QBM 101 Business Statistics

Department of Business Studies

Faculty of Business, Economics &
Accounting
HE
 SUBJECT OUTLINE:
 Module 1: Introduction; organizing
and graphing data; numerical
descriptive measures
 Module 2: Probability, discrete random
variables; continuous random variables and
the normal distribution
 Module 3: Sampling distributions;
estimation; hypothesis testing
 Module 4: Simple linear regression
 CHAPTER 5: DISCRETE
RANDOM VARIABLES
 5.1 Random variables
 5.2 Probability distribution of
a discrete random variable
 5.3 Mean and standard deviation of a
discrete random variable
 5.4 The binomial probability
distribution
 5.5 The Poisson probability
distribution
TABLE 5.1 FREQUENCY AND RELATIVE FREQUENCY
DISTRIBUTION OF THE NUMBER OF VEHICLES OWNED BY
FAMILIES
RANDOM VARIABLES

Definition
A random variable is a variable whose value is determined
by the outcome of a random experiment.

A random variable that assumes countable values is

called a discrete random variable.

A random variable that can assume any value contained in

one or more intervals is called a continuous random
variable.
RANDOM VARIABLES

Examples of continuous random variables:

1. The length of a room

2. The time taken to commute from home to work
3. The amount of milk in a gallon (note that we do not expect
“a gallon” to contain exactly one gallon of milk but either
slightly more or slightly less than one gallon)
4. The weight of a letter
Definition
The probability distribution of a discrete random variable lists
all the possible values that the random variable can assume and
their corresponding probabilities.

The probability distribution of a discrete random variable

possesses the following two characteristics.

1. 0 ≤ P(x) ≤ 1 for each value of x

2. Σ P(x) = 1.
EXAMPLE 5-2

Each of the following tables lists certain values of x and

their probabilities. Determine whether or not each table
represents a valid probability distribution.
EXAMPLE 5-2

(a)No, since the sum of all probabilities is not

equal to 1.0.
(b) Yes.
(c) No, since one of the probabilities is negative.
EXAMPLE 5-3
The following table lists the probability distribution of
the number of breakdowns per week for a machine based
on past data.

(a) Present this probability distribution graphically.

(b)Find the probability that the number of breakdowns for
this machine during a given week is
i. exactly 2
ii. 0 to 2
iii. more than 1
iv. at most 1
 EXAMPLE 5-3
Let X denote the number of breakdowns for this machine during a
given week.
 EXAMPLE 5-3
(b) Using Table 5.4,

i. P(exactly 2 breakdowns) = P(X = 2) = .35

ii. P(0 to 2 breakdowns) = P(0 ≤ X ≤ 2)

= P(X = 0) + P(X = 1) + P(X = 2)
= .15 + .20 + .35 = .70

iii. P(more then 1 breakdown) = P(X > 1)

= P(X = 2) + P(X = 3)
= .35 +.30 = .65

iv. P(at most one breakdown) = P(X ≤ 1)

= P(X = 0) + P(X = 1)
= .15 + .20 = .35
 EXAMPLE 5-4
According to a survey, 60% of all students at a large university
suffer from math anxiety. Two students are randomly selected
from this university. Let X denote the number of students in this
sample who suffer from math anxiety. Develop the probability
distribution of X.

Let us define the following two events:

N = the student does not suffer from math anxiety
M = the student suffers from math anxiety

P(X = 0) = P(NN) = .16

P(X = 1) = P(NM or MN) = P(NM) + P(MN)

= .24 + .24 = .48

P(X = 2) = P(MM) = .36

The mean of a discrete variable x is the value that is expected to
occur per repetition, on average, if an experiment is repeated a large
number of times. It is denoted by µ, also known as the expected
value, E(X), and it is calculated as
µ = E(X) = Σ x P(x)
Discrete probability
distribution

Mean,  E( X )   x 
P(x) E( X 2 )   x2  P(x)
Variance, 2
 E( X )
2

 E( X ) 
2
EXAMPLE 5-5

Find the mean number of breakdowns per week for this

machine.
EXAMPLE 5-5

The mean is µ = Σx P(x) = 1.80

DISCRETE PROBABILITY FUNCTION
STANDARD DEVIATION

The standard deviation of a discrete random variable X

measures the spread of its probability distribution and is
computed as:

  x2 P(x)  2

 E( X 2 )  E( X )

 2
EXAMPLE 5-6

Compute the standard deviation of X.

