1

Introduction
to
Quantitative
Analysis
To accompany
Quantitative Analysis for Management, Twelfth Edition,
by Render, Stair, Hanna and Hale
Power Point slides created by Jeff Heyl Copyright ©2015 Pearson Education, Inc.
 LEARNING OBJECTIVES
After completing this chapter, students will be able to:
1. Describe the quantitative analysis approach
2. Understand the application of quantitative analysis
in a real situation
3. Describe the three categories of business analytics
4. Describe the use of modeling in quantitative
analysis
5. Use computers and spreadsheet models to perform
quantitative analysis
6. Discuss possible problems in using quantitative
analysis
7. Perform a break-even analysis
Copyright ©2015 Pearson Education, Inc. 1–2
 CHAPTER OUTLINE
1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 Business Analytics
1.4 The Quantitative Analysis Approach
1.5 How to Develop a Quantitative Analysis Model
1.6 The Role of Computers and Spreadsheet Models
in the Quantitative Analysis Approach
1.7 Possible Problems in the Quantitative Analysis
Approach
1.8 Implementation — Not Just the Final Step
Copyright ©2015 Pearson Education, Inc. 1–3
 Introduction
• Mathematical tools have been used for
thousands of years
• Quantitative analysis can be applied to a
wide variety of problems
– Not enough to just know the mathematics of a
technique
– Must understand the specific applicability of
the technique, its limitations, and assumptions
– Successful use of quantitative techniques
usually results in a solution that is timely,
accurate, flexible, economical, reliable, and
easy to understand and use

Copyright ©2015 Pearson Education, Inc. 1–4

 Examples of Quantitative
Analyses
• Taco Bell saved over $150 million using
forecasting and scheduling quantitative analysis
models
• NBC television increased revenues by over $200
million between 1996 and 2000 by using
quantitative analysis to develop better sales plans
• Continental Airlines saves over $40 million every
year using quantitative analysis models to quickly
recover from weather delays and other
disruptions

Copyright ©2015 Pearson Education, Inc. 1–5

 What is Quantitative Analysis?

Quantitative analysis is a scientific approach to

managerial decision making in which raw data
are processed and manipulated to produce
meaningful information

Quantitative Meaningful
Raw Data Analysis Information

Copyright ©2015 Pearson Education, Inc. 1–6

 What is Quantitative Analysis?
• Quantitative factors are data that can be
accurately calculated
– Different investment alternatives
– Interest rates
– Inventory levels
– Demand
– Labor cost
• Qualitative factors are more difficult to
quantify but affect the decision process
– The weather
– State and federal legislation
– Technological breakthroughs
Copyright ©2015 Pearson Education, Inc. 1–7
 What is Quantitative Analysis?
• Quantitative and qualitative factors may have
different roles
• Decisions based on quantitative data can be
automated
• Generally quantitative analysis will aid the
decision-making process
• Important in many areas of management
– Production/Operations Management
– Supply Chain Management
– Business Analytics

Copyright ©2015 Pearson Education, Inc. 1–8

 Business Analytics
• A data-driven approach to decision making
– Large amounts of data
– Information technology is very important
– Statistical and quantitative analysis are used to
analyze the data and provide useful information
• Descriptive analytics – the study and
consolidation of historical data
• Predictive analytics – forecasting future
outcomes based on patterns in the past data
• Prescriptive analytics – the use of
optimization methods
Copyright ©2015 Pearson Education, Inc. 1–9
 Business Analytics
BUSINESS ANALYTICS CATEGORY QUANTITATIVE ANALYSIS TECHNIQUE
(CHAPTER)
Descriptive analytics Statistical measures such as means and standard
deviations (Chapter 2)
Statistical quality control (Chapter 15)
Predictive analytics Decision analysis and decision trees (Chapter 3)
Regression models (Chapter 4)
Forecasting (Chapter 5)
Project scheduling (Chapter 11)
Waiting line models (Chapter 12)
Simulation (Chapter 13)
Markov analysis (Chapter 14)
Prescriptive analytics Inventory models such as the economic order
quantity (Chapter 6)
Linear programming (Chapters 7, 8)
Transportation and assignment models (Chapter 9)
Integer programming, goal programming, and
nonlinear programming (Chapter 10)
Network models (Chapter 9)

