Chapter 2: Lesson 4

Probabilities using Random Variables

We have discussed various ways of assigning probability values to the outcome of
an experiment. Let us now use this probability information to compute the expected
outcome, variance and standard deviation of an experiment this can help select the
best decision among a number of alternatives.

A random variable assigns a real number to every possible outcome or event in

an experiment. It is normally represented by a letter such as x or y. When the
outcome itself is numerical as quantitative, the outcome numbers can be the
random variable. (For example: consider refrigerator sales at an appliance store.
The number of refrigerators sold during a given day can be the random variable.
Using X to represent this random variable, we can express this relationship as
follows:

X = number of refrigerators sold during the day

In general, whenever the experiment has quantifiable outcomes, it is beneficial

to define these quantitative outcomes as Random Variables.
There are 2 types of random variables: discrete and the
continuous random variables. Developing probability
distributions and making computations based on these
distributions depends on the type of random variables.

A random variable is a discrete random variable if it can

assume only a finite or limited set of values. Ex: range of 0-50.

A continuous random variable is a random variable that

has an infinite or an unlimited set of values. Ex: We can see that
testing the lifetime of a light bulb is an experiment with
continuous random variable. In this case, the random variable S,
is the time the bulb burns. It can last for 3,206 minutes, 6,500
minutes or any other value between 0 and 80,000 minutes. So
then its range will be: 0 < S < 80,000
PROBABILITY DISTRIBUTION OF A
DISCRETE RANDOM VARIABLE

When we have a discrete random variable,

there is a probability value assigned to each
event. These values must be between 0 and 1
and they must sum to 1.
Example: The 100 students in a statistics class have just
completed the instructor evaluations at the end the course.
The instructor is particularly interested in student response
to the textbook because he is in the process of writing a
competing statistics book. One of the questions on the
evaluation survey was “The textbook was well written and
helped me acquire the necessary information.”

5 Strongly Agree
4 Agree
3 Neutral
2 Disagree
1 Strongly Disagree
The student’s response are as follows:

Random
Outcome Variable (X) # Responding Probability
P(X)

Strongly Agree 5 10 0.1 = 10/100

Agree 4 20 0.2 = 20/100
Neutral 3 30 0.3 = 30/100
Disagree 2 30 0.3 = 30/100
Strongly Disagree 1 10 0.1 = 10/100
--------- ----- -----------------
100 1.00 = 100/100
 Shown is the random variable x and the corresponding
probability for each possible outcomes.
This discrete probability distribution was computed using
the relative frequency approach.

To get an idea about the characteristics of the distribution,

let us show a graphical depiction of the probability values.

The graph will give us a picture of its shape. It will help us

identify the central tendency of the distribution, called the
MEAN or EXPECTED VALUE and the amount of variability or
spread of the distribution, called the VARIANCE.
5 Strongly Agree 10%
4 Agree 20%
3 Neutral 30%
2 Disagree 30%
1 Strongly Disagree 10%
---------------
100%
EXPECTED VALUE OF A DISCRETE PROBABILITY

The expected value of a discrete probability is a weighted average of the

values of a random variable, computed as follows:

n
E(x) = ∑ Xi P(Xi)
i=1

= X1P(X1) + X2P(X2) + ……..XnP(Xn)

Where: Xi = random variable’s possible value

P(Xi) = probability of each of the random variable’s possible values

n
∑ = summation sign indicating we are adding all n possible values
I=1

E (X) = expected value or mean of the random variable

 To apply an example:
n
E(x) = ∑ Xi P(Xi)
i=1

= X1P(X1) + X2P(X2) +X3P(X3)+X4P(X4)+X5P(X5)

= (1) (0.10) + (2)(0.30) + (3)(0.30) + (4)(0.20) + (5)(0.10)
= 2.90

The expected value of 2.9 implies that the:

∙ Mean response is between (2) disagree and (3) neutral and;

∙ The average response is closer to (3) which is neutral.

Looking at the graph, this is consistent with the shape of the

probability function.
VARIANCE OF DISCRETE PROBABILITY
DISTRIBUTION:

Most people are also interested in the variability

of the distribution.

