Quantitative Techniques

Normal Distribution
 Learning Objectives

• Appreciate the importance of the normal

distribution.
• Recognize normal distribution problems, and
know how to solve them.
• Decide when to use the normal distribution to
other distributions
 What we should know

• Measure of dispersion
• Data type and scales
• Familiarity with SPSS and Excel
• Probability concepts
• Various distribution
• Parameters and statistic
 The Normal Distribution
The normal family of distributions occurs much
more often in econometrics than any other
parametric family.
One reason for this is that the sum of a large
number of independent random variables has an
approximately normal distribution.
Normal distributions are symmetrical about the
mean, and the normal probability curve is the
familiar bell-shaped curve. The mean, median,
and mode are equal for this family of
distributions
Shape of the Normal Distribution

0.3

y0.2

0.1

0
-4 -2 2 u 4
 Normal distribution
• bell-shaped
• symmetrical about the mean
• total area under curve = 1
• approximately 68% of distribution is
within one standard deviation of the mean
• approximately 95% of distribution is
within two standard deviations of the
mean
• approximately 99.7% of distribution is
within 3 standard deviations of the mean
• Mean = Median = Mode
 Characteristics of the Normal
Distribution
• Continuous distribution
• Symmetrical distribution
• Asymptotic to the
horizontal axis
• Unimodal
• A family of curves
• Area under the curve 1/2 1/2
sums to 1.
• Area to right of mean is  X
1/2.
• Area to left of mean is
1/2.
 The Mathematical Model
1
1   X    2

f X 

2
e
2 2
f  X  : density of random variable X
  3.14159; e  2.71828
 : population mean
 : population standard deviation
X : value of random variable    X   
 Many Normal Distributions
There are an infinite number of normal distributions

By varying the parameters  and , we obtain different

normal distributions
 Finding Probabilities
Probability is the
area under the
curve! P c  X  d   ?

f(X)

X
c d
 Which Table to Use?

An infinite number of normal distributions means an infinite

number of tables to look up!
 Z Table
Second Decimal Place in Z
Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09

0.00 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.10 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.20 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.30 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517

0.90 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.00 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.10 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.20 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015

2.00 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817

3.00 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990
3.40 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4998
3.50 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998
 Table Lookup of a
Standard Normal Probability
P ( 0  Z  1)  0 . 3413

Z 0.00 0.01 0.02

0.000.0000 0.0040 0.0080

0.100.0398 0.0438 0.0478
0.200.0793 0.0832 0.0871

1.000.3413 0.3438 0.3461

1.100.3643 0.3665 0.3686

1.200.3849 0.3869 0.3888
-3 -2 -1 0 1 2 3
 Applying the Z Formula
X
is
normal
distrib
dwith
=
485
an=
1  
P
(
485
X
600
)P
(
0
Z
1
.
10
).
36
For
=485
X
, Z 0.00 0.01 0.02
X- 485
485
Z=  0 0.000.0000 0.0040 0.0080
 105 0.100.0398 0.0438 0.0478

1.000.3413 0.3438 0.3461

For
=600
X
,
X-600
485 1.100.3643 0.3665 0.3686
= 
Z 1
.10
 105 1.200.3849 0.3869 0.3888
 The Cumulative Standardized
Normal Distribution
Cumulative Standardized Normal
Distribution Table (Portion)
Z  0 Z 1
Z .00 .01 .02
.5478
0.0 .5000 .5040 .5080
Shaded Area
Exaggerated
0.1 .5398 .5438 .5478

0.2 .5793 .5832 .5871 0

Probabilities
0.3 .6179 .6217 .6255 Z = 0.12

Only One Table is Needed

 Standardizing Example
X   6.2  5
Z   0.12
 10
Normal Distribution Standardized
Normal Distribution
  10
Z 1

6.2 X 0.12 Z
 5 Z  0
Shaded Area Exaggerated
 Example:
P  2.9  X  7.1  .1664
X   2.9  5 X   7.1  5
Z    .21 Z   .21
 10  10

Normal Distribution Standardized

Normal Distribution
  10
.0832 Z 1
.0832

2.9 7.1 X 0.21 0.21 Z

 5 Z  0
Shaded Area Exaggerated
 Example:
P  2.9  X  7.1  .1664(continued)
Cumulative Standardized Normal
Distribution Table (Portion) Z  0 Z 1
Z .00 .01 .02
.5832
0.0 .5000 .5040 .5080 Shaded Area
Exaggerated
0.1 .5398 .5438 .5478

0.2 .5793 .5832 .5871 0

Z = 0.21
0.3 .6179 .6217 .6255
 Example:
P  2.9  X  7.1  .1664(continued)
Cumulative Standardized Normal
Distribution Table (Portion) Z  0 Z 1
Z .00 .01 .02 .4168
-03 .3821 .3783 .3745 Shaded Area
Exaggerated
-02 .4207 .4168 .4129

-0.1 .4602 .4562 .4522 0

Z = -0.21
0.0 .5000 .4960 .4920
 Example:
P  X  8   .3821
X   85
Z   .30
 10

Normal Distribution Standardized

Normal Distribution
  10
Z 1
.3821

8 X 0.30 Z
 5 Z  0
Shaded Area Exaggerated
 Example:
P  X  8   .3821 (continued)

Cumulative Standardized Normal

Distribution Table (Portion) Z  0 Z 1
Z .00 .01 .02 .6179
0.0 .5000 .5040 .5080 Shaded Area
Exaggerated
0.1 .5398 .5438 .5478

0.2 .5793 .5832 .5871 0

Z = 0.30
0.3 .6179 .6217 .6255
 Finding Z Values for Known
Probabilities
Cumulative Standardized Normal
What is Z Given Distribution Table (Portion)
Probability = 0.6217 ?

