ECN121 Statistical Methods in Economics

Lecture 3 Programme
• Continuous random variables
• Continuous Probability distributions: Cumulative Probability
Distribution and Probability Density Functions
• Mean and Variance of a continuous random variable
• Uniform distribution
• Normal distribution and Standard normal distribution

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Continuous Random Variables

Continuous Random Variable

• Not all random variables have values that are countable
• When a random variable may assume any numerical value in
one or more intervals on the real number line, then we say
that the random variable is a continuous random variable

Examples of Continuous Random Variables:

• the temperature of a cup of coffee served at Cafe Nero
• the time that a customer has to wait on the phone before it
can go through to her broadband technical service
• the interest rate (in percentage) charged for mortgage loans at
a bank
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Continuous Random Variables

• Generally speaking
• We cannot count or list the numbers in the interval of a
continuous random variable because they are infinitesimally
close together
• That is, given any two numbers in an interval on the real line
there is always another number between them

• Definition of Continuous Random Variable: a continuous

random variable is a random variable taking values in a subset of
the real line R

P( X = x) = 0 for all elements of 

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 Types of Continuous Probability Distributions

• Cumulative Probability Distribution Function

• Probability Density Function

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Continuous Probability Distribution

• Cumulative Distribution Function: it is a function that

measures the cumulative probability for X ≤ x

F ( x) = P( X  (−, x]) = P( X  x)

Important: we denote the cumulative distribution function with

capital letters F(x)

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Continuous Probability Distribution

Properties of Cumulative Distribution Functions

• Property 1
F is not decreasing
• Property 2
F(-∞) = 0 and F(+∞) = 1
• Property 3 – For any interval [a, b] with a < b we have:

P(a  X  b) = F (b) − F (a )

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Cumulative Probability Distribution Function

F(x)
P( X  x1 ) = F ( x1 )

1
F(x1)

x1 x

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Cumulative Probability Distribution Function

F(x) P( x1  X  x2 ) = F ( x2 ) − F ( x1 )

1
F(x2)
F(x1)

x1 x2 x

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Probability Density Function

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Continuous Probability Distributions

• Probability Density Function: the probability density

function is the first derivative of the cumulative distribution
function
dF ( x)
f ( x) =
dx

– Theorem – If f is the probability density function and F is

the cumulative distribution function of a continuous
random variable X, then
b x
P( X  [a, b]) = P(a  X  b) =  f ( x)dx F ( x) =  f (t )dt
a −

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 Important Features of Continuous Probability Distributions
• An area under a continuous probability distribution (or probability
curve) is a probability

• The area under the density function f(x) corresponding to the

interval from a to b is the probability that x will attain a value
between a and b. The probability is written as P(a  x b)
f(x)

Since there is no area under a

continuous curve at a single
P(a ≤ x ≤ b)
point, the probability that a
continuous random variable X
attains a single value x is always
equal to 0 i.e., P(X = a) = 0 and
P(x = b) = 0
a b x

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Properties of Continuous Probability Density Function

Main Properties of Probability Density Functions

o Theorem – A function f defined over the real line is a

probability density function if and only if

f ( x)  0 for any real number x

 f ( x)dx = 1
The first condition plays the role of the condition p(x)  0 for all x
used in the discrete case

The second condition is equivalent to the discrete case condition:

 p( x) = 1
for all x 12
How can we graphically represent a
continuous random variable?

Histograms!
Mean, Variance and Standard Deviation
of a Continuous Distribution

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 Mean and Variance of Continuous Probability Distributions

• Definition of Mean or Expected Value of a Continuous

Random Variable
– if the distribution of X has a probability density function
f(x), the population mean of X is given by:

+
 = E ( X ) =  xf ( x)dx −   x  +
−

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Mean and Variance of Continuous Probability Distributions

• Definition of Variance of a Continuous Random Variable: if the

distribution of X has a probability density function f, the
(population) variance of X is

+
Var ( X ) = E ( X − E ( X )) 2 =  ( x − E ( X )) 2 f ( x)dx
−

• The variance can also be expressed as:

+
Var ( X ) = E ( X 2 ) − E 2 ( X ) =  −
2 2
x f ( x )dx E (X )
−

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Types of Continuous Distributions

The Uniform Distribution

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 The Uniform Distribution
• The Uniform Distribution: the simplest example of a continuous
distribution function is given by the Uniform Distribution
– Definition: if c and d are given numbers of the real line, the
probability curve describing the Uniform Distribution is

 1
 for c  x  d
f ( x) =  d − c
0 otherwise

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The Uniform Distribution: a graphical representation

How can we measure the probability that the random

variable X lies between two values a and b?
f(x)

1 b−a
P ( a  X  b) = (b − a) =
d −c d −c
1
f ( x) =
d −c

x
c a b d
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The Uniform Distribution: mean and standard deviation

• The mean and the

c+d
standard deviation of =
the population of all 2
possible observed
values of a random
variable X that has a d −c
uniform distribution are: =
12

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Types of Continuous Probability Distribution

The Normal (Gaussian) Distribution

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The Normal Probability Distribution

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Properties of Normal Probability Distribution

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 Normal Distribution: the Empirical Rule
• Empirical Rule:

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The Normal Probability Distribution

1  x− 
2

1 −  
2  
f ( x) = e
 2

X ~ N ( , 2 )

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Types of Continuous Probability Distributions

The Standard Normal Distribution

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The Standard Normal Distribution

Standard Normal Distribution: if a random variable X is normally

distributed with mean  and standard deviation , then the random
variable:
X −
Z=

is normally distributed with mean 0 and standard deviation 1

A normal distribution with mean 0 and standard deviation 1 is called

a standard normal distribution

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The Standard Normal Distribution

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 What use can we make of the
Standard Normal Distribution?

