Statistics for Business

and Economics
Anderson Sweeney
Williams
Slides by
John Loucks
St. Edward’s University

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 Chapter 6
Continuous Probability Distributions
 Uniform Probability Distribution
 Normal Probability Distribution
 Normal Approximation of Binomial
 Probabilities
Exponential Probability Distribution
f (x) Exponential
Uniform
f (x)
f (x)
Normal

x
x
x

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 Continuous Probability Distributions

 A continuous random variable can assume any

value in an interval on the real line or in a
collection of intervals.
 It is not possible to talk about the probability
of the random variable assuming a particular
 value.
Instead, we talk about the probability of the
random variable assuming a value within a
given interval.

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 Continuous Probability Distributions

 The probability of the random variable

assuming a value within some given interval
from x1 to x2 is defined to be the area under
the graph of the probability density function
between x1 and x2.
f (x) Exponential
Uniform
f (x)

f (x)
Normal

x
x xx1122 x22
x11 x22 x11
x
x11 x22
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 Uniform Probability Distribution

 A random variable is uniformly distributed

whenever the probability is proportional to the
interval’s length.
 The uniform probability density function is:

ff (x)
(x) =
= 1/(b
1/(b –– a)
a) for
for aa <
< xx <
<bb
=
=0 0 elsewhere
elsewhere

where: a = smallest value the variable can assume

b = largest value the variable can assume

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 Uniform Probability Distribution

 Expected Value of x

E(x)
E(x) =
= (a
(a +
+ b)/2
b)/2

 Variance of x

Var(x)
Var(x) =
= (b
(b -- a)
a)22/12
/12

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 Uniform Probability Distribution

 Example: Slater's Buffet

Slater customers are charged for the
amount of
salad they take. Sampling suggests that the
amount
of salad taken is uniformly distributed
between 5
ounces and 15 ounces.

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 Uniform Probability Distribution

 Uniform Probability Density Function

f(x)
f(x) =
= 1/10
1/10 for
for 5
5<< xx <
< 15
15
=
=0 0 elsewhere
elsewhere

where:
x = salad plate filling weight

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 Uniform Probability Distribution

 Expected Value of x

E(x) = (a + b)/2
= (5 + 15)/2
= 10

 Variance of x

Var(x) = (b - a)22/12
= (15 – 5)22/12
= 8.33

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 Uniform Probability Distribution

 Uniform Probability Distribution

for Salad Plate Filling Weight

f(x)

1/10

x
0 5 10 15
Salad Weight (oz.)

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 Uniform Probability Distribution

What is the probability that a customer

will take between 12 and 15 ounces of
salad?
f(x)

P(12 < x < 15) = 1/10(3) = .3

1/10

x
0 5 10 12 15
Salad Weight (oz.)

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 Area as a Measure of Probability

 The area under the graph of f(x) and

probability are identical.
 This is valid for all continuous random
 variables.
The probability that x takes on a value
between some lower value x1 and some higher
value x2 can be found by computing the area
under the graph of f(x) over the interval from
x1 to x2.

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 Normal Probability Distribution

 The normal probability distribution is the most

important distribution for describing a
continuous random variable.
 It is widely used in statistical inference.
 It has been used in a wide variety of
applications
including:
• Heights of • Test scores
people • Scientific
• Rainfall
 Abraham measurements
de Moivre, a French mathematician,
amounts
published The Doctrine of Chances in 1733.
 He derived the normal distribution.

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 Normal Probability Distribution

 Normal Probability Density Function

1  (x  )2 / 2 2
f (x)  e
 2

where:
 = mean
 = standard deviation
 = 3.14159
e = 2.71828

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 Normal Probability Distribution

 Characteristics

The distribution is symmetric; its skewness

measure is zero.

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 Normal Probability Distribution

 Characteristics

The entire family of normal probability

distributions is defined by its mean m and its
standard deviation s .

Standard Deviation s

x
Mean m

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 Normal Probability Distribution

 Characteristics

The highest point on the normal curve is at the

mean, which is also the median and mode.

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 Normal Probability Distribution

 Characteristics

The mean can be any numerical value: negative,

zero, or positive.

x
-10 0 25

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 Normal Probability Distribution

 Characteristics

The standard deviation determines the width of the

curve: larger values result in wider, flatter curves.

s = 15

s = 25

x
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 Normal Probability Distribution

 Characteristics

Probabilities for the normal random variable are

given by areas under the curve. The total area
under the curve is 1 (.5 to the left of the mean and
.5 to the right).

