Ch5 - Discrete

Statistics for Business and Economics (14e)
Statistics for
Business and Economics (14e)
and Essentials of Statistics for Business and Economics (9e)
Anderson, Sweeney, Williams, Camm, Cochran, Fry, Ohlmann

© 2020 Cengage Learning
© 2020 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with
a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 1
Chapter 5: Discrete Probability Distributions

5.1 - Random Variables
5.2 - Developing Discrete Probability
Distributions
5.3 - Expected Value and Variance
5.4 - Bivariate Distributions, Covariance, and
Financial Portfolios
5.5 - Binomial Probability Distribution
5.6 - Poisson Probability Distribution
5.7 - Hypergeometric Probability Distribution
© 2020 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed
with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
2
Random Variables (1 of 2)
• A random variable is a numerical description of the outcome of an experiment.
• A discrete random variable may assume either a finite number of values or an
infinite sequence of values.
• A continuous random variable may assume any numerical value in an interval or
collection of intervals.
3
Discrete Random Variable with a Finite Number of Values

Example: JSL Appliances
Let x = number of TVs sold at the store in one day, where x can take on 5 values
(0, 1, 2, 3, 4)
We can count the TVs sold, and there is a finite upper limit on the number that
might be sold (which is the number of TVs in stock).
4
Discrete Random Variable with an Infinite Number of Values

Let x = number of customers arriving in one day, where x can take on the values
0, 1, 2, . . .
We can count the customers arriving, but there is no finite upper limit on the
number that might arrive.
5
Random Variables (2 of 2)
Illustration Random Variable x Type
Family size x = Number of dependents reported on Discrete
tax return
Distance from home to stores x = Distance in miles from home to the Continuous
on a highway store site
Own dog or cat x = 1 if own no pet; Discrete

= 2 if own dog(s) only;
= 3 if own cat(s) only;
= 4 if own dog(s) and cat(s)
6
Discrete Probability Distributions (1 of 7)

• The probability distribution for a random variable describes how probabilities
are distributed over the values of the random variable.
• We can describe a discrete probability distribution with a table, graph, or
formula.
Types of discrete probability distributions:
• First type: uses the rules of assigning probabilities to experimental outcomes
to determine probabilities for each value of the random variable.
• Second type: uses a special mathematical formula to compute the probabilities
for each value of the random variable.
7

• The probability distribution is defined by a probability function, denoted by f(x),
that provides the probability for each value of the random variable.
• The required conditions for a discrete probability function are:
8

• There are three methods for assigning probabilities to random variables:
classical method, subjective method, and relative frequency method.
• The use of the relative frequency method to develop discrete probability
distributions leads to what is called an empirical discrete distribution.
9

Using past data on TV sales, a tabular representation of the probability distribution
for sales was developed.
Number
Units Sold of Days
0 80 0 .40 = 80/200
1 50 1 0.25
2 40 2 0.20
3 10 3 0.05
4 20 4 0.10
200 1.00
. .
10

11

• In addition to tables and graphs, a formula that gives the probability function,
f(x), for every value of x is often used to describe the probability distributions.
• Several discrete probability distributions specified by formulas are the discrete-
uniform, binomial, Poisson, and hypergeometric distributions.
12

• The discrete uniform probability distribution is the simplest example of a
discrete probability distribution given by a formula.
• The discrete uniform probability function is
where: n = the number of values the

random variable may assume
• The values of the random variable are equally likely.
13
Expected Value (1 of 2)
• The expected value, or mean, of a random variable is a measure of its central
location.
• The expected value is a weighted average of the values the random variable
may assume. The weights are the probabilities.
• The expected value does not have to be a value the random variable can
assume.
14
Variance and Standard Deviation

• The variance summarizes the variability in the values of a random variable.
• The variance is a weighted average of the squared deviations of a random

variable from its mean. The weights are the probabilities.
• The standard deviation, σ , is defined as the positive square root of the
variance.
15
Expected Value (2 of 2)
x f(x) xf(x)
0 .40 .00
1 .25 .25
2 .20 .40
3 .05 .15
4 .10 .40
16
Variance
Standard deviation of daily sales = 1.2884 TVs
X x –μ (x – μ )2 f(x) (x– μ )2 f(x)

