© 2011 Pearson Education, Inc

Statistics for Business and

Economics

Chapter 3
Probability

© 2011 Pearson Education, Inc

 Contents
1. Events, Sample Spaces, and Probability
2. Unions and Intersections
3. Complementary Events
4. The Additive Rule and Mutually Exclusive
Events
5. Conditional Probability
6. The Multiplicative Rule and Independent
Events
7. Random Sampling
8. Baye’s Rule
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 Learning Objectives

1. Develop probability as a measure of

uncertainty
2. Introduce basic rules for finding
probabilities
3. Use probability as a measure of reliability
for an inference

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 Thinking Challenge
• What’s the probability
of getting a head on
the toss of a single fair
coin? Use a scale from
0 (no way) to 1 (sure
thing).
• So toss a coin twice.
Do it! Did you get one
head & one tail?
What’s it all mean?

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 Many Repetitions!*
Total Heads
Number of Tosses
1.00

0.75

0.50

0.25

0.00
0 25 50 75 100 125
Number of Tosses
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 3.1

Events, Sample Spaces,

and Probability

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 Experiments & Sample Spaces
1. Experiment
• Process of observation that leads to a single
outcome that cannot be predicted with certainty
2. Sample point
Sample Space
• Most basic outcome of an
Depends on
experiment Experimenter!
3. Sample space (S)
• Collection of all possible outcomes

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 Sample Space Properties
1. Mutually Exclusive
Experiment: Observe Gender
• 2 outcomes can not
occur at the same
time
— Male & Female in
same person
2. Collectively Exhaustive
• One outcome in
sample space must
occur.
— Male or Female
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 Visualizing
Sample Space
1. Listing
S = {Head, Tail}

2. Venn Diagram

T
H
S
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 Sample Space Examples
Experiment Sample Space
• Toss a Coin, Note Face {Head, Tail}
• Toss 2 Coins, Note Faces {HH, HT, TH, TT}
• Select 1 Card, Note Kind {2♥, 2♠, ..., A♦} (52)
• Select 1 Card, Note Color {Red, Black}
• Play a Football Game {Win, Lose, Tie}
• Inspect a Part, Note Quality {Defective, Good}
• Observe Gender {Male, Female}

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 Events

1. Specific collection of sample points

2. Simple Event
• Contains only one sample point
3. Compound Event
• Contains two or more sample points

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 Venn Diagram
Experiment: Toss 2 Coins. Note Faces.
Sample Space S = {HH, HT, TH, TT}
Compound
Event: At
least one
TH Tail
Outcome HH HT

TT
S
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 Event Examples
Experiment: Toss 2 Coins. Note Faces.
Sample Space: HH, HT, TH, TT
Event Outcomes in Event
• 1 Head & 1 Tail HT, TH
• Head on 1st Coin HH, HT
• At Least 1 Head HH, HT, TH
• Heads on Both HH
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Probabilities

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 What is Probability?
1. Numerical measure of the
likelihood that event will 1 Certain
cccur
• P(Event)
• P(A)
.5
• Prob(A)
2. Lies between 0 & 1
3. Sum of sample points is 1
0 Impossible
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 Probability Rules
for Sample Points
Let pi represent the probability of sample point i.
1. All sample point probabilities must lie between 0
and 1 (i.e., 0 ≤ pi ≤ 1).
2. The probabilities of all sample points within a
sample space must sum to 1 (i.e.,  pi = 1).

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 Equally Likely Probability
P(Event) = X / T
• X = Number of outcomes in the
event
• T = Total number of sample points
in Sample Space
• Each of T sample points is equally © 1984-1994 T/Maker Co.

likely
— P(sample point) = 1/T

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Steps for Calculating Probability
1. Define the experiment; describe the process used to
make an observation and the type of observation
that will be recorded
2. List the sample points
3. Assign probabilities to the sample points
4. Determine the collection of sample points contained
in the event of interest
5. Sum the sample points probabilities to get the event
probability
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 Combinations Rule
A sample of n elements is to be drawn from a set of N
elements. The, the number of different samples possible
 N
is denoted by   and is equal to
n 
 N N!
 n   n!N  n !
where the factorial symbol (!) means that
n!  n n  1n  2 L 32 1

For example, 5!  5  4  3 2 1 0! is defined to be 1.

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 3.2

Unions and Intersections

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 Compound Events

Compound events:
Composition of two or more other events.
Can be formed in two different ways.