EXAMPLE 5-6

 E( X 2 )  E( X )
 7.7 
2
2.52
 1.45  1.204
EXAMPLE 5-7
Loraine Corporation is planning to market a new makeup
product. According to the analysis made by the financial
department of the company, it will earn an annual profit of
$4.5 million if this product has high sales and an annual
profit of $1.2 million if the sales are mediocre, and it will
lose $2.3 million a year if the sales are low. The
probabilities of these three scenarios are .32, .51 and .17
respectively.

(a)Let X be the profits (in millions of dollars) earned per

annum from this product by the company. Write the
probability distribution of X.
(b)Calculate the mean and the standard deviation of X.
EXAMPLE 5-7

E( X )    xP x  $ 1.661
million
σ  Var( X )   x2 P x 
2 8.1137 
E( X )  E( X )
2

 (1.661)2

 $ 2.314
EXERCISE 1

The following table records the probability

distribution of a discrete random variable X.

x 1 2 3 5 8 13
P(X = x) 0.10 0.25 r 2r 0.15 0.05

(a) Determine the value of r.

(b) Evaluate P(2  X 
9). and X .
(c) Determine X
Conditions of a Binomial Experiment

A binomial experiment must satisfy the following four

conditions.

1. There are n identical trials.

2. Each trial has only two possible outcomes.
3. The probabilities of the two outcomes remain
constant.
4. The trials are independent.
TOSSING A COIN
Consider the experiment consisting of 10 tosses of a coin.
Determine whether or not it is a binomial experiment.

1.There are a total of 10 trials (tosses), and they are all

identical. Here, n = 10.
2.Each trial (toss) has only two possible outcomes: a head and
a tail.
3.The probability of obtaining a head (a success) is ½ and that
of a tail (a failure) is ½ for any toss. That is,
p = P(H) = ½ and q = P(T) = ½
4. The trials (tosses) are independent.

Consequently, the experiment consisting of 10 tosses is a

binomial experiment.
THE BINOMIAL PROBABILITY DISTRIBUTION
For a binomial experiment, the probability of
exactly x successes in n trials is given by the
binomial formula

P( X  x)  C n
p x

q n x
x
where
n = total number of trials
p = probability of success
q = 1 – p = probability of failure
x = number of successes in n
trials
Binomial random
variables

X ~ B(n, p)
P( X  x)  Cx p q
n x n x

  np
  npq
Fair vs biased coin
Fair coin: Equal probability of
getting a head or a tail.
P(Head) = P(Tail ) = 0.5
P(Head) + P(Tail) = 1.0

Biased coin: Different probability of

getting a head or a tail.
P(Head) = 0.7 ≠ P(Tail) = 0.3
P(Head) + P(Tail) = 1.0
Terminology

More than 4: P( X 
4) Less than 4: P( X 
4) At least 4: P( X 
4) At most 4: P( X 
4)
Between 4 and 6: P(4
 X  6)
Between 4 and 6
(inclusive): P(4  X 
EXAMPLE 5-10
Five percent of all DVD players manufactured by a large
electronics company are defective. A quality control inspector
randomly selects three DVD player from the production line.
What is the probability that exactly one of these three DVD
players is defective?
D = a selected DVD player is defective P(D) = .05
G = a selected DVD player is good P(G) = .95
P(DGG) = P(D) P(G) P(G)
= (.05)(.95)(.95) = .0451
P(GDG) = P(G) P(D) P(G)
= (.95)(.05)(.95) = .0451
P(GGD) = P(G) P(G) P(D)
= (.95)(.95)(.05) = .0451

P(1 DVD player in 3 is defective)

= P(DGG or GDG or GGD)
= P(DGG) + P(GDG) + P(GGD)
= .0451 + .0451 + .0451
= .1353
EXAMPLE 5-10
EXAMPLE 5-10
n = total number of trials = 3 DVD players
x = number of successes = number of defective DVD
players = 1
n – x = number of failures = number of good DVD
players = 3 - 1 = 2
p = P(success) = .05
q = P(failure) = 1 – p = .95
X ~ B(n  3, p  0.05)
EXAMPLE 5-11
At the Express House Delivery Service, providing high- quality
service to customers is the top priority of the management. The
company guarantees a refund of all charges if a package it is
delivering does not arrive at its destination by the specified time.
It is known from past data that despite all efforts, 2% of the
packages mailed through this company do not arrive at their
destinations within the specified time. Suppose a corporation
mails 10 packages through Express House Delivery Service on
a certain day.

