Statistics for

Business and Economics

8th Edition

Chapter 3

Probability

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-1
 Chapter Goals
After completing this chapter, you should be
able to:
 Explain basic probability concepts and definitions
 Use a Venn diagram or tree diagram to illustrate

simple probabilities
 Apply common rules of probability
 Compute conditional probabilities
 Determine whether events are statistically

independent
 Use Bayes’ Theorem for conditional probabilities

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 3.1
Important Terms

 Random Experiment – a process leading to an

uncertain outcome
 Basic Outcome – a possible outcome of a
random experiment
 Sample Space (S) – the collection of all
possible outcomes of a random experiment
 Event (E) – any subset of basic outcomes from
the sample space

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 Important Terms
(continued)

 Intersection of Events – If A and B are two

events in a sample space S, then the
intersection, A ∩ B, is the set of all outcomes in
S that belong to both A and B

A AB B

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 Important Terms
(continued)

 A and B are Mutually Exclusive Events if they

have no basic outcomes in common
 i.e., the set A ∩ B is empty

A B

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 Important Terms
(continued)

 Union of Events – If A and B are two events in a

sample space S, then the union, A U B, is the
set of all outcomes in S that belong to either
A or B
S The entire shaded
area represents
AUB
A B

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 Important Terms
(continued)

 Events E1, E2, …,Ek are Collectively Exhaustive

events if E1 U E2 U . . . U Ek = S
 i.e., the events completely cover the sample space

 The Complement of an event A is the set of all

basic outcomes in the sample space that do not
belong to A. The complement is denoted A
S
A
A

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 Examples
Let the Sample Space be the collection of
all possible outcomes of rolling one die:

S = [1, 2, 3, 4, 5, 6]

Let A be the event “Number rolled is even”

Let B be the event “Number rolled is at least 4”
Then
A = [2, 4, 6] and B = [4, 5, 6]

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 Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

Complements:
A [1, 3, 5] B [1, 2, 3]
Intersections:

Unions:
A  B [4, 6] A  B [5]

A  B [2, 4, 5, 6]
A  A [1, 2, 3, 4, 5, 6] S
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 Examples
(continued)

S = [1, 2, 3, 4, 5, 6] A = [2, 4, 6] B = [4, 5, 6]

 Mutually exclusive:
 A and B are not mutually exclusive

The outcomes 4 and 6 are common to both

 Collectively exhaustive:
 A and B are not collectively exhaustive

A U B does not contain 1 or 3

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 3.2
Probability and Its Postulates

 Probability – the chance that 1 Certain

an uncertain event will occur
(always between 0 and 1)

0 ≤ P(A) ≤ 1 For any event A .5

0 Impossible

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 Assessing Probability
 There are three approaches to assessing the
probability of an uncertain event:

1. classical probability

2. relative frequency probability

3. subjective probability

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 Classical Probability
 Assumes all outcomes in the sample space are
equally likely to occur

Classical probability of event A:

NA number of outcomes that satisfy the event A
P(A)  
N total number of outcomes in the sample space


Requires a count of the outcomes in the sample space

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 Counting the Possible Outcomes

 Use the Combinations formula to determine the

number of combinations of n items taken k at a time

n n!
C  k
k! (n  k)!
 where
 n! = n(n-1)(n-2)…(1)
 0! = 1 by definition

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 Permutations and Combinations

The number of possible orderings

 The total number of possible ways of arranging x

objects in order is

x! x(x - 1)(x - 2) ...(2)(1)

 x! is read as “x factorial”

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 Permutations and Combinations
(continued)

Permutations: the number of possible

arrangements when x objects are to be
selected from a total of n objects and arranged
in order [with (n – x) objects left over]

n
P n(n  1)(n  2) ...(n  x  1)
x

n!