0 – 1.2 1.44 .40 .576
1 – 0.2 0.04 .25 .010
2 0.8 0.64 .20 .128
3 1.8 3.24 .05 .162
4 2.8 7.84 .10 .784
Variance of daily sales =
Empty cell Empty cell Empty cell Empty cell
σ 2 = 1.660
17
Bivariate Distributions (1 of 3)
A bivariate probability distribution is a probability distribution involving two random
variables.
For example, here are the daily sales at the DiCarlo Motors automobile dealership in
Saratoga, New York and DiCarlo, another dealership in Geneva, New York. The table
shows the number of cars sold at each of the dealerships over a 300-day period.
Geneva 0 1 2 3 4 5 Total
Dealership
0 21 30 24 9 2 0 86
1 21 36 33 18 2 1 111
2 9 42 9 12 3 2 77
3 3 9 6 3 5 0 26
Total 54 117 72 42 12 3 300
18
Let us define x = number of cars sold at the Geneva dealership and y = the number
of cars sold at the Saratoga dealership. We can now divide all of the frequencies by
the number of observations (300) to develop a bivariate empirical discrete
probability distribution for automobile sales at the two DiCarlo dealerships.
Geneva 0 1 2 3 4 5 Total
Dealership
0 .0700 .1000 .0800 .0300 .0067 .0000 .2867
1 .0700 .1200 .1100 .0600 .0067 .0033 .3700
2 .0300 .1400 .0300 .0400 .0100 .0067 .2567
3 .0100 .0300 .0200 .0100 .0167 .0000 .0867
Total .18 .39 .24 .14 .04 .01 1.0000
19
The table below shows the expected value for the mean total sales and the standard deviation of total sales
for these two dealerships.
s f(s) sf(s) s – E(s) (s – E(s))2 (s – E(s))2 f(s)
0 .0700 .0000 –2.6433 6.9872 .4891
1 .1700 .1700 –1.6433 2.7005 .4591
2 .2300 .4600 –.6433 .4139 .0952
3 .2900 .8700 .3567 .1272 .0369
4 .1267 .5067 1.3567 1.8405 .2331
5 .0667 .3333 2.3567 5.5539 .3703
6 .0233 .1400 3.3567 11.2672 .2629
7 .0233 .1633 4.3567 18.9805 .4429
8 .0000 .0000 5.3567 28.6939 .0000
N/A N/A
E(s) = 2.6433 N/A N/A
Var(s) = 2.3895
20
Covariance
The covariance and/or correlation coefficient are good measures of association
between two random variables.
= (2.3895 – 0.8696 – 1.25)/2

= 0.1350
A covariance of .1350 indicates that daily sales at DiCarlo’s two dealerships have a
positive relationship.
21
Correlation
To get a better sense of the strength of the relationship we can compute the
correlation coefficient.
The correlation coefficient of .1295 indicates there is a weak positive relationship

between the random variables representing daily sales at the two DiCarlo
dealerships. If the correlation coefficient had equaled zero, we would have
concluded that daily sales at the two dealerships were independent.
22
Binomial Probability Distribution (1 of 11)

Four Properties of a Binomial Experiment
1. The experiment consists of a sequence of n identical trials.
2. Two outcomes, success and failure, are possible on each trial.
3. The probability of a success, denoted by p, does not change from trial to trial.
(This is referred to as the stationarity assumption.)
4. The trials are independent.
23

• Our interest is in the number of successes occurring in the n trials.
• Let x denote the number of successes occurring in the n trials.
• Binomial Probability Function:
where:
x = the number of successes
p = the probability of a success on one trial
n = the number of trials
f(x) = the probability of x successes in n trials
n! = n(n – 1)(n – 2) ….. (2)(1)
24

Binomial Probability Function
25

Example: Evans Electronics
Evans Electronics is concerned about a low retention rate for its employees. In
recent years, management has seen a turnover of 10% of the hourly employees
annually.
Thus, for any hourly employee chosen at random, management estimates a
probability of 0.1 that the person will not be with the company next year.
Choosing 3 hourly employees at random, what is the probability that 1 of them
will leave the company this year?
26