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 Unions & Intersections
1. Union
• Outcomes in either events A or B or both
• ‘OR’ statement
• Denoted by  symbol (i.e., A  B)
2. Intersection
• Outcomes in both events A and B
• ‘AND’ statement
• Denoted by  symbol (i.e., A  B)

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 Event Union:
Venn Diagram
Experiment: Draw 1 Card. Note Kind, Color &
Suit.
Event
Ace Black Black:
Sample
Space: 2,
2, 2, 2, 2, ...,
..., A A
S
Event Ace: Event Ace  Black:
A, A, A, A A, ..., A, 2, ..., K
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 Event Union:
Two–Way Table
Experiment: Draw 1 Card. Note Kind, Color &
Suit. Color Simple
Sample Space Type Red Total
Black Event
(S): Ace:
Ace Ace & Ace & Ace
2, 2, 2, A,
Red Black
..., A A,
Non-Ace Non & Non & Non-
A,
Red Black Ace A
Event Total Red Black S
Ace  Black:
Simple Event Black:
A,..., A, 2, ..., K
2, ..., A
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 Event Intersection:
Venn Diagram
Experiment: Draw 1 Card. Note Kind, Color &
Suit.
Event
Ace Black Black:
Sample
Space: 2,...,A
2, 2, 2,
..., A
S
Event Ace: Event Ace  Black:
A, A, A, A A, A
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 Event Intersection:
Two–Way Table
Experiment: Draw 1 Card. Note Kind, Color &
Suit.
Color Simple
Sample Space Type Red Total
Black Event
(S): Ace:
Ace Ace & Ace & Ace
2, 2, 2, A, A,
Red Black
..., A A, A
Non-Ace Non & Non & Non-
Red Black Ace
Event Total Red Black S
Ace  Black:
Simple Event Black: 2, ..., A
A, A © 2011 Pearson Education, Inc
 Compound Event Probability

1. Numerical measure of likelihood that

compound event will occur
2. Can often use two–way table
• Two variables only

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 Event Probability Using
Two–Way Table

Event
Event B1 B2 Total
A1 P(A 1  B1) P(A 1  B2) P(A 1)
A2 P(A 2  B1) P(A 2  B2) P(A 2)
Total P(B 1) P(B 2) 1

Joint Probability Marginal (Simple) Probability

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 Two–Way Table Example
Experiment: Draw 1 Card. Note Kind & Color.

Color
Type Red Black Total
Ace 2/52 2/52 4/52
Non-Ace 24/52 24/52 48/52 P(Ace)

Total 26/52 26/52 52/52

P(Red) P(Ace  Red)

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 Thinking Challenge
What’s the Probability?
1. P(A) =
2. P(D) = Event
Event C D Total
3. P(C  B) = A 4 2 6
4. P(A  D) = B 1 3 4
5. P(B  D) = Total 5 5 10

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 Solution*
The Probabilities Are:
1. P(A) = 6/10
2. P(D) = 5/10 Event
Event C D Total
3. P(C  B) = 1/10 A 4 2 6
4. P(A  D) = 9/10 B 1 3 4
5. P(B  D) = 3/10 Total 5 5 10

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 3.3

Complementary Events

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 Complementary Events
Complement of Event A
• The event that A does not occur
• All events not in A
• Denote complement of A by AC

AC
A

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 Rule of Complements
The sum of the probabilities of complementary events
equals 1:

P(A) + P(AC) = 1

AC
A

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 Complement of Event
Example
Experiment: Draw 1 Card. Note Color.

Black
Sample
Space:
2, 2, 2,
..., A
S
Event Black: Complement of Event Black,
2, 2, ..., A BlackC: 2, 2, ..., A, A
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 3.4

The Additive Rule and

Mutually Exclusive Events

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 Mutually Exclusive Events
Mutually Exclusive Events
• Events do not occur
simultaneously

• A  B does not contain
any sample points

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 Mutually Exclusive
Events Example
Experiment: Draw 1 Card. Note Kind & Suit.

Sample
 Outcomes
in Event
Space: Heart:


2, 2, 2, 3, 4
2, ..., A , ..., A
S
Event Spade:
2, 3, 4, ..., A Events  and are Mutually Exclusive
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 Additive Rule
1. Used to get compound probabilities for
union of events
2. P(A OR B) = P(A  B)
= P(A) + P(B) – P(A  B)
3. For mutually exclusive events:
P(A OR B) = P(A  B) = P(A) + P(B)

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 Additive Rule Example
Experiment: Draw 1 Card. Note Kind & Color.
Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

P(Ace  Black) = P(Ace) + P(Black) – P(Ace  Black)

4 26 2 28
= + – =
52 52 52 52
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 Thinking Challenge
Using the additive rule, what is the probability?

1. P(A  D) = Event
Event C D Total
2. P(B  C) = A 4 2 6
B 1 3 4
Total 5 5 10

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 Solution*
Using the additive rule, the probabilities are:

1. P(A  D) = P(A) + P(D) – P(A  D)

6 5 2 9
= + – =
10 10 10 10

2. P(B  C) = P(B) + P(C) – P(B  C)

4 5 1 8
= + – =
10 10 10 10
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 3.5

Conditional Probability

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 Conditional Probability
1. Event probability given that another event
occurred
2. Revise original sample space to account for
new information
• Eliminates certain outcomes

3. P(A | B) = P(A and B) = P(A  B

P(B) P(B)

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Conditional Probability Using
Venn Diagram
Black ‘Happens’:
Eliminates All
Ace Black Other Outcomes

Black
S (S)

Event (Ace  Black)

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 Conditional Probability Using
Two–Way Table
Experiment: Draw 1 Card. Note Kind & Color.
Color
Type Red Black Total Revised
Sample
Ace 2 2 4 Space
Non-Ace 24 24 48
Total 26 26 52
P(Ace  Black) 2 / 52 2
P(Ace | Black) =  
P(Black) 26 / 52 26
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 Thinking Challenge
Using the table then the formula, what’s the
probability?

