MTH213: Business Statistics

Chapter 4: Basis Probability

Zayed University

College of Natural and Health Sciences

Department of Mathematics and Statistics

Chapter 4 MTH213: Business Statistics 1 / 42

1 The Concept of Probability
Basic Concepts
Probability

2 Elementary Probability Rules

3 Conditional Probability and Independence

Conditional Probability
Independence

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Basic Concepts: Random Experiments
Random Experiment
A random experiment is any process of observation that has an un-
certain outcome. The process must be defined so that on any single
repetition of the experiment, one and only one of the possible out-
comes will occur. The possible outcomes for an experiment are called
experimental outcomes.

Examples:
1 Tossing a coin once or several times.
2 Inspecting the quality of a product (Defective, Good).
3 The course grade of a selected student.
4 Rolling two dice.
5 Change in a stock price.
6 Conduct a sales call.
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Basic Concepts: Sample Space
Sample Space
The Sample Space of an experiment, denoted by S, is the set of all
possible experimental outcomes. The experimental outcomes in the
sample space are often called sample space outcomes.

Examples:
1 Examine a fuse for a defect and note N or D.
S = {N, D}
2 The garde of a student
S = {A, A− , B + , B, B − , C + , C, C − , D+ , D, F }
3 Number of customers served in a bank
S = {0, 1, 2, 3, ....}
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Tree Diagram
A tree diagram is a graphical representation that helps in visual-
izing a multiple-step experiment.
It is often a useful way to define the sample space for an experi-
ment that helps ensure no outcomes are omitted or repeated.
Example: Find the sample space for answering three True-False
questions.

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Basic Concepts: Events

Event
An event is a set of one or more sample space outcomes. An event is
said to be simple if it consists of exactly one outcome and compound
if it consists of more than one outcome.
Example: Consider the experiment of rolling two dice and define the
following events:
1 A= The sum of the two numbers is 2.

A = {(1, 1)}

2 C= Same number on both dice.

C = {(1, 1), (2, 2), (3, 3), (4, 4), (5, 5), (6, 6)}

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Exercises
1 Describe the sample space for the following experiments:
a The gender of the members of a committee of three members.
b The number of people entering a store on a particular day.
c The assembly time of a certain product.
d The education level of a selected employee.
e Two customers are asked to list their choice of ice cream flavor from
among vanilla, chocolate, and strawberry.
2 Suppose a university contains three colleges: college of science,
college of business and college of medicine. Consider now selecting
a student from the university and record the gender and college
of the selected student.
a Develop a tree diagram for this experiment.
b Describe the sample space of the experiment.
c Define the following events:
A= The student is a male.
B= The student is from a science college.
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Event Operations: Union
The union of two events A and B, denoted by A ∪ B and read A or B
is the event consisting of all outcomes that are either in A or in B or
in both events (so that the union includes outcomes for which both A
and B occur as well as outcomes for which exactly one occurs)- that
is, all outcomes in at least one of the events.

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Event Operations: Intersection

The intersection of two events A and B, denoted by A ∩ B and read A

and B is the event consisting of all outcomes that are in both A and
B.

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Event Operations: Complement

The complement of an event A, denoted by Ā (sometimes Ac or A0 ),

is the set of all outcomes in S that are not contained in A.

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Event Operations: Mutually Exclusive

A and B are said to be mutually exclusive or disjoint events if they

have no outcomes in common (i.e. A ∩ B = φ).

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Event Operations: Example

Let S = {0, 1, 2, 3, 4, 5, 6, 7, 8}, A = {0, 1, 2, 3, 4}, B = {3, 4, 5, 6},

and C = {1, 3, 5}.