Copyright ©2015 Pearson Education, Inc. 1 – 10

 The Quantitative Analysis Approach
FIGURE 1.1
Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

Copyright ©2015 Pearson Education, Inc. 1 – 11
 Defining the Problem
• Develop a clear and concise statement of
the problem to provide direction and
meaning
– This may be the most important and difficult
step
– Go beyond symptoms and identify true causes
– Concentrate on only a few of the problems –
selecting the right problems is very important
– Specific and measurable objectives may have
to be developed

Copyright ©2015 Pearson Education, Inc. 1 – 12

 Developing a Model
• Models are realistic,
solvable, and
understandable

$ Sales
mathematical
representations of a
situation $ Advertising

• Different types of models

Physical Scale Schematic
models models models

Copyright ©2015 Pearson Education, Inc. 1 – 13

 Developing a Model
• Mathematical model – a set of mathematical
relationships
• Models generally contain variables and
parameters
– Controllable variables, decision variables, are
generally unknown
• How many items should be ordered for inventory?
– Parameters are known quantities that are a part
of the model
• What is the cost of placing an order?
• Required input data must be available

Copyright ©2015 Pearson Education, Inc. 1 – 14

 Acquiring Input Data
• Input data must be accurate – GIGO rule

Garbage
In
Process
Garbage
Out

• Data may come from a variety of sources – company

reports, documents, employee interviews, direct
measurement, or statistical sampling
Copyright ©2015 Pearson Education, Inc. 1 – 15
 Developing a Solution
• Manipulating the model to arrive at the best
(optimal) solution
• Common techniques are
– Solving equations
– Trial and error – trying various approaches and
picking the best result
– Complete enumeration – trying all possible
values
– Using an algorithm – a series of repeating
steps to reach a solution

Copyright ©2015 Pearson Education, Inc. 1 – 16

 Testing the Solution

• Both input data and the model should be

tested for accuracy before analysis and
implementation
– New data can be collected to test the model
– Results should be logical, consistent, and
represent the real situation

Copyright ©2015 Pearson Education, Inc. 1 – 17

 Analyzing the Results
• Determine the implications of the solution
– Implementing results often requires change in an
organization
– The impact of actions or changes needs to be
studied and understood before implementation
• Sensitivity analysis determines how much
the results will change if the model or input
data changes
– Sensitive models should be very thoroughly
tested

Copyright ©2015 Pearson Education, Inc. 1 – 18

 Implementing the Results
• Implementation incorporates the solution
into the company
– Implementation can be very difficult
– People may be resistant to changes
– Many quantitative analysis efforts have failed
because a good, workable solution was not
properly implemented
• Changes occur over time, so even
successful implementations must be
monitored to determine if modifications are
necessary
Copyright ©2015 Pearson Education, Inc. 1 – 19
 Modeling in the Real World
• Quantitative analysis models are used
extensively by real organizations to solve
real problems
– In the real world, quantitative analysis models
can be complex, expensive, and difficult to sell
– Following the steps in the process is an
important component of success

Copyright ©2015 Pearson Education, Inc. 1 – 20

 How To Develop a Quantitative Analysis
Model

A mathematical model of profit:

Profit = Revenue – Expenses

• Revenue and expenses can be

expressed in different ways

Copyright ©2015 Pearson Education, Inc. 1 – 21

 How To Develop a Quantitative Analysis
Model
Profit = Revenue – (Fixed cost + Variable cost)
Profit = (Selling price per unit)(Number of units sold)
– [Fixed cost + (Variable costs per unit)
(Number of units sold)]
Profit = sX – [f + vX]
Profit = sX – f – vX