1. P(A|D) = Event
Event C D Total
2. P(C|B) =
A 4 2 6
B 1 3 4
Total 5 5 10

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 Solution*
Using the formula, the probabilities are:

P A  B  2 5 2
P A D    
P D  5 5
10

P C  B  110 1
P C B    
P B  4 4
10

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 3.6

The Multiplicative Rule

and Independent Events

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 Multiplicative Rule
1. Used to get compound probabilities for
intersection of events
2. P(A and B) = P(A  B)
= P(A)  P(B|A)
= P(B)  P(A|B)
3. For Independent Events:
P(A and B) = P(A  B) = P(A)  P(B)

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 Multiplicative Rule Example
Experiment: Draw 1 Card. Note Kind & Color.
Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

P(Ace  Black) = P(Ace)∙P(Black | Ace)

 4  2  2
    
 52  4  52
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 Statistical Independence
1. Event occurrence does not affect probability of
another event
• Toss 1 coin twice
2. Causality not implied
3. Tests for independence
• P(A | B) = P(A)
• P(B | A) = P(B)
• P(A  B) = P(A)  P(B)

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 Thinking Challenge
Using the multiplicative rule, what’s the
probability?
Event
1. P(C  B) =
Event C D Total
2. P(B  D) = A 4 2 6
3. P(A  B) = B 1 3 4
Total 5 5 10

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 Solution*
Using the multiplicative rule, the probabilities
are:
P C  B   P C  P B C    
5 1 1
10 5 10

P B  D   P B  P D B    
4 3 6
10 5 25

P A  B   P A  P B A   0
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 Tree Diagram
Experiment: Select 2 pens from 20 pens: 14
blue & 6 red. Don’t replace.
Dependent!
5/19 R P(R  R)=(6/20)(5/19) =3/38
6/20 R
14/19 B P(R  B)=(6/20)(14/19) =21/95

14/20
6/19 R P(B  R)=(14/20)(6/19) =21/95
B
13/19
B P(B  B)=(14/20)(13/19) =91/190
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 3.7

Random Sampling

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 Importance of Selection

How a sample is selected from a population is

of vital importance in statistical inference
because the probability of an observed sample
will be used to infer the characteristics of the
sampled population.

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 Random Sample

If n elements are selected from a population in

such a way that every set of n elements in the
population has an equal probability of being
selected, the n elements are said to be a
random sample.

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Random Number Generators

Most researchers rely on random number

generators to automatically generate the
random sample.
Random number generators are available in
table form, and they are built into most
statistical software packages.

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 3.8

Bayes’s Rule

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 Bayes’s Rule
Given k mutually exclusive and exhaustive
events B1, B1, . . . Bk , such that
P(B1) + P(B2) + … + P(Bk) = 1,
and an observed event A, then
P(Bi  A)
P(Bi | A) 
P( A)
P(Bi )P( A | Bi )

P(B1 )P( A | B1 )  P(B2 )P( A | B2 )  ...  P(Bk )P( A | Bk )

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 Bayes’s Rule Example
A company manufactures MP3 players at two
factories. Factory I produces 60% of the MP3
players and Factory II produces 40%. Two
percent of the MP3 players produced at Factory
I are defective, while 1% of Factory II’s are
defective. An MP3 player is selected at random
and found to be defective. What is the
probability it came from Factory I?

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 Bayes’s Rule Example
0.02 Defective
Factory
0 .6 I
0.98 Good

0.01 Defective
0 .4 Factory
II
0.99 Good
P(I | D) 
P(I )P(D | I ) 0.6  0.02
  0.75
P(I )P(D | I )  P(II )P(D | II ) 0.6  0.02  0.4  0.01
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 Key Ideas

Probability Rules for k Sample Points,

S1, S2, S3, . . . , Sk

1. 0 ≤ P(Si) ≤ 1

2.  P S   1
i

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 Key Ideas

Random Sample

All possible such samples have equal

probability of being selected.

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 Key Ideas

Combinations Rule

Counting number of samples of n elements

selected from N elements

 N N! N N  1N  2 L N  n  1
 n   n!N  n !  n n  1n  2 L 2 1

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 Key Ideas

Bayes’s Rule

P(Si )P( A | Si )
P(Si | A) 
P(S1 )P( A | S1 )  P(S2 )P( A | S2 )  ...  P(Sk )P( A | Sk )

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