A B

0
4 6
2
3
5
1

7
C

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Event Operations: Example
Let S = {0, 1, 2, 3, 4, 5, 6, 7, 8}, A = {0, 1, 2, 3, 4}, B = {3, 4, 5, 6},
and C = {1, 3, 5}. Then
Ā = {5, 6, 7, 8}
A B
A ∪ B = {0, 1, 2, 3, 4, 5, 6}
0
4 6 A ∪ C = {0, 1, 2, 3, 4, 5}
2
3
A ∩ B = {3, 4}
1
5 A ∩ C = {1, 3}
A ∩ C = {0, 2, 4, 5, 6, 7, 8}
8
A ∩ C = {0, 2, 4, 5, 6, 7, 8}
7
C
Ā ∪ C̄ = {0, 2, 4, 5, 6, 7, 8}
A ∩ B ∩ C = {3}
A∪B ∪C = {0, 1, 2, 3, 4, 5, 6}

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Exercises
1 A sample of three calculators is selected from a manufacturing
line, and each calculator is classified as either defective or accept-
able. Let A, B, and C denote the events that the first, second,
and third calculators respectively, are defective. Describe the sam-
ple space for this experiment and use it to define the following
events:
a A, B, C, Ā
b A ∩ B and B ∪ C
2 A pair of fair dice is tossed. Define the following events:

A = The sum of the two numbers is 7

B = At least one of the two dice shows a 4

a Describe the events A, B, A ∩ B, A ∪ B and Ā.

b Are A and B mutually exclusive? Why?
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Probability
Probability of an Event
Probability is a measure of the chance that an experimental outcome
will occur when an experiment is carried out.

Probability Axioms
If E is an experimental outcome, then P (E) denotes the probability
that E will occur and:
1 The probability of any outcome is between 0 and 1, i.e.

0 ≤ P (E) ≤ 1
I If E can never occur, then P (E) = 0
I If E is certain to occur, then P (E) = 1
2 The sum of the probabilities of all the outcomes equals 1.
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Assigning Probabilities to Experimental Outcomes

1 The classical method:

I The classical method makes certain assumptions (such as equally
likely, independence) about situation.
I Equally likely events are events that have the same probability of
occurring.
I If an experiment has n possible equally likely outcomes, this
method would assign a probability of n1 to each outcome.
I If the sample space outcomes are equally likely to occur, then:
Number of outcomes in A
P (A) =
Number of outcomes in S
I Examples:
When rolling a die, each sample point has a 16 chance of occurring.
4
When rolling two dice, the probability of getting a sum of 9 is 36 .

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Assigning Probabilities to Experimental Outcomes
2 The relative frequency method:
I Relative frequency method (Also called Empirical probability) as-
signs probabilities based on experimentation or historical data.
I Let E be an outcome of an experiment. Then, if the experiment
is performed N times, P (E) is the relative frequency of E, i.e.,
Number of times E occurs
P (E) =
N
I Example: The manager of a branch of Starbucks in a busy mall
is interested in determining the probability that a customer will
select a decaf versus a caffeinated drink. The sales records of the
past week indicate 2,250 sales of decaf and caffeinated of which
1,570 sales were for caffeinated drinks. Thus the chance that a
customer will purchase a caffeinated drink is
1570
P (Caffeinated) = = 0.6978 ≈ 0.70
2250
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Assigning Probabilities to Experimental Outcomes
3 The subjective method:
I Subjective methods assign probabilities based on the assignor’s
judgment; so we define probability as the degree of belief that
the experimental outcome will occur.
I Examples:
P(Receiving A in this course)
P(Etisalat stock will go down next week)
I The subjective probability, differs from the other two approaches
because subjective probability differs from person to person.
I Example: The development team for a new product may assign
a probability of 0.60 to the chance of success for the product,
while the president of the company may be less optimistic and
assign a probability of 0.30.
I The assignment of subjective probabilities to various outcomes is
usually based on a combination of an individual’s past experience,
personal opinion, and analysis of a particular situation.
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Exercises
1 In each of the following, indicate what method of probability as-
sessment would most likely be used to assess the probability:
a A financial crisis will happen in the next 5 years.
b A customer will return a purchase for a refund.
c A customer will randomly select a washer from an inventory of ap-
pliances that contains four white washers and one black washer.
d A customer will pay with cash, a credit card, or a debit card.
2 Three marketing managers were asked to assess the probability
that sales for next year will be more than 15% higher than the
current year. The three managers stated that the probability of
this happening was 0.40, 0.6 and 0.9.
a What method of probability assessment are the three managers us-
ing?
b Which manager is expressing the least uncertainty in the probability
assessment?
c Why did the managers provide different probability assessments?
Chapter 4 MTH213: Business Statistics 19 / 42
Probability Rules