(n  x)!
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 Permutations and Combinations
(continued)
 Combinations: The number of combinations
of x objects chosen from n is the number of
possible selections that can be made
n
P n
C  k
x
x!
n!

x! (n  x)!
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 Permutations and Combinations
Example
Suppose that two letters are to be selected
from A, B, C, D and arranged in order. How
many permutations are possible?
 Solution The number of permutations, with

4 4!
n = 4 and x = 2 , is P 
2 12
(4  2)!
 The permutations are
AB AC AD BA BC BD
CA CB CD DA DB DC

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 Permutations and Combinations
Example
(continued)

Suppose that two letters are to be selected

from A, B, C, D. How many combinations are
possible (i.e., order is not important)?
 Solution The number of combinations is

4 4!
C  2 6
2! (4  2)!
 The combinations are
AB (same as BA) BC (same as CB)
AC (same as CA) BD (same as DB)
AD (same as DA) CD (same as DC)

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 Assessing Probability
Three approaches (continued)

2. relative frequency probability


the limit of the proportion of times that an event A occurs in a large
number of trials, n
nA number of events in the population that satisfy event A
P(A)  
n total number of events in the population

3. subjective probability

an individual opinion or belief about the probability of occurrence

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 Probability Postulates

1. If A is any event in the sample space S, then

0 P(A) 1
2. Let A be an event in S, and let Oi denote the basic
outcomes. Then
P(A)  P(Oi )
A

(the notation means that the summation is over all the basic
outcomes in A)

3. P(S) = 1
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 3.3
Probability Rules

 The Complement rule:

P(A) 1 P(A) i.e., P(A)  P(A) 1

 The Addition rule:

 The probability of the union of two events is

P(A  B) P(A)  P(B)  P(A  B)

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-22
 A Probability Table

Probabilities and joint probabilities for two

events A and B are summarized in this table:

B
B
A P(A)
P(A  B) P(A  B )

A P(A  B) P(A  B ) P(A)

P(B) P( B ) P(S) 1.0

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-23
 Addition Rule Example

Consider a standard deck of 52 cards, with four

suits: ♥♣♦♠
Let event A = card is an Ace
Let event B = card is from a red suit

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 Addition Rule Example
(continued)

P(Red U Ace) = P(Red) + P(Ace) - P(Red ∩ Ace)

= 26/52 + 4/52 - 2/52 = 28/52

Don’t count
the two red
Color aces twice!
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-25
 Conditional Probability
 A conditional probability is the probability of one
event, given that another event has occurred:
The conditional
P(A  B)
P(A | B)  probability of A
P(B) given that B has
occurred

P(A  B) The conditional

P(B | A)  probability of B
P(A) given that A has
occurred

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-26
 Conditional Probability Example

 Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player
(CD). 20% of the cars have both.

 What is the probability that a car has a CD

player, given that it has AC ?
i.e., we want to find P(CD | AC)

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-27
 Conditional Probability Example
(continued)
 Of the cars on a used car lot, 70% have air
conditioning (AC) and 40% have a CD player (CD).
20% of the cars have both.

CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD  AC) .2
P(CD | AC)   .2857
P(AC) .7
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 Conditional Probability Example
(continued)
 Given AC, we only consider the top row (70% of the cars). Of
these, 20% have a CD player. 20% of 70% is 28.57%.

CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0

P(CD  AC) .2
P(CD | AC)   .2857
P(AC) .7

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 Multiplication Rule

 Multiplication rule for two events A and B:

P(A  B) P(A | B) P(B)

 also

P(A  B) P(B | A) P(A)

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 Multiplication Rule Example
P(Red ∩ Ace) = P(Red| Ace)P(Ace)
 2  4  2
    
 4   52  52
number of cards that are red and ace 2
 
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52
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 Statistical Independence
 Two events are statistically independent if
and only if:
P(A  B) P(A) P(B)
 Events A and B are independent when the probability of one
event is not affected by the other event
 If A and B are independent, then

P(A | B) P(A) if P(B)>0

P(B | A) P(B) if P(A)>0

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 Statistical Independence
(continued)
 For multiple events:

E1, E2, . . . , Ek are statistically independent if

and only if:

P(E1  E1  ...  E1 ) P(E1 ) P(E 2 )...P(E k )

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-33
 Statistical Independence Example
 Of the cars on a used car lot, 70% have air
conditioning (AC) and 40% have a CD player (CD).
20% of the cars have both.

CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
 Are the events AC and CD statistically independent?

