DEPARTMENT OF QUANTITATIVE METHODS & INFORMATION

SYSTEMS

Introduction to Business Statistics

QM 120
Chapter 5

Discrete random variables and their probability distribution

Spring 2008 Dr. Mohammad Zainal

 Chapter 5: Random Variables
2

Random variables

# of PC’s owned Frequency Relative Frequency

0 120 .12
1 180 .18
2 470 .47
3 230 .23
N = 1000 Sum = 1.000

¾Let x denote the number of PCs owned by a family. Then x

can take any of the four possible values (0, 1, 2, and 3).

¾A random variable (RV) is a variable whose value is

determined by the outcome of a random experiment.
 Chapter 5: Random Variables
3

Discrete random variable
¾A random variable that assumes countable values is called a
discrete random variable.
¾ Examples of discrete RVs:
¾ Number of cars sold at a dealership during a week
¾ Number of houses in a certain block
¾ Number of fish caught on a fishing trip
¾ Number of costumers in a bank at any given day

Continuous random variable
¾A random variable that can assume any value contained in
one or more intervals is called a continuous random variable.
 Chapter 5: Random Variables
4

¾ Examples of continuous RVs:
¾ Height of a person
¾ Time taken to complete a test
¾ Weight of a fish
¾ Price of a car

Example: Classify each of the following RVs as discrete or 
continuous.
¾ The number of new accounts opened at a bank during a week
¾ The time taken to run a marathon
¾ The price of a meal in fast food restaurant
¾ The score of a football game
¾ The weight of a parcel
 Chapter 5: Probability Distribution of a Discrete RV
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¾The probability distribution of a discrete RV lists all the

possible value that the RV can assume and their
corresponding probabilities.

Example: Write the probability distribution of the number of

PCs owned by a family.
X P(x)
# of PC’s  Frequency Relative 
owned Frequency 0 .12
0 120 .12 1 .18
1 180 .18
2 .47
2 470 .47
3 .23
3 230 .23
N = 1000 Sum = 1.000 ΣP(x) = 1.000
 Chapter 5: Probability Distribution of a Discrete RV
6

¾The following two characteristics must hold for any discrete 
probability distribution:
¾ The probability assigned to each value of a RV x lies in the range 0
to 1; that is 0 ≤ P(x) ≤ 1 for each x.
¾ The sum of the probabilities assigned to all possible values of x is
equal to 1.0; that is ΣP(x) = 1.

Example: Each of the following tables lists certain values of x

and their probabilities. Determine whether or not each table
represents a valid probability distribution.
x P(x) x P(x) x P(x)

0 .08 0 .25 4 .2

1 .11 1 .34 5 .3

2 .39 2 .28 6 .6

3 .27 3 .13 8 ‐.1

 Chapter 5: Probability Distribution of a Discrete RV
7

Example: The following table lists the probability distribution of 
a discrete RV x.
x 0 1 2 3 4 5 6
P(x) .11 .19 .28 .15 .12 .09 .06

a) P(x = 3) b) P(x ≤ 2) c) P(x ≥ 4) d) P(1 ≤ x ≤ 4)

e) Probability that x assumes a value less than 4
f) Probability that x assumes a value greater than 2
g) Probability that x assumes a value in the interval 2 to 5
 Chapter 5: Probability Distribution of a Discrete RV
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Example: For the following table
x 1 2 3 4 5
f 8 20 24 16 12

a) Construct a probability distribution table. Draw a graph of 
the probability distribution.
0.35
x f P(x)
0.3
1 8 .1 0.25
0.2
2 20 .25
0.15
3 24 .3 0.1

4 16 .2 0.05
0
5 12 .15 1 2 3 4 5

b) Find the following probabilities
i. P(x = 3) ii. P(x < 4) iii. P(x ≥ 3) iv. P(2 ≤ x ≤ 4)
P(x = 3) = .3 P(x < 4) = .1 + .25 + .3 = .65
P(x ≥ 3) = .3 + .2  + .15 = .65 P(2 ≤ x ≤ 4) = .25 + .3  + .2 = .75
 Chapter 5: Mean of a discrete RV
9

Mean of a discrete RV
¾The mean μ ‐or expected value E(x)‐ of a discrete RV is the
value that you would expect to observe on average if the
experiment is repeated again and again
¾ It is denoted by 
E (x ) = ∑ xp (x )
¾Illustration: Let us toss two fair coins, and let x denote the
number of heads observed. We should have the following
probability distribution table
x 0 1 2
P(x) 1/4 1/2 1/4
Suppose we repeat the experiment a large number of times,
say n =4,000. We should expect to have approximately
 Chapter 5: Mean of a discrete RV
10