Complement Rule
For any event A,
P (Ā) = 1 − P (A)

Addition Rule
For any two events A and B,

P (A ∪ B) = P (A) + P (B) − P (A ∩ B)

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Probability Rules

Mutually Exclusive Events

A and B are mutually exclusive if they cannot occur simultaneously:

P (A ∩ B) = P (φ) = 0

Collectively Exhaustive Events

A and B are collectively exhaustive events if one of the events must
occur:
P (A ∪ B) = 1

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Probability Rules

Addition Rule for Mutually Exclusive Events

1 Addition Rule for Two Mutually Exclusive Events: For any two
mutually exclusive events A and B,

P (A ∪ B) = P (A) + P (B)

2 Addition Rule for N Mutually Exclusive Events: The events

A1 , A2 , . . . , AN are mutually exclusive if no two of the events
have any sample space outcomes in common. In this case, no two
of the events can occur simultaneously, and,

P (A1 ∪ A2 ∪ . . . ∪ AN ) = P (A1 ) + P (A2 ) + . . . + P (AN )

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Example

A survey of magazine subscribers showed that during the past year,

45% rented a car for business reasons, 54% rented a car for personal
reasons, and 30% rented a car for both business and personal reasons.
Let

A = Renting a car for business reasons

B = Renting a car for personal reasons

Then, we have P (A) = 0.45, P (B) = 0.54 and P (A ∩ B) = 0.30.

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Example

a What is the probability that a subscriber did not rent a car during
the past year for business reasons?
b What is the probability that a subscriber rented a car during the
past year for business or personal reasons?
c What is the probability that a subscriber did not rent a car during
the past year for either business or personal reasons?
d Are “renting a car for business reasons” and “renting a car for per-
sonal reasons” mutually exclusive? Explain.

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Example

a P (Ā) = 1 − P (A) = 1 − 0.45 = 0.55

b

P (A ∪ B) = P (A) + P (B) − P (A ∩ B)
= 0.45 + 0.54 − 0.30 = 0.69

c P (Neither) = 1 − P (A ∪ B) = 1 − 0.69 = 0.31

d No, since P (A ∩ B) 6= 0.

Chapter 4 MTH213: Business Statistics 25 / 42

Exercises
1 A sample of automobile dealerships found that 19% of automo-
biles sold are silver, 22% of automobiles sold are sport utility
vehicles (SUVs), and 16% of automobiles sold are silver SUVs.
Find the probability that a randomly chosen sold automobile from
this sample is
a not silver.
b silver or an SUV.
c silver but not an SUV.
d an SUV but not silver.
e either silver or an SUV but not both.
f neither silver nor an SUV.
2 If A and B are two events such that P (Ā) = 0.65, P (A ∪ B) =
0.75 and P (A∩B) = 0.25. Find the following probabilities P (A),
P (B), P (A ∩ B̄) and P (Ā ∩ B).

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Exercises
3 The probability that condo sales will increase in the next 6 months
is 0.30. The probability that the interest rates on condo loans will
go up in the same period is 0.75. The probability that condo
sales or interest rates will go up during the next 6 months is 0.90.
What is the probability that both condo sales and interest rates
will increase during the next six months?
4 A sample of 500 respondents was selected in a large metropolitan
area to study consumer behavior. Among the questions asked
was: “Do you enjoy shopping for clothing?” Of 240 males, 136
answered yes. Of 260 females, 224 answered yes. Construct
a contingency table to evaluate the probabilities. What is the
probability that a respondent chosen at random
a enjoys shopping for clothing?
b is a female and enjoys shopping for clothing?
c is a female or enjoys shopping for clothing?
d is a male or a female?
Chapter 4 MTH213: Business Statistics 27 / 42
Exercises

5 A local postal carrier distributes letters, advertisements, and mag-

azines. For a certain day, she distributed the following numbers
of each type of item.
Mail Type
Delivered to Letters Ads Magazines Total
Home 325 406 203 934
Business 732 1021 97 1850
Total 1057 1427 300 2784
If an item is selected at random, find these probabilities.
a The item went to a home.
b The item was an ad, or it went to a business.
c The item was a letter, or it went to a home.

