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OPRE 6301/SYSM 6303

Quantitative Introduction to Risk and
Uncertainty in Business
7-1

Chapter Seven
Random Variables
and
Discrete Probability Distributions

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Random Variable
A random variable is
a function or rule
that assigns a number
to each outcome of an experiment

7-3

Random Variable
Discrete Random Variable
Variable who can take on
a countable number of values

Continuous Random Variable

Variable whose values are uncountable

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Probability Distribution
A table, formula or graph that describes the
values of a random variable and the probability
associated with these values

X => name of the random variable

x => a value of a random variable
P(X=x)
P(x)
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Discrete Probability
Distribution
Two fundamental requirements

0 P x 1

P x 1
all x

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Discrete Probability
Distribution

7-15

Number of Sales
P(S)=0.2 3 sales calls
Call 1

Call 2

Call 3

Event

S 0.2

SSS

Sc 0.8

SSSc

S 0.2

SScS

Sc 0.8

SScSc

S 0.2

ScSS

Sc 0.8

ScSSc

S 0.2

ScScS

Sc 0.8

ScScSc

S 0.2
S 0.2

Sc 0.8

S 0.2
Sc 0.8
Sc 0.8

Probability

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Number of Sales
P(S)=0.2 3 sales calls
Probability Distribution
x

Probability

0.512

0.384

0.096

0.008

7-23

Describing the Probability

Distribution
Population Mean

E x xP x
all x

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Describing the Probability

Distribution
Population Variance

V x 2 x 2 P x
all x

V x 2 x 2P x 2
all x

7-26

Describing the Probability

Distribution
Population Standard Deviation

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Example: Number of Pizzas

Page 223: Problem 7.20
a. Find the probability that a student has received 2 or
more pizzas this month.
X

P(X)

.1

.3

.4

.2

7-28

Example: Number of Pizzas

Page 223: Problem 7.20
b. Determine the mean of the number of pizzas delivered
each month.
X

P(X)

.1

.3

.4

.2

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Example: Number of Pizzas

Page 223: Problem 7.20
c. Determine the variance of the number of pizzas
delivered each month.
X

P(X)

.1

.3

.4

.2

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Laws of Expected Value

E c c
E X c E X c
E cX cE X
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Laws of Variance
V c 0
V X c V X
V cX c 2V X
7-32

Binomial Distribution
Binomial Random Variable
The number of successes
in the experiments n trials

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Binomial Distribution
Binomial Experiment
1. Consists of a fixed number of trials; n.
2. Each trial has two possible outcomes;
success and failure
3. The probability of success is p.
The probability of failure is (1-p).
4. The trials are independent

7-37

Binomial Probability Tree

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Binomial Probability Tree

The probability for each sequence
of branches that represent
x successes and n-x failures has probability
n x
x

p 1 p

To count the number of branch sequences that

produce x successes and n-x failures, we use the
combinatorial formula

C xn

n!
x!n x !

7-40

Binomial Probability
Distribution
P x

n!
p x 1 p n x
x!n x !

for x 0,1,2, , n

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Binomial Probability
Distribution
Quiz Luck Example
10 questions, 5 choices (1 correct)

7-42

Binomial Probability
Distribution
Quiz Luck Example
n=10, p=0.2
x
0
1
2
3
4
5
6
7
8
9
10

P(x) P(X<=x)
0.1074 0.1074
0.2684 0.3758
0.3020 0.6778
0.2013 0.8791
0.0881 0.9672
0.0264 0.9936
0.0055 0.9991
0.0008 0.9999
0.0001 1.0000
0.0000 1.0000
0.0000 1.0000

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Mean and Variance of

Binomial Distribution
Mean
=

Variance
= np 1 p
2

Standard Deviation
= np 1 p
7-44

Poisson Distribution
Poisson Random Variable
The number of successes that occur in a period of
time or an interval of space in a Poisson
experiment.

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Poisson Distribution
Poisson Experiment
1. The number of successes that occur in any
interval is independent of successes that occur in
any other interval
2. The probability of success in an interval is the
same for all equal-size intervals
3. The probability of a success in an interval is
proportional to the size of the interval
4. The probability of > one success in an interval
approaches 0 as the interval becomes smaller
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Poisson Distribution
Poisson Probability Distribution

e x
P x
x!

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Poisson Distribution
No typos in a textbook
Mean of 1.5 typos per 100 pages

7-51

Poisson Distribution
No typos in a 400 page textbook
Mean of 1.5 typos per 100 pages

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Poisson Distribution
Typos in a 400 page textbook
Mean of 1.5 typos per 100 pages
x
0
1
2
3
4
5
6
7
8
9

P(x) P(X<=x)
0.0025 0.0025
0.0149 0.0174
0.0446 0.0620
0.0892 0.1512
0.1339 0.2851
0.1606 0.4457
0.1606 0.6063
0.1377 0.7440
0.1033 0.8472
0.0688 0.9161

x
10
11
12
13
14
15
16
17
18
19

P(x) P(X<=x)
0.0413 0.9574
0.0225 0.9799
0.0113 0.9912
0.0052 0.9964
0.0022 0.9986
0.0009 0.9995
0.0003 0.9998
0.0001 0.9999
0.0000 1.0000
0.0000 1.0000

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