• The probability of the first employee leaving and the second and third
employees staying, denoted (S, F, F), is given by
p(1 – p)(1 – p)
• With a 0.10 probability of an employee leaving on any one trial, the probability
of an employee leaving on the first trial and not on the second and third trials is
given by
(0.10)(0.90)(0.90) = (0.10)(0.90)2 = 0.081
27

Two other experimental outcomes result in one success and two failures. The
probabilities for all three experimental outcomes involving one success follow.
Experimental Probability of
Outcome Experimental Outcome
(S, F, F) p(1 – p)(1 – p) = (.1)(.9)(.9) = .081

(F, S, F) (1 – p)p(1 – p) = (.9)(.1)(.9) = .081
(F, F, S) (1 – p)(1 – p)p = (.9)(.9)(.1) = .081
Empty cell
Total = .243
28

Using the probability function with p = 0.10, n = 3, and x = 1
29

30
Binomial Probabilities and Cumulative Probabilities

• Statisticians have developed tables that give probabilities and cumulative
probabilities for a binomial experiment random variable.
• These tables can be found in some statistics textbooks.
• With modern calculators and the capability of statistical software
packages, such tables are almost unnecessary.
31

Using Tables of Binomial Probabilities
n x p = .05 p = .10 p = .15 p = .20 p = .25 p =.30 p = .35 p =.40 p =.45 p =.50
3 0 .8574 .7290 .6141 .5120 .4219 .3430 .2746 .2160 .1664 .1250
3 1 .1354 .2430 .3251 .3840 .4219 .4410 .4436 .4320 .4084 .3750
3 2 .0071 .0270 .0574 .0960 .1406 .1890 .2389 .2880 .3341 .3750
3 3 .0001 .0010 .0034 .0080 .0156 .0270 .0429 .0640 .0911 .1250
32

• The expected value is:
• The variance is:
• The standard deviation is:
33

• The expected value is:
• The variance is:
• The standard deviation is:
34
Poisson Probability Distribution (1 of 6)

• A Poisson distributed random variable is often useful in estimating the number
of occurrences over a specified interval of time or space.
• It is a discrete random variable that may assume an infinite sequence of values
(x = 0, 1, 2, . . . ).
• Examples of Poisson distributed random variables:
• number of knotholes in 14 linear feet of pine board
• number of vehicles arriving at a toll booth in one hour
• Bell Labs used the Poisson distribution to model the arrival of phone calls.
35

Two Properties of a Poisson Experiment
1. The probability of an occurrence is the same for any two intervals of equal
length.
2. The occurrence or nonoccurrence in any interval is independent of the
occurrence or nonoccurrence in any other interval.
Poisson Probability Function:

where:
x = the number of occurrences in an interval
f(x) = the probability of x occurrences in an interval
μ = mean number of occurrences in an interval
e = 2.71828
x! = x(x – 1)(x – 2) . . . (2)(1)
36

Poisson Probability Function–
• Because there is no stated upper limit for the number of occurrences, the
probability function f(x) is applicable for values x = 0, 1, 2, … without limit.
• In practical applications, x will eventually become large enough so that f(x) is
approximately zero and the probability of any larger values of x becomes
negligible.
37

Example: Mercy Hospital
Patients arrive at the emergency room of Mercy Hospital at the average rate of 6
per hour on weekend evenings.
What is the probability of 4 arrivals in 30 minutes on a weekend evening?
Using the probability function with = 6/hour = 3/half-hour and x = 4
38

39
A property of the Poisson distribution is that the mean

and variance are equal.