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

Copyright ©2015 Pearson Education, Inc. 1 – 22

 How To Develop a Quantitative Analysis
Model

The
Profit = Revenue – (Fixed parameters
cost of this
+ Variable cost)
Profit = (Selling price permodel are f, v,of and
unit)(Number as
unitsssold)
these are
– [Fixed cost + (Variable theper
costs inputs
unit)
(Number of unitsinherent
sold)] in the model
Profit = sX – [f + vX] The decision variable of
Profit = sX – f – vX interest is X

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

Copyright ©2015 Pearson Education, Inc. 1 – 23

 Pritchett’s Precious Time Pieces
• The company buys, sells, and repairs old clocks
• Rebuilt springs sell for $8 per unit
• Fixed cost of equipment to build springs is $1,000
• Variable cost for spring material is $3 per unit
s=8 f = 1,000 v=3
Number of spring sets sold = X

Profits = $8X – $1,000 – $3X

If sales = 0, profits = –f = –$1,000

If sales = 1,000, profits = [($8)(1,000) – $1,000 – ($3)(1,000)]
= $4,000
Copyright ©2015 Pearson Education, Inc. 1 – 24
 Pritchett’s Precious Time Pieces
• Companies are often interested in the break-even
point (BEP), the BEP is the number of units sold
that will result in $0 profit
0 = sX – f – vX, or 0 = (s – v)X – f
Solving for X, we have
f = (s – v)X
f
X=
s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)
Copyright ©2015 Pearson Education, Inc. 1 – 25
 Pritchett’s Precious Time Pieces
• Companies are often interested in the break-even
point (BEP), the BEP is the number of units sold
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit
0 BEP = f$1,000/($8
= sX – – vX, or – $3)
0 ==(s200 units
– v)X –f
Solving
• Salesfor of we have
X, less than 200 units of rebuilt springs
f = (s – v)X
will result in a loss
• Sales of over 200 units f of rebuilt springs will
result in a profitX = s – v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)
Copyright ©2015 Pearson Education, Inc. 1 – 26
 Advantages of Mathematical Modeling

1. Models can accurately represent reality

2. Models can help a decision maker
formulate problems
3. Models can give us insight and
information
4. Models can save time and money in
decision making and problem solving
5. A model may be the only way to solve
large or complex problems in a timely
fashion
6. A model can be used to communicate
Copyright ©2015 Pearson Education, Inc. 1 – 27
 Models Categorized by Risk

• Mathematical models that do not

involve risk or chance are called
deterministic models
– All of the values used in the model are
known with complete certainty
• Mathematical models that involve risk
or chance are called probabilistic
models
– Values used in the model are estimates
based on probabilities
Copyright ©2015 Pearson Education, Inc. 1 – 28
 Computers and Spreadsheet Models

POM-QM for
Windows
• An easy to use
decision support
system for use in
POM and QM
courses
• This is the main
menu of quantitative
models
• An Excel add-in

PROGRAM 1.1 – Main Menu

Copyright ©2015 Pearson Education, Inc. 1 – 29

 Computers and Spreadsheet Models

PROGRAM 1.2A – Entering Data

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 Computers and Spreadsheet Models

PROGRAM 1.2B – Solution Screen

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 Computers and Spreadsheet Models

PROGRAM 1.3 – Excel Ribbon and Menu

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 Computers and Spreadsheet Models

PROGRAM 1.4 – Entering Data

Copyright ©2015 Pearson Education, Inc. 1 – 33

 Computers and Spreadsheet Models

PROGRAM 1.5 – Using Goal Seek

Copyright ©2015 Pearson Education, Inc. 1 – 34

 Possible Problems in the Quantitative Analysis Approach

• Defining the problem

– Problems may not be easily identified
– Conflicting viewpoints
– Impact on other departments
– Beginning assumptions
– Solution outdated
• Developing a model
– Fitting the textbook models
– Understanding the model