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 Statistical Independence Example
(continued)
CD No CD Total
AC .2 .5 .7
No AC .2 .1 .3
Total .4 .6 1.0
P(AC ∩ CD) = 0.2

P(AC) = 0.7
P(CD) = 0.4 P(AC)P(CD) = (0.7)(0.4) = 0.28

P(AC ∩ CD) = 0.2 ≠ P(AC)P(CD) = 0.28

So the two events are not statistically independent
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 3.4
Bivariate Probabilities
Outcomes for bivariate events:
B1 B2 ... Bk

A1 P(A1B1) P(A1B2) ... P(A1Bk)

A2 P(A2B1) P(A2B2) ... P(A2Bk)

. . . . .
. . . . .
. . . . .

Ah P(AhB1) P(AhB2) ... P(AhBk)

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 Joint and
Marginal Probabilities

 The probability of a joint event, A ∩ B:

number of outcomes satisfying A and B
P(A  B) 
total number of elementary outcomes

 Computing a marginal probability:


WhereBP(A
P(A)  B1 )k 
1, B2, …, B
P(A
are  B 2 ) exclusive
k mutually    P(A andcollectively
Bk )
exhaustive events

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 Marginal Probability Example

P(Ace)
2 2 4
P(Ace  Red)  P(Ace  Black)   
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

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 Using a Tree Diagram
.2
D .7 P(AC ∩ CD) = .2
Given AC or Has
C
no AC: .7
C ) = D oe
P( A not
s P(AC ∩ CD) = .5
C .5
A h a ve
H as CD .7
All
Cars
Do .2
e
n ot s .3
h av P(A C D P(AC ∩ CD) = .2
eA C )= . Has
C 3
D oe
s
not .1 P(AC ∩ CD) = .1
h a ve
CD .3 Ch. 3-39
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 Odds

 The odds in favor of a particular event are

given by the ratio of the probability of the
event divided by the probability of its
complement
 The odds in favor of A are

P(A) P(A)
odds  
1- P(A) P(A)

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 Odds: Example
 Calculate the probability of winning if the odds
of winning are 3 to 1:
3 P(A)
odds  
1 1- P(A)

 Now multiply both sides by 1 – P(A) and solve for P(A):

3 x (1- P(A)) = P(A)

3 – 3P(A) = P(A)
3 = 4P(A)
P(A) = 0.75

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 3.5
Bayes’ Theorem
Let A1 and B1 be two events. Bayes’ theorem states that

P(A 1 | B 1 )P(B 1 )
P(B 1 | A 1 ) 
P(A 1 )

and
P(B1 | A 1 )P(A 1 )
P(A 1 | B1 ) 
P(B1 )

 a way of revising conditional probabilities by using

available or additional information

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 3.5
Bayes’ Theorem
Bayes’ theorem (alternative statement)
P(A | E i )P(E i )
P(E i | A) 
P(A)
P(A | E i )P(E i )

P(A | E 1 )P(E 1 )  P(A | E 2 )P(E 2 )    P(A | E k )P(E k )
 where:
Ei = ith event of k mutually exclusive and
collectively
exhaustive events
A = new event that might impact P(Ei)
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 Bayes’ Theorem Example

 A drilling company has estimated a 40%

chance of striking oil for their new well.
 A detailed test has been scheduled for more
information. Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
 Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-44
 Bayes’ Theorem Example
(continued)

 Let S = successful well

U = unsuccessful well
 P(S) = .4 , P(U) = .6 (prior probabilities)
 Define the detailed test event as D
 Conditional probabilities:
P(D|S) = .6 P(D|U) = .2
 Goal is to find P(S|D)

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 Bayes’ Theorem Example
(continued)

Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) 
P(D | S)P(S)  P(D | U)P(U)
(.6)(.4)

(.6)(.4)  (.2)(.6)
.24
 .667
.24  .12
So the revised probability of success (from the original estimate of .4),
given that this well has been scheduled for a detailed test, is .667

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-46
 Chapter Summary
 Defined basic probability concepts
 Sample spaces and events, intersection and union

of events, mutually exclusive and collectively

exhaustive events, complements
 Examined basic probability rules
 Complement rule, addition rule, multiplication rule

 Defined conditional, joint, and marginal probabilities

 Reviewed odds and the overinvolvement ratio
 Defined statistical independence
 Discussed Bayes’ theorem

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch. 3-47
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mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher.
Printed in the United States of America.

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