / 365
Not Wed. 27 286 313

Total 31 334 365

P(Jan. and Wed.) = 4 / 365

Chap 4-11
 Mutually Exclusive Events

 Mutually exclusive events

 Events that cannot occur simultaneously

Example: Randomly choosing a day from 2010

A = day in January; B = day in February

 Events A and B are mutually exclusive

Chap 4-12
 Collectively Exhaustive Events
 Collectively exhaustive events
 One of the events must occur
 The set of events covers the entire sample space
Example: Randomly choose a day from 2010

A = Weekday; B = Weekend;
C = January; D = Spring;

 Events A, B, C and D are collectively exhaustive

(but not mutually exclusive – a weekday can be in
January or in Spring)
 Events A and B are collectively exhaustive and
also mutually exclusive
Chap 4-13
 Computing Joint and
Marginal Probabilities

 The probability of a joint event, A and B:

number of outcomes satisfying A and B
P( A and B) 
total number of elementary outcomes

 Computing a marginal (or simple) probability:

P(A)  P(A and B1)  P(A and B2 )    P(A and Bk )

 Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

Chap 4-14
Joint Probability Example

P(Jan. and Wed.)

number of days that are in Jan. and are Wed. 4
 
total number of days in 2010 365

Jan. Not Jan. Total

Wed. 4 48 52
Not Wed. 27 286 313

Total 31 334 365

Chap 4-15
Marginal Probability Example

P(Wed.)
4 48 52
 P(Jan. and Wed.)  P(Not Jan. and Wed.)   
365 365 365

Jan. Not Jan. Total

Wed. 4 48 52
Not Wed. 27 286 313

Total 31 334 365

Chap 4-16
 Marginal & Joint Probabilities In A
Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)
A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

Chap 4-17
 Probability Summary So Far
 Probability is the numerical measure
of the likelihood that an event will 1 Certain
occur
 The probability of any event must be
between 0 and 1, inclusively
0 ≤ P(A) ≤ 1 For any event A 0.5
 The sum of the probabilities of all
mutually exclusive and collectively
exhaustive events is 1
P(A)  P(B)  P(C)  1
0 Impossible
If A, B, and C are mutually exclusive and
collectively exhaustive
Chap 4-18
 General Addition Rule

General Addition Rule:

P(A or B) = P(A) + P(B) - P(A and B)

If A and B are mutually exclusive, then

P(A and B) = 0, so the rule can be simplified:

P(A or B) = P(A) + P(B)

For mutually exclusive events A and B

Chap 4-19
 General Addition Rule Example

P(Jan. or Wed.) = P(Jan.) + P(Wed.) - P(Jan. and Wed.)

= 31/365 + 52/365 - 4/365 = 79/365
Don’t count
the four
Wednesdays
in January
Jan. Not Jan. Total twice!
Wed. 4 48 52
Not Wed. 27 286 313

Total 31 334 365

Chap 4-20
 Computing Conditional
Probabilities
 A conditional probability is the probability of one
event, given that another event has occurred:
P(A and B) The conditional
P(A | B)  probability of A given
P(B) that B has occurred

P(A and B) The conditional

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

Where P(A and B) = joint probability of A and B

P(A) = marginal or simple probability of A
P(B) = marginal or simple probability of B
Chap 4-21
 Conditional Probability Example

 Of the cars on a used car lot, 90% have air

conditioning (AC) and 40% have a GPS. 35% of
the cars have both.

 What is the probability that a car has a GPS

given that it has AC ?

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

Chap 4-22
 Conditional Probability Example
(continued)
 Of the cars on a used car lot, 90% have air conditioning
(AC) and 40% have a GPS.
35% of the cars have both.
GPS No GPS Total
AC 0.35 0.55 0.90
No AC 0.05 0.05 0.10
Total 0.40 0.60 1.00

P(GPS and AC) 0.35

P(GPS | AC)    0.3889
P(AC) 0.90
Chap 4-23
 Conditional Probability Example
(continued)
 Given AC, we only consider the top row (90% of the cars). Of these,
35% have a GPS. 35% of 90% is about 38.89%.

GPS No GPS Total

AC 0.35 0.55 0.90
No AC 0.05 0.05 0.10
Total 0.40 0.60 1.00

P(GPS and AC) 0.35

P(GPS | AC)    0.3889
P(AC) 0.90
Chap 4-24
 Using Decision Trees
.35
.90 P(AC and GPS) = 0.35
Given AC or
no AC:

.55 P(AC and GPS’) = 0.55

.90
All Conditional
Probabilities
Cars
.05
.10 P(AC’ and GPS) = 0.05

.05 P(AC’ and GPS’) = 0.05

.10
Chap 4-25
 Using Decision Trees
(continued)
.35
.40 P(GPS and AC) = 0.35
Given GPS
or no GPS:

