Probability

Lecture 7 Discussion Notes

Business Mathematics
IFB and A&F Year 1
Kelebogile Kenalemang
Botswana Accountancy College

1
 Definition of Terms
• A simple event is any single outcome from a probability experiment.
Each simple event is denoted ei.
• The sample space, S, of a probability experiment is the collection of
all possible simple events. In other words, the sample space is a list
of all possible outcomes of a probability experiment.
• An event is any collection of outcomes from a probability
experiment. An event may consist of one or more simple events.
Events are denoted using capital letters such as E.
• The probability of an event, denoted P(E), is the likelihood of that
event occurring.
• An unusual event is an event that has a low probability of occurring.
2
 Probability
• Probability is a measure of the likelihood of a random phenomenon or
chance behavior.
1. The probability of any event E, P(E), must be between 0 and 1
inclusive. That is,

0 < P(E) < 1.

2. If an event is impossible, the probability of the event is 0.

3. If an event is a certainty, the probability of the event is 1.
4. If S = {e1, e2, …, en}, then P(e1) + P(e2) + … + P(en) = 1
3
 Example
• If you are trying to win a particular tender, then there are only 2
possible outcomes-either you win or you don’t.
• If the probability of winning the tender is 0.4, then the probability of
not winning must be 0.6 as the 2 probabilities must add up to one.

4
Probability Notations
• The probability of event A occurring is written as P(A)
• The probability of P(not A) = 1 – P(A) i.e. the probability of event A
not occurring
• this is known as “complementary rule”
• P (event) =

5
Example
• An ordinary six sided die is rolled. What is the probability that it will
show a number less than 3
Ans: the possible list of all possible equally likely outcomes of rolling a
die is: 1, 2, 3, 4, 5, 6. the outcomes that constitute the “event” under
consideration are: 1, 2 hence the answer is 2/6 = 1/3

6
 DIY: Activity 1
A standard pack of playing cards has 52 cards (excluding “jokers”).
Suppose you pick one card at random. Determine the probability for
each of the following:
a. The card you pick is a king
b. The card you pick is red
c. The card you pick is a club
d. The card is the ace of spades

7
Methods for determining probability
• Three methods for determining the probability of an event:
1. The classical method
2. The empirical method
3. The subjective method

8
Classical Method
• The classical method of computing probabilities requires equally likely
outcomes.
• An experiment is said to have equally likely outcomes when each
simple event has the same probability of occurring.
• If an experiment has n equally likely simple events and if the number of
ways that an event E can occur is m, then the probability of E, P(E), is

• So, if S is the sample space of this experiment, then

9
In short form

10
 EXAMPLE Computing Probabilities Using the Classical Method

• Suppose a “fun size” bag of M&Ms contains 9 brown candies, 6

yellow candies, 7 red candies, 4 orange candies, 2 blue candies,
and 2 green candies. Suppose that a candy is randomly selected.
(a) What is the probability that it is brown?
(b) What is the probability that it is blue?
(c) Comment on the likelihood of the candy being brown versus blue.

11
Computing Probability Using the Empirical Method

• The probability of an event E is approximately the number of

times event E is observed divided by the number of repetitions
of the experiment.

12
EXAMPLE Using Relative Frequencies to Approximate Probabilities

• The following data represent the number of homes with various

types of home heating fuels based on a survey of 1,000 homes.
• (a) Approximate the probability that a randomly selected home
uses electricity as its home heating fuel.
• (b) Would it be unusual to select a home that uses coal or coke
as its home heating fuel?

13
14
Subjective probabilities
• Subjective probabilities are probabilities obtained based upon
an educated guess.
• For example, there is a 40% chance of rain tomorrow.