Copyright ©2015 Pearson Education, Inc. 1 – 35

 Possible Problems in the Quantitative Analysis Approach

• Acquiring accurate input data

– Using accounting data
– Validity of the data
• Developing a solution
– Hard-to-understand mathematics
– Only one answer is limiting
• Testing the solution
• Solutions not always intuitively obvious
• Analyzing the results
• How will it affect the total organization

Copyright ©2015 Pearson Education, Inc. 1 – 36

 Implementation –
Not Just the Final Step

• Lack of commitment and resistance to

change
– Fear formal analysis processes will reduce
management’s decision-making power
– Fear previous intuitive decisions exposed as
inadequate
– Uncomfortable with new thinking patterns
– Action-oriented managers may want “quick and
dirty” techniques
– Management support and user involvement are
important

Copyright ©2015 Pearson Education, Inc. 1 – 37

 Implementation –
Not Just the Final Step

• Lack of commitment by quantitative

analysts
– Analysts should be involved with the problem
and care about the solution
– Analysts should work with users and take their
feelings into account

Copyright ©2015 Pearson Education, Inc. 1 – 38

 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

Ch. 3-39
3.1
Important Terms

• Random Experiment – a process leading

to an uncertain outcome
• Basic Outcome – a possible outcome of a
random experiment
• Sample Space (S) – the collection of all
possible outcomes of a random
experiment
• Event (E) – any subset of basic outcomes
from the sample space
Ch. 3-40
 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 S

A AB B

Ch. 3-41
 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
S

A B

Ch. 3-42
 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
AUB
A B

Ch. 3-43
 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
Ch. 3-44
 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]

Ch. 3-45
 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:

Unions:
A  B  [4, 6] A  B  [5]

A  B  [2, 4, 5, 6]
A  A  [1, 2, 3, 4, 5, 6]  S
Ch. 3-46
 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

Ch. 3-47
3.2
Probability and Its
Postulates
• Probability – the chance 1 Certain
that an uncertain event will
occur (always between 0
and 1)

0 ≤ P(A) ≤ 1 For any event A .5

0 Impossible
Ch. 3-48
 Assessing Probability
• There are three approaches to assessing the
probability of an uncertain event:

1. classical probability

2. relative frequency probability

3. subjective probability

Ch. 3-49
 Classical Probability
• Assumes all outcomes in the sample space
are equally likely to occur

Classical probability of event A:

NA number of outcomes that satisfy the event A
P(A)  
N total number of outcomes in the sample space

• Requires a count of the outcomes in the sample

space

Ch. 3-50
 Counting the Possible
Outcomes
• Use the Combinations formula to determine the
number of combinations of n items taken k at a time

n!
C  n
k
k! (n  k)!
• where
– n! = n(n-1)(n-2)…(1)
– 0! = 1 by definition

Ch. 3-51
 Permutations and
Combinations
The number of possible orderings
• The total number of possible ways of arranging x
objects in order is

x!  x(x - 1)(x - 2) ...(2)(1)

• x! is read as “x factorial”

Ch. 3-52
 Permutations and
Combinations (continued)

Permutations: the number of possible

arrangements when x objects are to be
selected from a total of n objects and arranged
in order [with (n – x) objects left over]

P  n(n  1)(n  2) ...(n  x  1)

n
x

n!

(n  x)!
Ch. 3-53
 Permutations and
Combinations (continued)

• Combinations: The number of combinations

of x objects chosen from n is the number of
possible selections that can be made
n
P
C n
k  x
x!
n!

x! (n  x)!
Ch. 3-54
 Permutations and
Combinations Example
Suppose that two letters are to be selected
from A, B, C, D and arranged in order. How
many permutations are possible?
• Solution The number of permutations, with
4!
n = 4 and x = 2 , is P 
4
2  12
(4  2)!