(a)Find the probability that exactly one of these 10 packages

will not arrive at its destination within the specified time.
(b)Find the probability that at most one of these 10 packages
will not arrive at its destination within the specified time.
EXAMPLE 5-11
n = total number of packages mailed = 10
p = P(success) = .02
q = P(failure) = 1 – .02 = .98

X ~ B(n  10, p  0.02)

(a) P( X  1)  10C1 (.02)1 (.98)9  10  (.02)1
(.98)9  (10)(.02)(.83374776)
 0.1667
(b) P( X  1)10P(
C X  0)0 (.98)
(.02)  P(10X10C
1) (.02)1 (.98)9
0
1
 (1)(1)(.81707281)  (10)(.02)
(.83374776)
 0.8171 0.1667
= 0.9838
EXAMPLE 5-12
In a Pew Research Center nationwide telephone survey
conducted in March through April 2011, 74% of college
graduates said that college provided them intellectual growth
(Time, May 30, 2011). Assume that this result holds true for the
current population of college graduates. Let X denote the
number in a random sample of three college graduates who hold
this opinion. Write the probability distribution of X and draw a
bar graph for this probability distribution.

n = total college gradates in the sample = 3

p = P(a college graduate holds the said opinion) = .74
q = P(a college graduate does not hold the said opinion)
= 1 - .74 = .26
EXAMPLE 5-12
P( X  0)  3C (.74)0 (.26)3  (1)(1)(.017576)  .0176
0

P( X  1)  3C1(.74)1 (.26)2  (3)(.74)(.0676)  .1501

P( X  2)  3C (.74)2 (.26)1  (3)(.5476)(.26)  .4271
2

P( X  3)  3C 3(.74)3 (.26)0  (1)(.405224)(1)  .4052

EXAMPLE 5-13
In an NPD Group survey of adults, 30% of 50-year-old or older
(let us call them 50-plus) adult Americans said that they would
be willing to pay more for healthier options at restaurants
(USA TODAY, July 20, 2011). Suppose this result holds true
for the current population of 50-plus adult Americans. A random
sample of five 50- plus adult Americans is selected.

(a)Find the probability that exactly three persons in

this sample hold the said opinion.
(b)Find the probability that at most two persons in this sample
hold the said opinion.
(c)Find the probability that at least three persons in
this sample hold the said opinion.
(d)Find the probability that one to three persons in this sample
hold the said opinion.
EXAMPLE 5-13
EXAMPLE 5-13
n  5, p  0.3, q  0.7
X ~ B(n  5, p  0.3)
(a) P( X  3) 
0.1323
(b) P( X  2)  P( X
 0)  P( X  1) 
P( X  2)

0.1681
0.3602 
0.3087
= 0.8372
(c) P( X  3)  P( X
PROBABILITY OF SUCCESS AND THE SHAPE
OF THE BINOMIAL DISTRIBUTION

1. The binomial probability distribution is symmetric if p

=.50.

2. The binomial probability distribution is skewed to

the right if p is less than .50.

3. The binomial probability distribution is skewed to the

left if p is greater than .50.
SYMMETRIC

Probability Distribution of x for n = 4 and p = .50

SKEWED TO THE RIGHT

Probability Distribution of x for n = 4 and p = .30

SKEWED TO THE LEFT

Probability Distribution of x for n = 4 and p = .80

MEAN AND STANDARD DEVIATION OF THE
BINOMIAL DISTRIBUTION
The mean and standard deviation of a binomial
distribution are, respectively,

  np and 
 npq
where n is the total number of trails, p is the probability of
success, and q is the probability of failure.
EXAMPLE 5-14
In a 2011 Time magazine poll, American adults were asked,
“When children today in the U.S. grow up, do you think they
will be better off or worse off than people are now?” Of these
adults, 52% said worse. Assume that this result is true for
the current population of U.S. adults. A sample of 50 adults
is selected. Let X be the number of adults in this sample who
hold the above-mentioned opinion. Find the mean and
standard deviation of the probability distribution of X.
EXAMPLE 5-14
n = 50, p = .52, and q = .48 (1 – 0,52)
Using the formulas for the mean and standard
deviation of the binomial distribution,

X ~ B(n  50, p  0.52)

 np  50(.52)  26
 npq  (50)(.52)(.48)  3.5327
EXERCISE 2
Assume that 40% of all the students in a
mathematics department failed their statistic test.

(a) What is the probability that exactly half of a

group of 10 students failed their test?
(b)What is the probability that between 6 and 10
(inclusive) students out of a group of 20 students passed
their statistics test?
(c)What is the probability that none of a group of 8
students failed their statistics test?
Conditions to Apply the Poisson Probability Distribution

The following three conditions must be satisfied to apply

the Poisson probability distribution.
1. X is a discrete random variable.
2. The occurrences are random.
3. The occurrences are independent.

