Chapter 3 3-1

Statistics for
Business and Economics
8th Global Edition

Chapter 3

Elements of Chance: Probability Methods

Copyright © 2013 Pearson Education Ch. 3-1

Chapter Goals
After completing this chapter, you should be
able to:
 Explain basic probability concepts and definitions

 Use a Venn diagram or tree diagram to illustrate

simple probabilities
 Apply common rules of probability

 Compute conditional probabilities

 Determine whether events are statistically

independent
 Use Bayes’ Theorem for conditional probabilities

Copyright © 2013 Pearson Education Ch. 3-2

Statistics for Business and Economics, 8/e Copyright © 2013 Pearson Education
 Chapter 3 3-2

3.1
Important Terms

 Random Experiment – a process leading to an

uncertain outcome
 Basic Outcome – a possible outcome of a
random experiment
 Sample Space (S) – the collection of all
possible outcomes of a random experiment
 Event (E) – any subset of basic outcomes from
the sample space

Copyright © 2013 Pearson Education Ch. 3-3

Important Terms
(continued)

 Intersection of Events – If A and B are two

events in a sample space S, then the
intersection, A ∩ B, is the set of all outcomes in
S that belong to both A and B

A AB B

Copyright © 2013 Pearson Education Ch. 3-4

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 Chapter 3 3-3

Important Terms
(continued)

 A and B are Mutually Exclusive Events if they

have no basic outcomes in common
 i.e., the set A ∩ B is empty

A B

Copyright © 2013 Pearson Education Ch. 3-5

Important Terms
(continued)

 Union of Events – If A and B are two events in a

sample space S, then the union, A U B, is the
set of all outcomes in S that belong to either
A or B
S The entire shaded
area represents
A B AUB

Copyright © 2013 Pearson Education Ch. 3-6

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 Chapter 3 3-4

Important Terms
(continued)

 Events E1, E2, …,Ek are Collectively Exhaustive

events if E1 U E2 U . . . U Ek = S
 i.e., the events completely cover the sample space

 The Complement of an event A is the set of all

basic outcomes in the sample space that do not
belong to A. The complement is denoted A
S
A
A

Copyright © 2013 Pearson Education Ch. 3-7

Examples
Let the Sample Space be the collection of
all possible outcomes of rolling one die:

S = [1, 2, 3, 4, 5, 6]

Let A be the event “Number rolled is even”

Let B be the event “Number rolled is at least 4”
Then
A = [2, 4, 6] and B = [4, 5, 6]
Copyright © 2013 Pearson Education Ch. 3-8

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 Chapter 3 3-5

Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

Complements:
A  [1, 3, 5] B  [1, 2, 3]
Intersections:
A  B  [4, 6] A  B  [5]
Unions:
A  B  [2, 4, 5, 6]
A  A  [1, 2, 3, 4, 5, 6]  S
Copyright © 2013 Pearson Education Ch. 3-9

Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

 Mutually exclusive:
 A and B are not mutually exclusive
 The outcomes 4 and 6 are common to both

 Collectively exhaustive:
 A and B are not collectively exhaustive
 A U B does not contain 1 or 3

Copyright © 2013 Pearson Education Ch. 3-10

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 Chapter 3 3-6

3.2
Probability and Its Postulates

 Probability – the chance that 1 Certain

an uncertain event will occur
(always between 0 and 1)

0 ≤ P(A) ≤ 1 For any event A .5

0 Impossible

Copyright © 2013 Pearson Education Ch. 3-11

Assessing Probability
 There are three approaches to assessing the
probability of an uncertain event:

1. classical probability

2. relative frequency probability

3. subjective probability

Copyright © 2013 Pearson Education Ch. 3-12

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 Chapter 3 3-7

Classical Probability
 Assumes all outcomes in the sample space are
equally likely to occur

Classical probability of event A:

NA number of outcomes that satisfy the event A
P(A)  
N total number of outcomes in the sample space

