Statistics for Business and Economics (13e)

Slides by
Statistics for
Johnand Economics (13e)
Business
Loucks
Anderson, Sweeney, Williams, Camm, Cochran
St. Edward’s
© 2017 Cengage Learning
University

Slides by John Loucks

St. Edwards University

© 2017 Cengage Learning. 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
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1
 Statistics for Business and Economics (13e)

Chapter 6 Exponential
f (x)
Continuous Probability Distributions
• Uniform Probability Distribution
• Normal Probability Distribution
• Exponential Probability Distribution
x
Uniform
f (x)
f (x) Normal

x
x

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 Statistics for Business and Economics (13e)

Continuous Probability Distributions

• A continuous random variable can assume any value in an interval on the real
line or in a collection of intervals.
• It is not possible to talk about the probability of the random variable assuming
a particular value.
• Instead, we talk about the probability of the random variable assuming a value
within a given interval.

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 Statistics for Business and Economics (13e)

Continuous Probability Distributions

• 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.
f (x) Exponential

Uniform
f (x)
f (x) Normal

x
x1 x2

x
x1 x2
x
x1 x2

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

• A random variable is uniformly distributed whenever the probability is
proportional to the interval’s length.
• The uniform probability density function is:

f (x) = 1/(b – a) for a < x < b

=0 elsewhere
where: a = smallest value the variable can assume
b = largest value the variable can assume

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

• Expected Value of x
E(x) = (a + b)/2
• Variance of x
Var(x) = (b - a)2/12

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

• Example: 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.

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

• Uniform Probability Density Function
f(x) = 1/10 for 5 < x < 15
=0 elsewhere

where:
x = salad plate filling weight

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

• Expected Value of x
E(x) = (a + b)/2
= (5 + 15)/2
= 10

• Variance of x
Var(x) = (b - a)2/12
= (15 – 5)2/12
= 8.33

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

• Salad Plate Filling Weight

f(x)

1/10

x
0 5 10 15
Salad Weight (oz.)

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 Statistics for Business and Economics (13e)

Uniform Probability Distribution

What is the probability that a customer
will take between 12 and 15 ounces of salad?

f(x)

P(12 < x < 15) = 1/10(3) = .3

1/10

x
0 5 10 12 15
Salad Weight (oz.)

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 Statistics for Business and Economics (13e)

Area as a Measure of Probability

• The area under the graph of f(x) and probability are identical.
• This is valid for all continuous random variables.
• The probability that x takes on a value between some lower value x1 and some
higher value x2 can be found by computing the area under the graph of f(x)
over the interval from x1 to x2.

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• The normal probability distribution is the most important distribution for
describing a continuous random variable.
• It is widely used in statistical inference.
• It has been used in a wide variety of applications including:
• Heights of people • Test scores
• Amounts of rainfall • Scientific measurements
• Abraham de Moivre, a French mathematician, published The Doctrine of
Chances in 1733.
• He derived the normal distribution.

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Normal Probability Density Function

where: μ = mean
σ = standard deviation
π = 3.14159
e = 2.71828

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics
The distribution is symmetric; its skewness measure is zero.

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics
The entire family of normal probability distributions is defined by its mean
μ and its standard deviation σ .

Standard Deviation σ

x
Mean μ

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics
The highest point on the normal curve is at the mean, which is also the
median and mode.

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics
The mean can be any numerical value: negative, zero, or positive.

x
-10 0 25

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics
The standard deviation determines the width of the
curve: larger values result in wider, flatter curves.

σ = 15

σ = 25

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics
Probabilities for the normal random variable are given by areas under the
curve. The total area under the curve is 1 (.5 to the left of the mean and
.5 to the right).

.5 .5
x

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics (basis for the empirical rule)

68.26% of values of a normal random variable

are within +/- 1 standard deviation of its mean.

95.44% of values of a normal random variable

are within +/- 2 standard deviations of its mean.

99.72% of values of a normal random variable

are within +/- 3 standard deviations of its mean.

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Characteristics (basis for the empirical rule)
99.72%
95.44%
68.26%

μ
x
μ – 3σ μ – 1σ μ + 1σ μ + 3σ
μ – 2σ μ + 2σ

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Characteristics
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.