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Conditional Probability
Conditional Probability
The probability of event A occurring, given that event B has occurred,
is called the conditional probability of event A given event B, denoted
P (A|B) is
P (A ∩ B)
P (A|B) =
P (B)
provided P (B) > 0.

Multiplication Rule
Given any two events A and B,

P (A ∩ B) = P (A|B)P (B)
= P (B|A)P (A)

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Examples

1 The probability that a regularly scheduled flight departs (D) on

time is 0.83; the probability that it arrives (A) on time is 0.82;
and the probability that it departs and arrives on time is 0.78.
a Find the probability that a plane arrives on time given that it de-
parted on time.
b Find the probability that a plane departed on time given that it has
arrived on time.

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Examples

1 The probability that a regularly scheduled flight departs (D) on

time is 0.83; the probability that it arrives (A) on time is 0.82;
and the probability that it departs and arrives on time is 0.78.
a Find the probability that a plane arrives on time given that it de-
parted on time.

P (A ∩ D) 0.78
P (A|D) = = = 0.94
P (D) 0.83
b Find the probability that a plane departed on time given that it has
arrived on time.
P (A ∩ D) 0.78
P (D|A) = = = 0.95
P (A) 0.82

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Examples

2 A firm has classified its customers in two ways:(1) according to

whether the account is overdue and (2) whether the account is
new (less than 12 months) or old. An analysis of the firm’s records
provided the input for the following table of joint probabilities.
Overdue (O) Not Overdue (Ō) Total
New (N ) 0.06 0.13 0.19
Old (N̄ ) 0.52 0.29 0.81
Total 0.58 0.42 1
One account is randomly selected.
a If the account is overdue, what is the probability that it is new?
b If the account is new, what is the probability that it is overdue?

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Examples
2 A firm has classified its customers in two ways:(1) according to
whether the account is overdue and (2) whether the account is
new (less than 12 months) or old. An analysis of the firm’s records
provided the input for the following table of joint probabilities.
Overdue (O) Not Overdue (Ō) Total
New (N ) 0.06 0.13 0.19
Old (N̄ ) 0.52 0.29 0.81
Total 0.58 0.42 1
One account is randomly selected.
a If the account is overdue, what is the probability that it is new?
P (N ∩ O) 0.06
P (N |O) = = = 0.1034
P (O) 0.58
b If the account is new, what is the probability that it is overdue?
P (N ∩ O) 0.06
P (O|N ) = = = 0.3158
P (N ) 0.19
Chapter 4 MTH213: Business Statistics 33 / 42
Exercises
1 The probability that an automobile needs an oil change is 0.25; the
probability that it needs a new oil filter is 0.40; and the probability
that both the oil and filter need changing is 0.14.
a If the oil had to be changed, what is the probability that a new oil
filter is needed?
b If a new oil filter is needed, what is the probability that the oil has
to be changed?
2 A construction company has bid on two contracts. The probability
of winning contract A is 0.3. If the company wins contract A, then
the probability of winning contract B is 0.4. If the company loses
contract A, then the probability of winning contract B decreases
to 0.2. Find the probability of the following events.
a Winning both contracts
b Winning exactly one contract
c Winning at least one contract
Chapter 4 MTH213: Business Statistics 34 / 42
Exercises
3 A department store analyzed its most recent sales and determined
the relationship between the way the customer paid for the item
and the price category of the item. The joint probabilities in the
following table were calculated.
Cash Credit card Debit Card Total
Less than $20 0.09 0.03 0.04 0.16
$20-$100 0.05 0.21 0.18 0.44
More than $100 0.03 0.23 0.14 0.4
Total 0.17 0.47 0.36 1
a What proportion of purchases was paid by debit card?
b Find the probability that a credit card purchase was made given
that it was more than $100.
c Determine the proportion of purchases made by credit card or by
debit card.
d Find the probability that a purchase of more than $100 was made
given that it was paid by credit card.
Chapter 4 MTH213: Business Statistics 35 / 42
Exercises

4 Discrimination in the workplace is illegal, and companies that dis-

criminate are often sued. The female instructors at a large uni-
versity recently lodged a complaint about the most recent round
of promotions from assistant professor to associate professor. An
analysis of the relationship between gender and promotion pro-
duced the following joint probabilities.
Promoted Not Promoted Total
Female 0.03 0.12 0.15
Male 0.17 0.68 0.85
Total 0.2 0.8 1

a What is the rate of promotion among female assistant professors?

b What is the rate of promotion among male assistant professors?
c Is it reasonable to accuse the university of gender bias?