.05 P(GPS and AC’) = 0.05

.40
All Conditional
Probabilities
Cars
.55
.60 P(GPS’ and AC) = 0.55

.05 P(GPS’ and AC’) = 0.05

.60
Chap 4-26
 Independence
 Two events are independent if and only
if:

P(A | B)  P(A)
 Events A and B are independent when the probability
of one event is not affected by the fact that the other
event has occurred

Chap 4-27
 Multiplication Rules

 Multiplication rule for two events A and B:

P(A and B)  P(A | B)P(B)

Note: If A and B are independent, then P(A | B)  P(A)

and the multiplication rule simplifies to

P(A and B)  P(A)P(B)

Chap 4-28
 Marginal Probability

 Marginal probability for event A:

P(A)  P(A | B1)P(B1)  P(A | B2 )P(B2 )    P(A | Bk )P(Bk )

 Where B1, B2, …, Bk are k mutually exclusive and

collectively exhaustive events

Chap 4-29
 Bayes’ Theorem

 Bayes’ Theorem is used to revise previously

calculated probabilities based on new
information.

 Developed by Thomas Bayes in the 18th

Century.

 It is an extension of conditional probability.

Chap 4-30
 Bayes’ Theorem

P(A | B i )P(B i )
P(B i | A) 
P(A | B 1 )P(B 1 )  P(A | B 2 )P(B 2 )      P(A | B k )P(B k )

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

Chap 4-31
 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?

Chap 4-32
 Bayes’ Theorem Example
(continued)

 Let S = successful well

U = unsuccessful well
 P(S) = 0.4 , P(U) = 0.6 (prior probabilities)
 Define the detailed test event as D
 Conditional probabilities:
P(D|S) = 0.6 P(D|U) = 0.2
 Goal is to find P(S|D)

Chap 4-33
 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)
(0.6)(0.4)

(0.6)(0.4)  (0.2)(0.6)
0.24
  0.667
0.24  0.12

So the revised probability of success, given that this well

has been scheduled for a detailed test, is 0.667
Chap 4-34
 Bayes’ Theorem Example
(continued)

 Given the detailed test, the revised probability

of a successful well has risen to 0.667 from
the original estimate of 0.4

Prior Conditional Joint Revised

Event
Prob. Prob. Prob. Prob.
S (successful) 0.4 0.6 (0.4)(0.6) = 0.24 0.24/0.36 = 0.667
U (unsuccessful) 0.6 0.2 (0.6)(0.2) = 0.12 0.12/0.36 = 0.333

Sum = 0.36

Chap 4-35
 Counting Rules

 Rules for counting the number of possible

outcomes
 Counting Rule 1:
 If any one of k different mutually exclusive and
collectively exhaustive events can occur on each of
n trials, the number of possible outcomes is equal to

kn
 Example
 If you roll a fair die 3 times then there are 63 = 216 possible
outcomes

Chap 4-36
 Counting Rules
(continued)

 Counting Rule 2:
 If there are k1 events on the first trial, k2 events on
the second trial, … and kn events on the nth trial, the
number of possible outcomes is
(k1)(k2)…(kn)
 Example:
 You want to go to a park, eat at a restaurant, and see a
movie. There are 3 parks, 4 restaurants, and 6 movie
choices. How many different possible combinations are
there?
 Answer: (3)(4)(6) = 72 different possibilities
Chap 4-37
 Counting Rules
(continued)

 Counting Rule 3:
 The number of ways that n items can be arranged in
order is
n! = (n)(n – 1)…(1)

 Example:
 You have five books to put on a bookshelf. How many
different ways can these books be placed on the shelf?

 Answer: 5! = (5)(4)(3)(2)(1) = 120 different possibilities

Chap 4-38
 Counting Rules
(continued)
 Counting Rule 4:
 Permutations: The number of ways of arranging X
objects selected from n objects in order is

n!
n Px 
(n  X)!
 Example:
 You have five books and are going to put three on a
bookshelf. How many different ways can the books be
ordered on the bookshelf?

 Answer: different possibilities

n! 5! 120
P
n x     60
(n  X)! (5  3)! 2
Chap 4-39
 Counting Rules
(continued)

 Counting Rule 5:
 Combinations: The number of ways of selecting X
objects from n objects, irrespective of order, is
n!
n Cx 
X!(n  X)!
 Example:
 You have five books and are going to randomly select three
to read. How many different combinations of books might
you select?
n! 5! 120
 Answer: Cx     10 different possibilities
X!(n  X)! 3! (5  3)! (6)(2)
n

Chap 4-40
 Chapter Summary

 Discussed basic probability concepts

 Sample spaces and events, contingency tables, simple
probability, and joint probability
 Examined basic probability rules
 General addition rule, addition rule for mutually exclusive events,
rule for collectively exhaustive events
 Defined conditional probability
 Statistical independence, marginal probability, decision trees,
and the multiplication rule
 Discussed Bayes’ theorem
 Discussed various counting rules
Chap 4-41