 Requires a count of the outcomes in the sample space

Copyright © 2013 Pearson Education Ch. 3-13

Counting the Possible Outcomes

 Use the Combinations formula to determine the

number of combinations of n items taken k at a time

n!
Cnk 
k! (n  k)!
 where
 n! = n(n-1)(n-2)…(1)
 0! = 1 by definition

Copyright © 2013 Pearson Education Ch. 3-14

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 Chapter 3 3-8

Permutations and Combinations

The number of possible orderings

 The total number of possible ways of arranging x

objects in order is

x!  x(x - 1)(x - 2) ...(2)(1)

 x! is read as “x factorial”

Copyright © 2013 Pearson Education Ch. 3-15

Permutations and Combinations

(continued)

Permutations: the number of possible

arrangements when x objects are to be
selected from a total of n objects and arranged
in order [with (n – x) objects left over]

P nx  n(n  1)(n  2) ...(n  x  1)

n!

(n  x)!
Copyright © 2013 Pearson Education Ch. 3-16

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 Chapter 3 3-9

Permutations and Combinations

(continued)

 Combinations: The number of combinations

of x objects chosen from n is the number of
possible selections that can be made

n P nx
C 
x
x!
n!

x!(n  x)!
Copyright © 2013 Pearson Education Ch. 3-17

Permutations and Combinations

Example
Suppose that two letters are to be selected
from A, B, C, D and arranged in order. How
many permutations are possible?
 Solution The number of permutations, with

4!
n = 4 and x = 2 , is P 42   12
(4  2)!

 The permutations are

AB AC AD BA BC BD
CA CB CD DA DB DC
Copyright © 2013 Pearson Education Ch. 3-18

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 Chapter 3 3-10

Permutations and Combinations

Example
(continued)

Suppose that two letters are to be selected

from A, B, C, D. How many combinations are
possible (i.e., order is not important)?
 Solution The number of combinations is

4!
C 24  6
2! (4  2)!
 The combinations are
AB (same as BA) BC (same as CB)
AC (same as CA) BD (same as DB)
AD (same as DA) CD (same as DC)

Copyright © 2013 Pearson Education Ch. 3-19

Assessing Probability
Three approaches (continued)
2. relative frequency probability
 the limit of the proportion of times that an event A occurs in a large
number of trials, n

nA number of events in the population that satisfy event A

P(A)  
n total number of events in the population

3. subjective probability
an individual opinion or belief about the probability of occurrence

Copyright © 2013 Pearson Education Ch. 3-20

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 Chapter 3 3-11

Probability Postulates

1. If A is any event in the sample space S, then

0  P(A)  1

2. Let A be an event in S, and let Oi denote the basic

outcomes. Then
P(A)   P(Oi )
A

(the notation means that the summation is over all the basic outcomes in A)

3. P(S) = 1

Copyright © 2013 Pearson Education Ch. 3-21

3.3
Probability Rules

 The Complement rule:

P(A)  1 P(A) i.e., P(A)  P(A)  1

 The Addition rule:

 The probability of the union of two events is

P(A  B)  P(A)  P(B)  P(A  B)

Copyright © 2013 Pearson Education Ch. 3-22

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 Chapter 3 3-12

A Probability Table

Probabilities and joint probabilities for two

events A and B are summarized in this table:

B B

A P(A  B) P(A  B ) P(A)

A P(A  B) P(A  B ) P(A)

P(B) P( B ) P(S)  1.0

Copyright © 2013 Pearson Education Ch. 3-23

Addition Rule Example

Consider a standard deck of 52 cards, with four

suits: ♥♣♦♠
Let event A = card is an Ace
Let event B = card is from a red suit

Copyright © 2013 Pearson Education Ch. 3-24

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 Chapter 3 3-13

Addition Rule Example

(continued)

P(Red U Ace) = P(Red) + P(Ace) - P(Red ∩ Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Copyright © 2013 Pearson Education Ch. 3-25

Conditional Probability
 A conditional probability is the probability of one
event, given that another event has occurred:
The conditional
P(A  B) probability of A
P(A | B) 
P(B) given that B has
occurred

P(A  B) The conditional

P(B | A)  probability of B
P(A) given that A has
occurred

Copyright © 2013 Pearson Education Ch. 3-26

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 Chapter 3 3-14

Conditional Probability Example

 Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player
(CD). 20% of the cars have both.