15
 Probability Rules-Addition rule
• If A and B are mutually exclusive events, then you can simply add the probabilities
together
• P(A or B) = P (A) + P(B)
• Mutually exclusive events cannot both occur at the same time e.g. a particular
person cannot simultaneously be aged both 50 and below 21
• The more general rule is
P(A or B) = P(A) – P(B) – P(A and B)
This one allows us to calculate probabilities when both events can happen
simultaneously. For example, an employee could be both 50 and female.
It is important to be able to determine whether the 2 events are mutually exclusive
or not.
16
DIY- Activity 2
Identify which of the following pairs of events, if any, are mutually
exclusive:
a. Roll one die. A=get a 6 B = get a 5
b. Pick a card from a standard 52 card pack
A=get an ace, B = get a red card
c. Sitting two exams (business economics and business decision analysis
(BDA)) A=pass business economics B=pass BDA
d. Bidding for an item on an online auction site. A=win the auction,
B=lose the auction

17
DIY: activity 3
Suppose you roll a fair die. What is the probability of getting a 2 or a 3?

18
DIY: activity 4
• Suppose you roll a fair die. What is the probability of getting a
multiple of 3 or an even number?

19
Probability Rules: Multiplication Rule
• If 2 events are “independent”, then you can just multiply the individual
probabilities together.
P(A and B) =
Two events are said to be “independent” if the occurrence of one event does
not affect the probability of the other event occurring.
More generally the multiplication rule has to be adapted as follows:
P(A and B) = P(A) × P(B/A) for “conditional” events
Two events are said to be conditional if the occurrence of one event does
affect the probability of the other event occurring
P(B/A) means the probability of B occurring, given that A has occurred
20
DIY: Activity 5
Which of the following events is/are likely to be independent?
a. Successive tosses of a coin
b. Successive selections of a card from a pack without replacement
c. Gender and shoe size
d. Breakdown of machines of different types and ages

21
 Probability Rules: Multiplication Rule
Office A Office B Office C Total
Qualified 26 29 24 79
Not qualified 11 9 12 32
Total 37 38 36 111

What is the probability that a randomly selected employee will come from office B and
not be qualified?

22
Example
Multiplication rules can be used with conditional probabilities to
construct probability distributions
Example, suppose a firm is considering a new project and has the
estimated the following:
1. In the first year, there is a 60% probability that sales will be 10,000
units and a 40% probability that sales will be 6000 units
2. If sales are high in the first year, then in the second year there is a 70%
chance of sales of 12000 units and a 30% chance of sales of 8000 units
3. If sales are low in the first year, then in the second year there is a 50%
chance of sales of 7000 units and a 505 chance of sales of 5000
23
Example cont
• You can construct a tree diagram to make it easy for you or
Year 1:
Sales Probability
10000 0.6
6000 0.4
Total 1.00

Year 2
Sales Probability
12000 0.42
8000 0.18
7000 0.2
5000 0.2

24
DIY: Activity 6
• Past data show that the probability of a married woman of age 32
being alive in 30 years time is 0.69. similarly, the probability of a
married man age 35 being alive in 30 years time is 0.51. calculate, for
a married couple (woman aged 32, man aged 35), the probabilities
that in 30 years time;
a. They are both alive
b. Only (exactly) one is alive
c. Neither is alive

25
Risk and Uncertainty
• Business planning is rarely certain.
• We may budget for sales of 100 000 units per annum but could
anticipate sales being anywhere between 50 000 and 130 000 units.
• Risk: a scenario when we know the difference possible outcomes and
can estimate their associated probabilities
• Uncertainty: used when we do not know the possible outcomes
and /or their associated probabilities. The future cannot be predicted
because there is insufficient information about what the future
outcomes might be. Decisions under conditions of uncertainty are a
matter of guesswork.
26
Example
A company has recorded the following daily sales over the last 200 days
Daily sales (units) Number of days
100 40
200 60
300 80
400 20

What is the expected sales level in the future?

27
Example cont’d

• We convert the above results into a probability distribution

Daily sales probability
100 40/200=0.2
200 60/200=0.3
300 0.4
400 0.1

The expected values of the futures sales is given by

EV = (0.2×100)+(0.3……= 240 units

28
DIY-Activity 7
• A decision has to be made between 3 options, A, B and C. the possible
profits and losses are:
Option A: a profit of P2000 with probability 0.5 or otherwise a loss of
P500
Option B: a profit of P800 with probability 0.3 or otherwise a profit of
P500
Option C: a profit of P1000 with probability of 0.8 of P500 with
probability of 0.1 or otherwise a loss of P400
Which option should be chosen under the Expected Value criterion?

29