• The permutations are

AB AC AD BA BC BD
CA CB CD DA DB DC
Ch. 3-55
 Permutations and
Combinations Example
(continued)
Suppose that two letters are to be selected from A, B,
C, D. How many combinations are possible (i.e., order
is not important)?
• Solution The number of combinations is
4!
C2 
4
6
2! (4  2)!
• The combinations are
AB (same as BA) BC (same as CB)
AC (same as CA) BD (same as DB)
AD (same as DA) CD (same as DC)

Ch. 3-56
 Assessing Probability
Three approaches (continued)
2. relative frequency probability
• the limit of the proportion of times that an event A occurs in a large
number of trials, n

nA number of events in the population that satisfy event A

P(A)  
n total number of events in the population

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

Ch. 3-57
 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)   P(Oi )
A

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

3. P(S) = 1
Ch. 3-58
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  B)  P(A)  P(B)  P(A  B)

Ch. 3-59
 A Probability Table

Probabilities and joint probabilities for two events A

and B are summarized in this table:

B B

A P(A  B) P(A  B ) P(A)

A P(A  B) P(A  B ) P(A)

P(B) P( B ) P(S)  1.0

Ch. 3-60
 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

Ch. 3-61
 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

Ch. 3-62
 Conditional Probability
• A conditional probability is the probability
of one event, given that another event
has occurred: The conditional
P(A  B)
P(A | B)  probability of A given
P(B) that B has occurred

P(A  B) The conditional

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

Ch. 3-63
 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.

• What is the probability that a car has a

CD player, given that it has AC ?

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

Ch. 3-64
 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  AC) .2
P(CD | AC)    .2857
P(AC) .7
Ch. 3-65
 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  AC) .2
P(CD | AC)    .2857
P(AC) .7
Ch. 3-66
 Multiplication Rule

• Multiplication rule for two events A and B:

P(A  B)  P(A | B) P(B)

• also

P(A  B)  P(B | A) P(A)

Ch. 3-67
 Multiplication Rule
Example
P(Red ∩ Ace) = P(Red| Ace)P(Ace)

 2  4  2
    
 4  52  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 Ch. 3-68
 Statistical Independence
• Two events are statistically independent
if and only if:
P(A  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

Ch. 3-69
 Statistical Independence
(continued)
• For multiple events:

E1, E2, . . . , Ek are statistically independent if

and only if:

P(E1  E1  ...  E1 )  P(E1 ) P(E2 )...P(Ek )

Ch. 3-70
 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?

Ch. 3-71
 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
Ch. 3-72
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)

Ch. 3-73
 Joint and
Marginal Probabilities
• The probability of a joint event, A ∩ B:
number of outcomes satisfying A and B
P(A  B) 
total number of elementary outcomes

• Computing a marginal probability:

P(A)  P(A  B1 )  P(A  B 2 )    P(A  Bk )

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

collectively exhaustive events
Ch. 3-74
 Marginal Probability
Example
P(Ace)

2 2 4
 P(Ace  Red)  P(Ace  Black)   
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Ch. 3-75
 Using a Tree Diagram
.2
Given AC or no D .7 P(AC ∩ CD) = .2
C
AC: Has
= . 7
) D oe
P (A C s
have not .5 P(AC ∩ CD) = .5
AC CD
s
Ha .7
All
Cars
Doe .2
hav s not .3
eA P(A C D P(AC ∩ CD) = .2
C Has
C) =
.3
D oe
s
have not .1 P(AC ∩ CD) = .1
CD
.3 Ch. 3-76
3.5 Bayes’ Theorem
Let A1 and B1 be two events. Bayes’ theorem states that

P(A 1 | B 1 )P(B 1 )
P(B 1 | A 1 ) 
P(A 1 )

and
P(B 1 | A 1 )P(A 1 )
P(A 1 | B 1 ) 
P(B 1 )
• a way of revising conditional probabilities by using
available or additional information

Ch. 3-77
 3.5 Bayes’ Theorem
Bayes’ theorem (alternative statement)

P(A | E i )P(Ei )
P(Ei | A) 
P(A)
P(A | E i )P(Ei )

P(A | E 1)P(E1 )  P(A | E 2 )P(E2 )    P(A | E k )P(Ek )

• where:
Ei = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Ei)
Ch. 3-78
 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?