.5 .5
x

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 Normal Probability Distribution

 Characteristics (basis for the empirical rule)

68.26% of values of a normal random variable

are within+/- 1 standard deviation of its mea

95.44% of values of a normal random variable

are within +/- 2 standard deviations of its mea

99.72% of values of a normal random variable

are within +/- 3 standard deviations of its mea
me

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 Normal Probability Distribution

 Characteristics (basis for the empirical rule)

99.72%
95.44%
68.26%

m
x
m – 3s m – 1s m + 1s m + 3s
m – 2s m + 2s
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Characteristics

A
A random
random variable
variable having
having aa normal
normal distribution
distribution
with
with aa mean
mean ofof 00 and
and aa standard
standard deviation
deviation of
of 11 is
is
said
said to
to have
have aa standard
standard normal
normal probability
probability
distribution.
distribution.

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 Standard Normal Probability Distribution

 Characteristics

The letter z is used to designate the standard

normal random variable.

s = 1

z
0

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Converting to the Standard Normal Distribution

x 
z


We can think of z as a measure of the number of

standard deviations x is from .

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Example: Pep Zone

Pep Zone sells auto parts and supplies
including
a popular multi-grade motor oil. When the
stock of
this oil drops to 20 gallons, a replenishment
The store manager is concerned that sales
order is
are
placed.
being lost due to stockouts while waiting for a
replenishment order.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Example: Pep Zone

It has been determined that demand
during
replenishment lead-time is normally
distributed
with a mean of 15 gallons and a standard
The manager would like to know the
deviation
probability
of 6 gallons.
of a stockout during replenishment lead-time.
In
other words, what is the probability that
demand P(x > 20) = ?
during lead-time will exceed 20 gallons?
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 1: Convert x to the standard normal distributio

z = (x - )/
= (20 - 15)/6
= .83

Step 2: Find the area under the standard normal

curve to the left of z = .83.

see next slide

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Cumulative Probability Table for

the Standard Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z
< .83)
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step
Step 3:
3: Compute
Compute thethe area
area under
under the
the standard
standard norm
norm
curve
curve to
to the
the right
right of
of zz =
= .83.
.83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

Probability
of a P(x >
stockout 20)

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 Standard Normal Probability Distribution

 Solving for the Stockout Probability

Area = 1 - .7967
Area = .7967
= .2033

z
0 .83

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 Standard Normal Probability Distribution

 Standard Normal Probability Distribution

If the manager of Pep Zone wants the
probability
of a stockout during replenishment lead-time
to be
no more than .05, what should the reorder
(Hint: Given a probability, we can use the
point be?
standard
normal table in an inverse fashion to find the
-------------------------------------------------------------
corresponding
-- z value.)

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 Standard Normal Probability Distribution

 Solving for the Reorder Point

Area = .9500

Area = .0500

z
0 z.05

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 Standard Normal Probability Distribution

 Solving for the Reorder Point

Step
Step 1:
1: Find
Find the
the z-value
z-value that
that cuts
cuts off
off an
an area
area of
of .05
.05
in
in the
the right
right tail
tail of
of the
the standard
standard normal
normal
distribution.
distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678
We look up
.9686 .9693 .9699 .9706
the
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750complement
.9756 .9761 .9767
. . . . . . . . of the
. tail. area.
(1 - .05 = .95)
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 Standard Normal Probability Distribution

 Solving for the Reorder Point

Step
Step 2:
2: Convert
Convert zz.05 to the corresponding value of x.
.05 to the corresponding value of x.

x =  + z.05
.05

 = 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probabili

of a stockout during leadtime at (slightly less than)

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 Normal Probability Distribution

 Solving for the Reorder Point

Probability of
Probability of
no
a
stockout
stockout
during
during
replenishment
replenishment
lead-time
lead-time
= .95
= .05

x
15 24.87

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 Standard Normal Probability Distribution

 Solving for the Reorder Point

By raising the reorder point from 20 gallons to
25 gallons on hand, the probability of a stockout
decreases from about .20 to .05.
This is a significant decrease in the chance that
Pep Zone will be out of stock and unable to meet a
customer’s desire to make a purchase.