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 Standard Normal Curve

• The Standard Normal Table

– the table reports the proportion of observations that are
below a given value z (Z ≤ z) or

– For any value z, the table reports the cumulative

probability that Z ≤ z
P( Z  z )

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𝑋~𝑁(𝜇 = 20, 𝜎 2 = 9), 𝑃 𝑋 ≤ 24 = ?

𝑃 𝑋 ≤ 24
Probability Content
from -oo to Z
= 𝑃(𝑍 ≤ 1.33) = 0.9082 Z | 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
----+----------------------------------------------------------------------
0.0 | 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.5279 0.5319 0.5359
0.1 | 0.5398 0.5438 0.5478 0.5517 0.5557 0.5596 0.5636 0.5675 0.5714 0.5753
0.2 | 0.5793 0.5832 0.5871 0.5910 0.5948 0.5987 0.6026 0.6064 0.6103 0.6141
0.3 | 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.6443 0.6480 0.6517
0.4 | 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.6808 0.6844 0.6879
0.5 | 0.6915 0.6950 0.6985 0.7019 0.7054 0.7088 0.7123 0.7157 0.7190 0.7224
0.6 | 0.7257 0.7291 0.7324 0.7357 0.7389 0.7422 0.7454 0.7486 0.7517 0.7549
0.7 | 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.7823 0.7852
0.8 | 0.7881 0.7910 0.7939 0.7967 0.7995 0.8023 0.8051 0.8078 0.8106 0.8133
0.9 | 0.8159 0.8186 0.8212 0.8238 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389
1.0 | 0.8413 0.8438 0.8461 0.8485 0.8508 0.8531 0.8554 0.8577 0.8599 0.8621
1.1 | 0.8643 0.8665 0.8686 0.8708 0.8729 0.8749 0.8770 0.8790 0.8810 0.8830
1.2 | 0.8849 0.8869 0.8888 0.8907 0.8925 0.8944 0.8962 0.8980 0.8997 0.9015
1.3 | 0.9032 0.9049 0.9066 0.9082 0.9099 0.9115 0.9131 0.9147 0.9162 0.9177
1.4 | 0.9192 0.9207 0.9222 0.9236 0.9251 0.9265 0.9279 0.9292 0.9306 0.9319
1.5 | 0.9332 0.9345 0.9357 0.9370 0.9382 0.9394 0.9406 0.9418 0.9429 0.9441
1.6 | 0.9452 0.9463 0.9474 0.9484 0.9495 0.9505 0.9515 0.9525 0.9535 0.9545
1.7 | 0.9554 0.9564 0.9573 0.9582 0.9591 0.9599 0.9608 0.9616 0.9625 0.9633
1.8 | 0.9641 0.9649 0.9656 0.9664 0.9671 0.9678 0.9686 0.9693 0.9699 0.9706
1.9 | 0.9713 0.9719 0.9726 0.9732 0.9738 0.9744 0.9750 0.9756 0.9761 0.9767
2.0 | 0.9772 0.9778 0.9783 0.9788 0.9793 0.9798 0.9803 0.9808 0.9812 0.9817
2.1 | 0.9821 0.9826 0.9830 0.9834 0.9838 0.9842 0.9846 0.9850 0.9854 0.9857
2.2 | 0.9861 0.9864 0.9868 0.9871 0.9875 0.9878 0.9881 0.9884 0.9887 0.9890
2.3 | 0.9893 0.9896 0.9898 0.9901 0.9904 0.9906 0.9909 0.9911 0.9913 0.9916
2.4 | 0.9918 0.9920 0.9922 0.9925 0.9927 0.9929 0.9931 0.9932 0.9934 0.9936
2.5 | 0.9938 0.9940 0.9941 0.9943 0.9945 0.9946 0.9948 0.9949 0.9951 0.9952
2.6 | 0.9953 0.9955 0.9956 0.9957 0.9959 0.9960 0.9961 0.9962 0.9963 0.9964
2.7 | 0.9965 0.9966 0.9967 0.9968 0.9969 0.9970 0.9971 0.9972 0.9973 0.9974
2.8 | 0.9974 0.9975 0.9976 0.9977 0.9977 0.9978 0.9979 0.9979 0.9980 0.9981
2.9 | 0.9981 0.9982 0.9982 0.9983 0.9984 0.9984 0.9985 0.9985 0.9986 31
0.9986
3.0 | 0.9987 0.9987 0.9987 0.9988 0.9988 0.9989 0.9989 0.9989 0.9990 0.9990
Standard Normal Curve

How could we compute

P( x1  X  x2 )

First, we standardise the variables. This gives us:

 x −  X −  x2 −  
P( x1 −   X −   x2 −  ) → P 1    → P( z1  Z  z 2 )
    

Secondly, we compute the probability by using the following

expression:

P( z1  Z  z 2 ) = P( Z  z 2 ) − P( Z  z1 )
Next week: types of probability distributions!

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