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Characteristics
The letter z is used to designate the standard normal random variable.

σ=1

z
0

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Converting to the Standard Normal Distribution

We can think of z as a measure of the

number of standard deviations x is from μ.

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• 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.

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Example: Pep Zone
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?
P(x > 20) = ?

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Stockout Probability
Step 1: Convert x to the standard normal distribution.

z = (x - μ)/σ
= (20 - 15)/6
= .83
Step 2: Find the area under the standard normal curve to the left of z = .83.

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• 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 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z < .83) = .7967

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Stockout Probability
Step 3: Compute the area under the standard normal
curve to the right of z = .83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Stockout Probability

Area = .7967 Area = 1 - .7967

= .2033

z
0 .83

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

If the manager of Pep Zone wants the probability of a stockout during
replenishment lead-time to be no more than .05, what should the reorder
point be?
(Hint: Given a probability, we can use the standard normal table in an
inverse fashion to find the corresponding z value.)

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Reorder Point

Area = .9500
Area = .0500

z
0 z.05

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Reorder Point
Step 1: Find the z-value that cuts off an area of .05 in the right tail of the
standard normal distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 .9693 .9699 .9706
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 .9756 .9761 .9767
. . . . . . . . . . .

We look up the complement of the tail area (1 - .05 = .95)

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Reorder Point
Step 2: Convert z.05 to the corresponding value of x.

x = μ + z.05σ
= 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probability

of a stockout during lead time at (slightly less than) .05.

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 Statistics for Business and Economics (13e)

Normal Probability Distribution

• Solving for the Reorder Point

Probability of no Probability of a
stockout during stockout during
replenishment replenishment
lead-time = .95 lead-time = .05

x
15 24.87

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 Statistics for Business and Economics (13e)

Standard Normal Probability Distribution

• Solving for the Reorder Point
By raising the reorder point from 20 gallons to 25 gallons on hand, the
probability of a stockout decreases from about .20 to .05.
This is a significant decrease in the chance that Pep Zone will be out of
stock and unable to meet a customer’s desire to make a purchase.

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 Statistics for Business and Economics (13e)

Using Excel to Compute Normal Probabilities

• Excel has two functions for computing cumulative probabilities and x values for
any normal distribution:
• NORM.DIST is used to compute the cumulative probability given an x
value.
• NORM.INV is used to compute the x value given a cumulative
probability.

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 Statistics for Business and Economics (13e)

Exponential Probability Distribution

• The exponential probability distribution is useful in describing the time it takes
to complete a task.
• The exponential random variables can be used to describe:
• Time between vehicle arrivals at a toll booth
• Time required to complete a questionnaire
• Distance between major defects in a highway
• In waiting line applications, the exponential distribution is often used for
service time.

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 Statistics for Business and Economics (13e)

Exponential Probability Distribution

• A property of the exponential distribution is that the mean and standard
deviation are equal.
• The exponential distribution is skewed to the right. Its skewness measure is 2.

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 Statistics for Business and Economics (13e)

Exponential Probability Distribution

• Density Function

where: μ = expected value or mean

e = 2.71828

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 Statistics for Business and Economics (13e)

Exponential Probability Distribution

• Cumulative Probabilities

where:
x0 = some specific value of x

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 Statistics for Business and Economics (13e)

Exponential Probability Distribution

• Example: Al’s Full-Service Pump
The time between arrivals of cars at Al’s full-service gas pump follows an
exponential probability distribution with a mean time between arrivals of 3
minutes. Al would like to know the probability that the time between two
successive arrivals will be 2 minutes or less.

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 Statistics for Business and Economics (13e)

Exponential Probability Distribution

• Example: Al’s Full-Service Pump
f(x)

.4 P(x < 2) = 1 - 2.71828-2/3 = 1 - .5134 = .4866

.3
.2
.1
x
0 1 2 3 4 5 6 7 8 9 10
Time Between Successive Arrivals (mins.)

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 Statistics for Business and Economics (13e)

Relationship between the Poisson and

Exponential Distributions
The Poisson distribution
provides an appropriate
description
of the number of occurrences
per interval.

The exponential distribution

provides an appropriate
description
of the length of the interval
between occurrences.

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 Statistics for Business and Economics (13e)

End of Chapter 6

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