Variance for Number of Arrivals during 30-Minute periods
40
Hypergeometric Probability Distribution (1 of 7)

• The hypergeometric distribution is closely related to the binomial distribution.
• However, for the hypergeometric distribution:
• the trials are not independent, and
• the probability of success changes from trial to trial.
• Hypergeometric Probability Function:
where: x = number of successes

n = number of trials
f(x) = probability of x successes in n trials
N = number of elements in the population
r = number of elements in the population labeled success
41

Hypergeometric Probability Function
42

• The probability function f(x) on the is usually applicable for values of x = 0, 1, 2,
… n.
• If these two conditions do not hold for a value of x, the corresponding f(x)
equals 0.
Example: Neveready’s Batteries
Bob Neveready has removed two dead batteries from a flashlight and
inadvertently mingled them with the two good batteries he intended as
replacements. The four batteries look identical.
Bob now randomly selects two of the four batteries. What is the probability he
selects the two good batteries?
43

Using the probability function:
where: x = 2 = number of good batteries selected

n = 2 = number of batteries selected
N = 4 = number of batteries in total
r = 2 = number of good batteries in total
44
• Mean:
• Variance:
45

• Mean:
• Variance:
46

• Consider a hypergeometric distribution with n trials and let p = (r/N) denote
the probability of a success on the first trial.
• If the population size is large, the term (N – n)/(N – 1) approaches 1.
• The expected value and variance can be written E(x) = np and Var(x) = np(1 – p).
• Note that these are the expressions for the expected value and variance of a
binomial distribution.
• When the population size is large, a hypergeometric distribution can be
approximated by a binomial distribution with n trials and a probability of
success p = (r/N).
47
End of Chapter 5
48

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Statistics for Business and Economics (14e)

Anderson, Sweeney, Williams, Camm, Cochran, Fry, Ohlmann

Chapter 5: Discrete Probability Distributions

Discrete Random Variable with a Finite Number of Values

Discrete Random Variable with an Infinite Number of Values

Own dog or cat x = 1 if own no pet; Discrete

Discrete Probability Distributions (1 of 7)

Discrete Probability Distributions (2 of 7)

Discrete Probability Distributions (3 of 7)

Discrete Probability Distributions (4 of 7)

Discrete Probability Distributions (5 of 7)

Discrete Probability Distributions (6 of 7)

Discrete Probability Distributions (7 of 7)

where: n = the number of values the

Variance and Standard Deviation

• The variance is a weighted average of the squared deviations of a random

X x –μ (x – μ )2 f(x) (x– μ )2 f(x)

Total 54 117 72 42 12 3 300

E(s) = 2.6433 N/A N/A

= (2.3895 – 0.8696 – 1.25)/2

The correlation coefficient of .1295 indicates there is a weak positive relationship

Binomial Probability Distribution (1 of 11)

Binomial Probability Distribution (2 of 11)

Binomial Probability Distribution (3 of 11)

Binomial Probability Distribution (4 of 11)

Binomial Probability Distribution (5 of 11)

Binomial Probability Distribution (6 of 11)

(S, F, F) p(1 – p)(1 – p) = (.1)(.9)(.9) = .081

Binomial Probability Distribution (7 of 11)

Binomial Probability Distribution (8 of 11)

Binomial Probabilities and Cumulative Probabilities

Binomial Probability Distribution (9 of 11)

Binomial Probability Distribution (10 of 11)

• The variance is:

• The standard deviation is:

Binomial Probability Distribution (11 of 11)

Example: Evans Electronics

• The variance is:

• The standard deviation is:

Poisson Probability Distribution (1 of 6)

Poisson Probability Distribution (2 of 6)

Poisson Probability Function:

Poisson Probability Distribution (3 of 6)

Poisson Probability Distribution (4 of 6)

Using the probability function with = 6/hour = 3/half-hour and x = 4

Poisson Probability Distribution (5 of 6)

Poisson Probability Distribution (6 of 6)

A property of the Poisson distribution is that the mean

Example: Mercy Hospital

Hypergeometric Probability Distribution (1 of 7)

where: x = number of successes

Hypergeometric Probability Distribution (2 of 7)

Hypergeometric Probability Distribution (3 of 7)

Hypergeometric Probability Distribution (4 of 7)

where: x = 2 = number of good batteries selected

Hypergeometric Probability Distribution (5 of 7)

Hypergeometric Probability Distribution (6 of 7)

Hypergeometric Probability Distribution (7 of 7)

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