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 Normal Approximation of Binomial
Probabilities

When
When the
the number
number ofof trials,
trials, n,
n, becomes
becomes large,
large,
evaluating
evaluating the
the binomial
binomial probability
probability function
function by
by hand
hand
or
or with
with aa calculator
calculator is
is difficult.
difficult.

The
The normal
normal probability
probability distribution
distribution provides
provides an
an
easy-to-use
easy-to-use approximation
approximation of of binomial
binomial probabilities
probabilities
where
where np
np >
>55 and
and n(1
n(1 -- p)
p) >
> 5.
5.

In
In the
the definition
definition of
of the
the normal
normal curve,
curve, setset
= np(1  and
= np
np p)
and

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 Normal Approximation of Binomial
Probabilities

Add
Add and
and subtract
subtract aa continuity
continuity correction
correction factor
factor
because
because aa continuous
continuous distribution
distribution is
is being
being used
used to
to
approximate
approximate aa discrete
discrete distribution.
distribution.

For
For example,
example, P(xP(x =
= 12)
12) for
for the
the discrete
discrete binomial
binomial
probability
probability distribution
distribution is
is approximated
approximated by by
P(11.5
P(11.5 << xx <
< 12.5)
12.5) for
for the
the continuous
continuous normal
normal
distribution.
distribution.

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 Normal Approximation of Binomial
Probabilities
 Example
Suppose that a company has a history of
making errors in 10% of its invoices. A
sample of 100 invoices has been taken, and
we want to compute the probability that 12
invoices
In thiscontain errors.
case, we want to find the binomial
probability of 12 successes in 100 trials. So,
we set:
  np m(1 =
 pnp
) = 100(.1) = 10
= [100(.1)(.9)] ½
=3

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 Normal Approximation of Binomial
Probabilities
 Normal Approximation to a Binomial
Probability
Distribution with n = 100 and p = .1

s=3
P(11.5 < x < 12.5)
(Probability
of 12 Errors)

x
m = 10 12.5
11.5
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 Normal Approximation of Binomial
Probabilities
 Normal Approximation to a Binomial
Probability
Distribution with n = 100 and p = .1

P(x < 12.5) = .7967

x
10 12.5

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 Normal Approximation of Binomial
Probabilities
 Normal Approximation to a Binomial
Probability
Distribution with n = 100 and p = .1

P(x < 11.5) = .6915

x
10
11.5
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Normal Approximation of Binomial
Probabilities
 The Normal Approximation to the Probability
of 12 Successes in 100 Trials is .1052

P(x = 12)
= .7967 - .6915
= .1052

x
10 12.5
11.5
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 Exponential Probability Distribution

 The exponential probability distribution is

useful in describing the time it takes to
 complete a task. random variables can be used
The exponential
to describe:
• Time between vehicle arrivals at a toll booth
• Time required to complete a questionnaire
• Distance between major defects in a highway
 In waiting line applications, the exponential
distribution is often used for service times.

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 Exponential Probability Distribution

 A property of the exponential distribution is

that the mean and standard deviation are
 equal.
The exponential distribution is skewed to the
right. Its skewness measure is 2.

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 Exponential Probability Distribution

 Density Function

1
f ( x )  e  x /  for x > 0


where:  = expected or mean

e = 2.71828

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 Exponential Probability Distribution

 Cumulative Probabilities

P ( x  x0 ) 1  e  xo / 

where:
x0 = some specific value of x

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 Exponential Probability Distribution

 Example: Al’s Full-Service Pump

The time between arrivals of cars at Al’s
full-
service gas pump follows an exponential
probability
distribution with a mean time between arrivals
of 3
minutes. Al would like to know the probability
that
the time between two successive arrivals will
be 2
minutes or less.
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 Exponential Probability Distribution

 Example: Al’s Full-Service Pump

f(x)

.4 P(x < 2) = 1 - 2.71828-2/3

-2/3 = 1 - .5134 = .4
.3
.2
.1
x
0 1 2 3 4 5 6 7 8 9 10
Time Between Successive Arrivals (mins.)

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 Relationship between the Poisson
and Exponential Distributions

The Poisson distribution

provides an appropriate description
of the number of occurrences
per interval

The exponential distribution

provides an appropriate description
of the length of the interval
between occurrences

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 End of Chapter 6

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