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Session_10

The document discusses continuous probability distributions, focusing on uniform and normal distributions. It explains how probabilities are calculated using density functions and provides examples, including the calculation of expected values and variances. Additionally, it covers standardization of normal distributions and practical applications in business scenarios, such as stockout probabilities for inventory management.

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himanshunayak.0801
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17 views

Session_10

The document discusses continuous probability distributions, focusing on uniform and normal distributions. It explains how probabilities are calculated using density functions and provides examples, including the calculation of expected values and variances. Additionally, it covers standardization of normal distributions and practical applications in business scenarios, such as stockout probabilities for inventory management.

Uploaded by

himanshunayak.0801
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Mr.

Godbole

 CASE

 Excel
Continuous Probability
Distributions

Uniform Probability
Distribution
Normal Probability Distribution
Normal Approximation of
Binomial Probabilities
Continuous Probability
Distributions
 In last class, we saw a list

 Here, we’ve a continuum,


 values between 0 & 100, or all values >= 0.

 A continuous random variable can


assume any value in an interval or in a
collection of intervals.
Continuous Probability
Distributions
 Instead of assigning probabilities to
each individual value in the continuum,
the total probability of 1 is spread over this
continuum.
 The spread is represented a density function

 Probability is N.D. for a particular value.

 Instead, probability is defined for an


interval.
Probability calculation

The probability of the random variable


assuming a value within some given
interval from x1 to x2 is defined to be
the area under the graph of the probability
density function between x1 and x2.
A density function,
usually denoted by f(x)
or p(x), specifies the
probability distribution
of a continuous random
variable X.

 higher the value of f(x) is, the more likely x


is.

 The total area between the graph of f(x)


and the horizontal axis, which represents
the total probability, is equal to 1.
Uniform Continuous Probability
Distribution
 A random variable is uniformly
distributed whenever the probability is
proportional to the interval’s length.

where:
a = smallest value the variable can
assume
b = largest value the variable
can assume
Uniform Probability Distribution

 The expected value of x is E(x) = (a +


b)/2.

 The variance of x is Var(x) = (b – a)2/12.


Example: Uniform Probability
Distribution
Slater’s Buffet
Slater’s customers are charged for the amount of salad they take.
Sampling suggests that the amount of salad taken is uniformly
distributed between 5 ounces and 15 ounces.
The uniform probability density function is

where:
x = salad plate filling
weight
What is the probability that a
customer will take between 12
and 15 ounces of salad?
Calculate mean and Var??

 The expected value of x is E(x) = (a +


b)/2
= (5 + 15)/2
= 10
 The variance of x is Var(x) = (b – a)2/12
= (15 – 5)2/12
= 8.33
The Normal Distribution

 The most important distribution.


 continuous distribution
 symmetric bell-shaped curve

 Abraham de Moivre, a French


mathematician, published The Doctrine
of Chances in 1733.
 He first proposed the normal distribution.
Normal Distribution

 Any particular normal


distribution is
specified by its
mean and standard
deviation.
 By changing the

mean, the normal


curve shifts to the
right or left.
 By changing the

standard deviation,
the curve becomes
more or less
spread out.
Normal Probability Density
Function

where:
= mean
= standard deviation
= 3.14159
e = 2.71828
Property of normal distribution

Probabilities for the normal random variable are


given by areas under the curve. The total area
under the curve is 1 (0.5 to the left of the mean
and 0.5 to the right).
Standard Normal

A random variable having a normal distribution


with a mean of 0 and a standard deviation of 1 is
said to have a standard normal probability
distribution.
Standardizing

 The standard normal distribution is denoted by


N(0,1).
 Or the Z distribution.

 To standardize a variable, subtract its mean and


then divide the difference by the standard
deviation:
Z-value

 A Z-value can also be used to tell by what


number of standard deviations the value
lies to the right or left of the mean.
 If Z is +ve,
 the original value is to the right of the mean.
 If Z is -ve,
 the original value is the left of the mean.

 Standardizing allows measuring variables


with different means and/or standard
deviations on a single scale.
Standardizing Example: Open
mutual funds data
 Calculate the mean and standard deviation
 Use the z value formula to standardize values.
 OR calculate the Z-values directly, using the
STANDARDIZE function.
Standardizing mutual fund returns

Summary statistics from values below


Mean 0.091 0.000
Stdev 0.047 1.000

Fund Annual return Z value standardize


1 0.007 -1.8047 -1.8047148
2 0.080 -0.2363 -0.2363317
3 0.082 -0.1934 -0.1933623
4 0.123 0.6875 0.6875104
5 0.022 -1.4824 -1.4824443
Example:

Pep Zone

Pep Zone sells auto parts and supplies including a popular


multi-grade motor oil. When the stock of this oil drops to 20
gallons, a replenishment order is placed.
The store manager is concerned that sales are being lost due
to stockouts while waiting for a replenishment order.
It has been determined that demand during replenishment
lead-time is normally distributed with a mean of 15 gallons
and a standard deviation of 6 gallons.
The manager would like to know the probability of a stockout
during replenishment lead-time. In other words, what is the
probability that demand during lead-time will exceed
20 gallons?
Pep Zone

Solving for the Stockout Probability


Step 1: Convert x to the standard normal
distribution.

Step 2: Find the area under the standard


normal curve to the left of = 0.83.
Pep Zone

Cumulative Probability Table for the


Standard Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7795 .8023 .8051 .8078 .8106 .8133
.9 .8129 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .
Now use

 NORM.S.DIST function in excel

 Now use NORM.DIST function

 There is a slight difference, why?


Which probability did we
calculate?
Solving for the Stockout Probability
Step 3: Compute the area under the standard normal curve to
the right of z = 0.83.
Pep Zone

Solving for the Stockout Probability


Empirical Rules Revisited
Normal Approximation of Binomial
Dist.
 If you graph the
binomial probabilities,
you will see an
interesting
phenomenon: the
graph begins to look
symmetric and bell-
shaped when n is
fairly large and p is
not too close to 0 or 1.
 So, when above conditions meet, empirical
rules can apply to binomial dist.
Schlitz’s confidence

 In 1981, the Joseph Schlitz Brewing


Company spent $1.7 million for what
appeared to be a shockingly bold and
risky marketing campaign for its flagging
brand, Schlitz
 At halftime of the Super Bowl, in front of
100 million people around the world, the
company broadcast a live taste test
pitting Schlitz Beer against a key
competitor, Michelob
 Half of all Bud drinkers like Schlitz

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