∙ If the variability is low; it is much more likely that the

outcome of the experiment will be close to the
average or expected value;

∙ If the variability is high, there is less chance that the

outcome will be close to the expected value. (This
means that the probability spread out over the
various random variable values.)
 The variance of a probability distribution is a number that
reveals the overall spread or dispersion of the distribution.

n
O 2 = Variance = ∑ [ Xi – E(x)] 2 P(Xi)
i=1

Where: Xi = random variable’s possible values

E(x) = expected value of the random variable

[ Xi – E(x)] 2 = difference between each value of

the random variable and the expected value

P(Xi) = probability of each possible value of the

random variable
 Here is how the procedure is done:
5
2
O = Variance = ∑ [ Xi – E(x)] 2 P(Xi)
i=1
= (1-2.9)2 (.10) + (2-2.9)2 (.30) + (3-2.9)2 (.30) + (4-2.9)2 (.20) +
(5-2.9)2 (.10)
= (-1.9)2 (.10) + (-0.9)2(.30) + (.10)2(.30) + (1.1)2(.20) + (2.1)2(.10)
= 0.361 + 0.243 + .003 + .242 + .441
Variance= 1.29

A related measure of dispersion is the standard deviation. The standard deviation is

just the square root of the variance.
_______ _______
O = √ variance = √ O 2

Using the previous example:

_______ _______
O = √ variance = √ O 2
________
O = √ 1.29 = 1.14
PROBABILITY DISTRIBUTION OF A CONTINUOUS RANDOM VARIABLE:

Under this topic, we will be introduced to the binomial distribution..

The Binomial Distribution:

Many business experiments can be characterized by the Bernoulli Process.

The probability of obtaining specific outcomes in a Bernoulli Process is described
by the binomial probability distribution.

In order to be a Bernoulli process, an experiment must have the following

characteristics:

1. Each trial in a Bernoulli process has only 2 possible outcomes. These

are typically called a success or failure.
Examples: yes or no; heads or tails; pass or fail ; defective or good.

2. The probability stays the same from one trial to the next.

3. The trials are statistically dependent.

4. The number of trials is a positive integer.

Example: Tossing of a Coin

The binomial distribution is used to find the probability

of a specific number of successes, out of n trials of a
Bernoulli process. To find the probability, it is
necessary to know the following:

n = the number of trials

p = the probability of a success on any single trial
r = the number of successes
q = 1- p = the probability of a failure
The binomial formula is:

Probability of r success in n trials =

n!
-----------------------
p r q n-r
r! (n - r)!

The symbol ! means factorial, an

n! = n (n-1)(n-2) ….. (1)

ex: 5! = 5 x 4 x 3 x 2 x 1
= 120
Probability of getting 4 heads in 5 tosses :
n = the number of trials = 5 tosses
p = the probability of a success on any single trial = .50
r = the number of successes = 4 heads
q = 1- p = the probability of a failure (1 -.50) = .50

p = 0.50 (head or tail)

P = (4 successes in 5 trials) = n!
-----------------------
p r q n-r
r! (n - r)!

5!
= ----------------- (0.5) 4(0.5 )5-4
4! (5-4)!
= 5(4)(3)(2)(1)
----------------- (0.0625) (0.5)
4(3)(2)(1)(1!)

= 120
------ (.03125) = 0.15625
24

The probability of getting 4 heads in 5 tosses is 16%.

A batch in a finishing line of a manufacturing firm contains 40% red items.
If five items are taken at random from the batch, find the probability of
having exactly 3 red items.

Given: n=5
r= 3
p = .40
q = .60

Probability of 3 red items in 5 trials = 5!

----------------------- (
.40 3 ) (.60 5-3 )
3! (5-3)!
120
----------------------- (
= .064) (.36 )
6 (2)
= 10 (0.02304)

= 0.2304 or 23%

The probability of having exactly 3 red items if 5 items are taken at

random from a batch is 23%.
 Thank you and
Have a Good Day!