 What is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD | AC)

Copyright © 2013 Pearson Education Ch. 3-27

Conditional Probability Example

(continued)
 Of the cars on a used car lot, 70% have air
conditioning (AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD  AC) .2
P(CD | AC)    .2857
P(AC) .7
Copyright © 2013 Pearson Education Ch. 3-28

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 Chapter 3 3-15

Conditional Probability Example

(continued)
 Given AC, we only consider the top row (70% of the cars). Of
these, 20% have a CD player. 20% of 70% is 28.57%.

CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD  AC) .2
P(CD | AC)    .2857
P(AC) .7

Copyright © 2013 Pearson Education Ch. 3-29

Multiplication Rule

 Multiplication rule for two events A and B:

P(A  B)  P(A | B) P(B)

 also

P(A  B)  P(B | A) P(A)

Copyright © 2013 Pearson Education Ch. 3-30

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 Chapter 3 3-16

Multiplication Rule Example

P(Red ∩ Ace) = P(Red| Ace)P(Ace)
 2  4  2
    
 4  52  52
number of cards that are red and ace 2
 
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
Copyright © 2013 Pearson Education Ch. 3-31

Statistical Independence
 Two events are statistically independent
if and only if:
P(A  B)  P(A) P(B)
 Events A and B are independent when the probability of one
event is not affected by the other event
 If A and B are independent, then

P(A | B)  P(A) if P(B)>0

P(B | A)  P(B) if P(A)>0

Copyright © 2013 Pearson Education Ch. 3-32

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 Chapter 3 3-17

Statistical Independence
(continued)

 For multiple events:

E1, E2, . . . , Ek are statistically independent if

and only if:

P(E1  E1  ...  E1 )  P(E1 ) P(E 2 )...P(Ek )

Copyright © 2013 Pearson Education Ch. 3-33

Statistical Independence Example

 Of the cars on a used car lot, 70% have air
conditioning (AC) and 40% have a CD player (CD).
20% of the cars have both.
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

 Are the events AC and CD statistically independent?

Copyright © 2013 Pearson Education Ch. 3-34

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 Chapter 3 3-18

Statistical Independence Example

(continued)
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(AC ∩ CD) = 0.2

P(AC) = 0.7
P(AC)P(CD) = (0.7)(0.4) = 0.28
P(CD) = 0.4

P(AC ∩ CD) = 0.2 ≠ P(AC)P(CD) = 0.28

So the two events are not statistically independent
Copyright © 2013 Pearson Education Ch. 3-35

Joint and
Marginal Probabilities

 The probability of a joint event, A ∩ B:

number of outcomes satisfying A and B
P(A  B) 
total number of elementary outcomes

 Computing a marginal probability:

P(A)  P(A  B1 )  P(A  B2 )    P(A  Bk )

 Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

Copyright © 2013 Pearson Education Ch. 3-36

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 Chapter 3 3-19

Marginal Probability Example

P(Ace)
2 2 4
 P(Ace  Red)  P(Ace  Black)   
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Copyright © 2013 Pearson Education Ch. 3-37

Using a Tree Diagram

.2
.7 P(AC ∩ CD) = .2
Given AC or
no AC:
P(AC ∩ CD) = .5
.5
.7
All
Cars
.2
.3 P(AC ∩ CD) = .2

.1 P(AC ∩ CD) = .1

Copyright © 2013 Pearson Education

.3 Ch. 3-38

Statistics for Business and Economics, 8/e Copyright © 2013 Pearson Education