Z  0 Z 1 Z .00 .01 0.2

.6217 0.0 .5000 .5040 .5080

0.1 .5398 .5438 .5478

0.2 .5793 .5832 .5871

0
Shaded Area 0.3 .6179 .6217 .6255
Exaggerated Z  .31
 Recovering X Values for Known
Probabilities
Normal Distribution Standardized
Normal Distribution
  10
.6179 Z 1
.3821

X
 5 ? Z  0
0.30 Z

X    Z  5   .30   10   8
 Assessing Normality
 Not all continuous random variables are
normally distributed
 It is important to evaluate how well the data
set seems to be adequately approximated by
a normal distribution
 Assessing Normality
(continued)
 Construct charts
 For small- or moderate-sized data sets, do stem-
and-leaf display and box-and-whisker plot look
symmetric?
 For large data sets, does the histogram or polygon
appear bell-shaped?
 Compute descriptive summary measures
 Do the mean, median and mode have similar
values?
 Is the range approximately 6 s?
 Assessing Normality
(continued)
 Observe the distribution of the data set
 Do approximately 2/3 of the observations lie
between mean  1 standard deviation?
 Do approximately 4/5 of the observations lie
between mean  1.28 standard deviations?
 Do approximately 19/20 of the observations lie
between mean  2 standard deviations?
 Evaluate normal probability plot
 Do the points lie on or close to a straight line?
 Assessing Normality
(continued)

 Normal probability plot

 Arrange data into ordered array
 Find corresponding standardized normal quantile
values
 Plot the pairs of points with observed data values
on the vertical axis and the standardized normal
quantile values on the horizontal axis
 Evaluate the plot for evidence of linearity
 Lowest Stock decision at post office

The manager of a small postal substation is trying

to quantify the variation in the weekly demand for
mailing envelops. She has decided to assume that
this demand is normally distributed. She knows
that on an average 100 envelops are purchased
weekly and that 90 percent of the time, weekly
demand is below 115. The manager wants to stock
enough mailing envelops each week so that the
percentage of running out of envelops is no higher
than 5 percent. Can you suggest her the lowest
such stock level?
Prediction of number of spectators in a match

Mr. Sanga Kumar, the McDonald stand manager

for the Micromax tri-series ODI at Dambulla
Stadium, SriLanka, just had two cancellation on his
crew. This means that if more than 72,000 people
come to watch today’s cricket match, the line for
hot-dogs will constitute a disgrace to Mr. Kumar
and will harm business at the future games. Mr.
Kumar knows from his experience that number of
spectators who come to the game is normally
distributed with mean 67,000 and standard deviation
4,000 people. Mr. Kumar has an option to hire two
temporary employees to ensure the business won’t
be harmed in the future at an additional cost of
$200. If he believes the future harm to business of
having more than 72,000 fans at the match would
be $ 5000, what would you suggest him to go for?
 Inspection Shop

On the basis of past experience, automobile

inspectors in Maruti Udyog Limited in Gurgaon,
have noticed that 5 percent of the cars coming in for
their annual inspection fail to pass. Find the
probability that between 7 and 18 of the next 200
cars to enter the Inspection shop will fail in the
inspection.
 Normal Approximation
of the Binomial Distribution
• The normal distribution can be used to
approximate binomial probabilities
• Procedure
– Convert binomial parameters to normal parameters
– Does the n*p is greater than 5? If so, continue;
otherwise, do not use the normal approximation.
– Correct for continuity
– Solve the normal distribution problem
Normal Approximation of Binomial:
Parameter Conversion
• Conversion equations
np
 npq

• Conversion example:
Given that X ,ha
fin
P
(X25
|n60and
p
.30
)
.

np
 (
60)
(.)
3018

np
q(
60)
(.)
30
(.)
703
.55
Normal Approximation of Binomial:
Interval Check

  3  18  3(355
. )  18  1065
.
  3  7.35
  3  2865
.

0 10 20 30 40 50 60 70
n
Normal Approximation of Binomial:
Correcting for Continuity

Values The
binomial
probabilit
y,
Being Correction
Determined P(
X 25
|n60
and
p.30)
is
approximat
ed
bynormal
the probay
X +.50
X -.50 P(X |
24.5 
18 
and3.55).
X -.50
X +.05
X -.50 and +.50
X +.50 and -.50
Normal Approximation of Binomial:
Graphs

0.12
0.10
0.08
0.06
0.04
0.02
0
6 8 10 12 14 16 18 20 22 24 26 28 30
Normal Approximation of Binomial:
Computations
X P(X)
The normal approximation,
P(X  24.5|   18 and   355
. )
25 0.0167
 . 18
245
26 0.0096
 P Z  
27 0.0052  355
. 
28 0.0026
29 0.0012  P(Z  183
. )
30 0.0005
31 0.0002 .5 P 0  Z  183
. 
32 0.0001
33 0.0000 .5.4664
Total 0.0361
.0336
 Normal Distribution with Excel
• NORMDIST(x, mean, sd, cumulative)
• NORMSDIST(z)
• NORMINV(probability, mean, sd)
• NORMSINV(probability)
• STANDARDIZE(x, mean, sd)
Thanks