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Independence
If the probability of event A is not affected by the existence of
event B, we would say that events A and B are independent.
Events that are not independent are often said to be dependent.
Independence
I Two events A and B are said to be independent if and only if:
1 P (A|B) = P (A) or, equivalently,
2 P (B|A) = P (B) or, equivalently
3 P (A ∩ B) = P (A)P (B)

I If A and B are independent, then A and B̄, Ā and B, and Ā and B̄

are independent as well.
I In general, if A1 , A2 , · · · , An are independent then
P (A1 ∩ A2 ∩ · · · ∩ An ) = P (A1 )P (A2 ) · · · P (An )

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Mutual Exclusiveness and Independence
Do not confuse the notion of mutually exclusive events with that
of independent events.
Two events with nonzero probabilities cannot be both mutually
exclusive and independent.
If one mutually exclusive event is known to occur, the other cannot
occur.; thus, the probability of the other event occurring is reduced
to zero (and they are therefore dependent).
Two events that are not mutually exclusive, might or might not
be independent.
Demonstrations: Given: P (A) = 0.4, P (B) = 0.5,
A. If A and B are mutually exclusive; are they independent?
B. If A and B are independent; are they mutually exclusive?
C. If A and B are not mutually exclusive; are they independent?
D. If A and B are not independent; are they mutually exclusive?
Chapter 4 MTH213: Business Statistics 38 / 42
Example

An applicant has applied for positions at Company A and Company B.

The probability of getting an offer from Company A is 0.4, and the
probability of getting an offer from Company B is 0.3. Assuming that
the two job offers are independent of each other, what is the probability
that
a the applicant gets an offer from both companies?
b the applicant will get at least one offer?
c the applicant will not be given an offer from either company?
d Company A does not offer her a job, but Company B does?

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Example
a Probability that the applicant gets an offer from both companies?
P (A ∩ B) = P (A)P (B) = (0.4)(0.3) = 0.12
b Probability that the applicant will get at least one offer?
P (A ∪ B) = P (A) + P (B) − P (A ∩ B)
= 0.4 + 0.3 − 0.12 = 0.58
c Probability that the applicant will not be given an offer from either
company?
P (Ā ∩ B̄) = P (Ā)P (B̄) = (1 − 0.4)(1 − 0.3) = 0.42
d Probability that Company A does not offer her a job, but Company
B does?
P (Ā ∩ B) = P (Ā)P (B) = (1 − 0.4)(0.3) = 0.18
Chapter 4 MTH213: Business Statistics 40 / 42
Exercises
1 The URS construction company has submitted two bids, one to
build a large hotel in London and the other to build a commercial
office building in New York City. The company believes it has a
40% chance of winning the hotel bid and a 25% chance of winning
the office building bid. The company also believes that winning
the hotel bid is independent of winning the office building bid.
a What is the probability the company will win both contracts?
b What is the probability the company will win at least one contract?
c What is the probability the company will lose both contracts?
2 A quality control engineer knows that 10% of the microproces-
sor chips produced by a machine are defective. Out of a large
shipment, five chips are chosen at random.
a What is the probability that none of them is defective?
b What is the probability that at least one is defective? Explain.

Chapter 4 MTH213: Business Statistics 41 / 42

Exercises
3 Assume you are taking two courses this semester (A and B). The
probability that you will pass course A is 0.835, the probability
that you will pass both courses is 0.276. The probability that you
will pass at least one of the courses is 0.981.
a What is the probability that you will pass course B?
b Are the events of passing the courses independent? Explain.
c Are the events of passing the courses mutually exclusive? Explain.
4 A department store analyzed its most recent sales and determined
the relationship between the way the customer paid for the item
and the price category of the item.
Cash Credit card Debit Card
Less than $20 0.09 0.03 0.04
$20-$100 0.05 0.21 0.18
More than $100 0.03 0.23 0.14
Are the events of “paying by credit card” and “purchasing less
than $20” independent? Explain.
Chapter 4 MTH213: Business Statistics 42 / 42