1 thousand zeros, 2 thousand ones, and 1 thousand twos. Then 
the average value of x would equal 
Sum of measurements 1, 000 (0) + 2, 000 (1) + 1000 (2)
=
n 4, 000
⎛1⎞ ⎛1⎞ ⎛1⎞
= ⎜ ⎟ (0) + ⎜ ⎟ (1) + ⎜ ⎟ (2)
⎝4⎠ ⎝2⎠ ⎝4⎠

E (x ) = ∑ xp (x )
Similarly, if we use the                           , we would have

E (x ) = 0P (0) + 1P (1) + 2P (2)

= 0(1/ 4) + 1(1/ 2) + 2(1/ 4)
=1
 Chapter 5: Mean of a discrete RV
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Example: Recall “ number of PC’s owned by a family” 
example. Find the mean number of PCs owned by a family.
x P(x)
0 .12 We need to find x.p(x)
1 .18 for each value of x and
then add them up
2 .47
together
3 .23

x P(x) x.P(x)
0 .12 0(.12) = 0.00 ΣxP(x) = 0.00
1 .18 1(.18) = 0.18  + 0.18 + 0.94
0.69 =1.81
2 .47 2(.47) = 0.94
3 .23 3(.23) = 0.69

Thus, on average, we expect to see 1.81 PC owned by a family!
 Chapter 5: Mean of a discrete RV
12

Example: In a lottery conducted to benefit the local fire

company, 8000 tickets are to be sold at $5 each. The prize is a
$12,000. If you purchase two tickets, what is your expected
gain?

Your gain is:

o Either the $12,000 but don’t forget the ticket price you
already paid
o or you buy the ticket for a $10 but get nothing
x P(x) x.P(x)
12000 ‐ 10 2/8000 2.9975
‐10 7998/8000 ‐9.9975
Sum ‐7

Expected gain = E(x) = ‐ $7, that is to lose 7 dollars

 Chapter 5: Mean of a discrete RV
13

Example: Determine the annual premium for a $1000

insurance policy covering an event that over a long period of
time, has occurred at the rate of 2 times in 100. Let
x : the yearly financial gain to the insurance company
resulting from the sale of the policy
C : unknown premium
Calculate the value of C such that the expected gain E(x) will
equal to zero so that the company can add the administrative
costs and profit.
x P(x) x.P(x)
C 98/100 0.98C
C‐1000 2/100 0.02C‐20 

E(x) = 0 =.98C + .02C – 20 → C =$20, the insurance company should

ask a minimum of $20 and add the administrative costs and profit
to that amount.
 Chapter 5: Mean of a discrete RV
14

Example: You can insure a $50,000 diamond for its total value
by paying a premium of D dollars. If the probability of theft in
a given year is estimated to be .01, what premium should the
insurance company charge if it wants the expected gain to
equal $1000.
x P(x) x.P(x)
D .99 0.99D
D‐50,000 .01 0.01D‐500 

E(x) = 1000 =.99D + .01D – 500 → D =$1500, the insurance company

should ask for that amount as a premium
 Chapter 5: Standard Deviation of a Discrete RV
15

¾ The standard deviation of a discrete RV x, denoted by σ,

measures the spread of its probability distribution.
¾ A higher value of σ indicates that x can assume values over
a larger range about the mean. While, a smaller value
indicates that most of the values that can x assume are
clustered closely around the mean.
¾ The standard deviation σ can be found using the following
formula:
σ= ∑ x 2
p ( x ) − μ 2

¾ Hence, the variance σ2 can be obtained by squaring its

standard deviation σ.
 Chapter 5: Standard Deviation of a Discrete RV
16

Example: Recall “ number of PC’s owned by a family”

example. Find the standard deviation of PCs owned by a
family.
x P(x)
0 .12 Here we need to find
two columns x.p(x) and
1 .18 x2.p(x)
2 .47
3 .23

x P(x) x.P(x) x2.P(x)

0 .12 0(.12) = 0.00 0(.00) = 0.00
Σx2P(x) = 0.00
+ 0.18 + 1.88
1 .18 1(.18) = 0.18  1(.18) = 0.18
+ 2.07 =4.13
2 .47 2(.47) = 0.94 2(.94) = 1.88
3 .23 3(.23) = 0.69 3(.69) =2.07

σ 2 = 4.13 − 1.812 = .8539 ⇒ σ = .8539 = .924

 Chapter 5: Standard Deviation of a Discrete RV
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Example: An electronic store sells a particular model of a computer

notebook. There are only four notebooks in stocks, and the manager
wonders what today’s demand for this particular model will be. She
learns from marketing department that the probability distribution
for x, the daily demand for the laptop, is as shown in the table.
x 0 1 2 3 4 5
P(x) .10 .40 .20 .15 .10 .05