Examples:
4.The number of accidents that occur on a given highway during
a 1-week period.
5.The number of customers entering a grocery store during
a 1–hour interval.
6.The number of television sets sold at a department store during a
given week.
THE POISSON PROBABILITY DISTRIBUTION

Poisson Probability Distribution Formula

According to the Poisson probability distribution, the

probability of x occurrences in an interval is

P( X  x)  e  x
x!

where λ (pronounced lambda) is the mean number of

occurrences in that interval and the value of e is
approximately 2.71828.
Mathematical constants

  3.142...
Euler's number, e 
2.71828... Euler's constant, 

0.5772...
THE POISSON PROBABILITY DISTRIBUTION

X ~ Po()

P( X  x) e 
x

 x!


 
EXAMPLE 5-17
On average, a household receives 9.5 telemarketing
phone calls per week. Using the Poisson distribution
formula, find the probability that a randomly selected
household receives exactly 6 telemarketing phone calls
during a given week.

 x e9.5 (9.5)6
P( X  6)  e  
x! 6!
(.00007485)(735, 091.8906)

720
 0.0764
Example: On average, two new accounts are opened per day at
an Imperial Savings Bank branch. Assume that the events of
account opening follow a Poisson distribution, find the probability
that:
(a) exactly 6 accounts will be opened during a one-day
period.
(b) at most 3 accounts will be opened during a one-
day
period.
(c) less than 3 accounts will be opened during a two-
day
period.
(d) between 4 and 6 (inclusive) accounts will be
opened
during a three-day period.
(e) Find the mean and standard deviation of the number of
accounts opened during a five-day working week.
Let X be the number of new
accounts.
(a) X ~ Po(=2)
e2  26
P( X  6)   0.01203
6!

(b) P( X  3)
 P( X  0)  P( X 1)  P( X 
2)  P( X  3)
e 2  2 0e  2
2 e1  2
2 2e  2
2 3
 0!  1  2!  3!
21! 22 23 
 e2  20    
 0! 1! 2! 3! 
 0.8571
Let X be the number of new
accounts. (c) X ~ Po(=2  2=4)
P( X  3)
 P( X  0)  P( X 1)  P( X
 2)
e 4  4 0e  4
4 e1  4
4 2
 0!  1!  2!

 e4  4   
1 2
 0 4 4
 0! 1! 2!
 0.2381

Let X be the number of new
accounts. (d) X ~ Po(=3 2=6)
P(4  X  6)
 P( X  4)  P( X 5)  P( X
6)
e 6  6 4e  6
6 5e  6
6 6
 4!  5!  6!

 e6  6   
5 6
4 6 6
 4! 5! 6!
 0.4551

(e) Let X be the number of new
accounts.
X ~ Po(=5 2=10)
Mean,   10
Standard deviation,    10  3.162
EXAMPLE 5-20
On average, two new accounts are opened per day at an
Imperial Saving Bank branch. Find the probability that on
a given day the number of new accounts opened at this
bank will be
(a) exactly 6 ; (b) at most 3; (c) at least 7; (d) at least 2
EXAMPLE 5-20

(a) P(X = 6) = .0120

(b) P(at most 3) = P(X = 0) + P(X = 1) + P(X = 2) + P(X = 3)

=.1353 +.2707 + .2707 + .1804 = .8571

(c) P(at least 7) = P(X = 7) + P(X = 8) + P(X = 9)

= .0034 + .0009 + .0002 = .0045

(d) P(at least 2) = 1-P(X = 0) – P(X = 1) = 1 – .1353 - .2707 = .594

EXAMPLE 5-21
An auto salesperson sells an average of .9 car per day. Let
X be the number of cars sold by this salesperson on any
given day. Using the Poisson probability distribution table,
write the probability distribution of X. Draw a graph of the
probability distribution.
EXERCISE 3
The number of students arriving at an information counter
from 8am to 5pm follows a Poisson distribution with a
mean of 18.

(i)What is the probability that no student arrives in the next

hour?
(ii)What is the probability that more than 5 students arrive
at the counter from 9am to 11am?
(iii)What is the probability that there are more than 7 but
less than 12 students who arrive at the counter from
12noon to 4:45pm?
 SUMMARY
 Discrete probability
 Binomial
 Poisson
 Calculate the probability of given
condition (more than 3, less than 4, at
most 5, less than 6 but at least 2,
between 7 and 9)
 Calculate the mean, variance, and
standard deviation