Ch. 3-79
 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)
Ch. 3-80
 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
Ch. 3-81
4.1
Random Variables
• Random Variable
– Represents a possible numerical value from
a random experiment
Random
Variables

Ch. 4 Discrete Continuous Ch. 5

Random Variable Random Variable

Ch. 4-82
 Discrete Random
Variable
• Takes on no more than a countable
number of values

Examples:

– Roll a die twice

Let X be the number of times 4 comes up
(then X could be 0, 1, or 2 times)

– Toss a coin 5 times. Ch. 4-83

 Continuous Random
Variable
• Can take on any value in an interval
– Possible values are measured on a
continuum

Examples:

– Weight of packages filled by a mechanical

filling process
– Temperature of a cleaning solution
– Time between failures of an electrical
component
Ch. 4-84
4.2
Probability Distributions for Discrete Random Variables

Let X be a discrete random variable and x be one of its

possible values
 The probability that random variable X takes
specific value x is denoted P(X = x)
 The probability distribution function of a random
variable is a representation of the probabilities for
all the possible outcomes.
 Can be shown algebraically, graphically, or with
a table

Ch. 4-85
 Probability Distributions for
Discrete Random Variables
Experiment: Toss 2 Coins. Let X = # heads.
Show P(x) , i.e., P(X = x) , for all values of x:

4 possible outcomes
Probability Distribution
T T x Value Probability

0 1/4 = .25
T H 1 2/4 = .50

2 1/4 = .25
H T
Probability

.50

.25
H H
0 1 2 x Ch. 4-86
 Probability Distribution
Required Properties
 0 ≤ P(x) ≤ 1 for any value of x

 The individual probabilities sum to 1;

 P(x)  1
x

(The notation indicates summation over all possible x values)

Ch. 4-87
 Cumulative Probability
Function
• The cumulative probability function, denoted
F(x0), shows the probability that X does not
exceed the value x0

F(x0 )  P(X  x 0 )

Where the function is evaluated at all values of x0

Ch. 4-88
 Cumulative Probability
Function (continued)

Example: Toss 2 Coins. Let X = # heads.

x Value P(x) F(x)

0 0.25 0.25
1 0.50 0.75
2 0.25 1.00

Ch. 4-89
 Derived Relationship
The derived relationship between the probability
distribution and the cumulative probability
distribution

• Let X be a random variable with probability distribution

P(x) and cumulative probability distribution F(x0). Then

F(x 0 )   P(x)
xx0

(the notation implies that summation is over all possible

values of x that are less than or equal to x0)
Ch. 4-90
 Derived Properties
Derived properties of cumulative probability
distributions for discrete random variables

• Let X be a discrete random variable with cumulative

probability distribution F(x0). Then

1. 0 ≤ F(x0) ≤ 1 for every number x0

2. for x0 < x1, then F(x0) ≤ F(x1)

Ch. 4-91
4.3 Properties of
Discrete Random Variables
• Expected Value (or mean) of a discrete
random variable X:
E[X]  μ   xP(x)
x

– Example: Toss 2 coins, x P(x)

x = # of heads, 0 .25

compute expected value of x: 1 .50

2 .25

E(x) = (0 x .25) + (1 x .50) + (2 x .25)

= 1.0
Ch. 4-92
 Variance and
Standard Deviation
• Variance of a discrete random variable X

σ 2  E[(X  μ)2 ]   (x  μ)2 P(x)

x
Can also be expressed as

σ 2  E[X 2 ]  μ2   x 2 P(x)  μ2
x

• Standard Deviation of a discrete random variable X

σ  σ2  x
(x  μ) 2
P(x)
Ch. 4-93
 Standard Deviation
Example
– Example: Toss 2 coins, X = # heads,
compute standard deviation (recall E[X] = 1)

σ x
(x  μ) 2
P(x)

σ  (0  1)2 (.25)  (1  1)2 (.50)  (2  1)2 (.25)  .50  .707

Possible number of heads

= 0, 1, or 2

Ch. 4-94