Find the mean, variance, and the standard deviation of x. Is it likely

that five or more costumers will want to buy a laptop?
Solution:
x P(x) x.P(x) x2.P(x) μ= 1.9
0 .10 0.00 0.00 σ= 1.34
1 .40 0.40 0.40 P(X ≥ 5) = 0.05
2 .20 0.40 0.80
It means it is unlikely the 5
3 .15 0.45 1.35
or more costumers will
4 .10 0.40 1.60
want to buy laptops at any
5 .05 0.25 1.25
given day
 Chapter 5: Standard Deviation of a Discrete RV
18

Example: A farmer will earn a profit of $30,000 in case of

heavy rain next year, $60,000 in case of moderate rain, and
$15,000 in case of little rain. A meteorologist forecasts that the
probability is .35 for heavy rain, .40 for moderate rain, and .25
for little rain next year. Let x be the RV that represents next
year’s profits in thousands of dollars for this farmer. Write the
probability distribution of x. Find the mean, variance, and the
standard deviation of x.
x P(x) xP(x) x2P(x)
30 0.35 10.50 315.00
μ= 38.250 → $ 38,250 60 0.40 24.00 1440.00
15 0.25 3.75 56.25
σ= 18.66 → $ 18,660 Sum 38.25 1811.25
 Chapter 5: Standard Deviation of a Discrete RV
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Example: An instant lottery ticket costs $2. Out of a total of

10,000 tickets printed for this lottery, 1000 tickets contain a
prize of $5 each. 100 tickets contain a prize of $10 each, 5
tickets contain a prize of $1000 each, and 1 ticket has the prize
of $5000. Let x be the RV that denotes the net amount player
wins by playing this lottery. Write the probability distribution
of x. Determine the mean and the standard deviation of x.
x P(x) xP(x) x2P(x)
μ= ‐$0.4 → Lose $ 0.4 5-2 0.1 0.3 0.9
10-2 0.01 0.08 0.64
1000-2 0.0005 0.499 498.002
5000-2 0.0001 0.4998 2498
-2 0.8894 -1.7788 3.5576
Sum -0.4 3001.1
Thus, on the average, the players who play the game are expected
to lose $ 0.4 per ticket.

σ= $ 54.78
 Chapter 5: Standard Deviation of a Discrete RV
20

Example: Based in its analysis of future demand for its

products, the financial department a company has determined
that there is a .17 probability that the company will lose $1.2
million during the next year, a .21 probability that it will lose
$.7 million, a .37 probability that it will make a profit of $0.9
million, and a .25 probability that it will make a profit of $2.3
million.
a) Let x be a RV that denotes the profit earned by this
company during the next year. Write the probability
distribution of x. x P(x) xP(x) x2P(x)
-1.2 0.17 -0.204 0.2448
-0.7 0.21 -0.147 0.1029
0.9 0.37 0.333 0.2997
2.3 0.25 0.575 1.3225
Sum 0.557 1.9699
 Chapter 5: Standard Deviation of a Discrete RV
21

b) Find the mean and standard deviation of the probability of

part a.

μ = $ 557,000

σ= $ 1.288 million
 Chapter 5: Factorials & Combinations
22

Factorials
¾ The symbol n!, reads as “n factorial,” represents the
product of all integers from n to 1. In other words,
n! = n(n ‐ 1)(n ‐ 2)(n ‐ 3)…3.2.1
Example: Evaluate 7!
7! = 7.6.5.4.3.2.1 = 5040
Example: Evaluate (12‐4)!
(12‐4)! = (8)! = 8.7.6.5.4.3.2.1 =40,320
 Chapter 5: Factorials & Combinations
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Example: Evaluate (8‐8)!

(8‐8)! = (0)! = 1

Example: Find the value of 8!

By using factorial Table or your calculator.
Locate 8 in the column labeled n.
Then read the value for n! next
to 8.
 Chapter 5: Factorials & Combinations
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Combinations
¾ Combinations give the number of ways x elements can be
selected from n elements. The notation used to denote the
total number of combinations is

n C x = C xn = ( nx )
¾ It can be found using the following formula

n!
C =n Cx =
n

x!(n − x)!
x

¾ Remember: n is always greater than or at least equal to x.

 Chapter 5: Factorials & Combinations
25

Example: Three members of a jury will be randomly selected

from five people. How many different combinations are
possible?

We have total of n = 5 and we are to select r = 3 of them. Hence,

5C3 = 5!/[3! (5‐3)!] = 5!/(3! . 2!) = 120/(6 . 2) = 10

If we assume their names are A, B, C, D, and E. Then the 10

combinations of the jury are

ABC ABD ABE ACD ACE ADE BCD BCE BDE CDE