Introduction to Management Science

8th Edition
by
Bernard W. Taylor III

Chapter 2
Probability and Statistics

Chapter 2 - Probability and Statistics 1

Chapter Topics

Types of Probability
Fundamentals of Probability
Statistical Independence and Dependence
Expected Value
The Normal Distribution

Chapter 2 - Probability and Statistics 2

Types of Probability
Objective Probability
Classical, or a priori (prior to the occurrence) probability is an
objective probability that can be stated prior to the
occurrence of the event. It is based on the logic of the
process producing the outcomes.
Objective probabilities that are stated after the outcomes of
an event have been observed are relative frequencies, based
on observation of past occurrences.
Relative frequency is the more widely used definition of
objective probability.

Chapter 2 - Probability and Statistics 3

Types of Probability
Subjective Probability
Subjective probability is an estimate based on personal
belief, experience, or knowledge of a situation.
It is often the only means available for making probabilistic
estimates.
Frequently used in making business decisions.
Different people often arrive at different subjective
probabilities.
Objective probabilities used in this text unless otherwise
indicated.

Chapter 2 - Probability and Statistics 4

Fundamentals of Probability
Outcomes and Events
An experiment is an activity that results in one of several
possible outcomes which are termed events.
The probability of an event is always greater than or equal to
zero and less than or equal to one.
The probabilities of all the events included in an experiment
must sum to one.
The events in an experiment are mutually exclusive if only
one can occur at a time.
The probabilities of mutually exclusive events sum to one.

Chapter 2 - Probability and Statistics 5

Fundamentals of Probability
Distributions
A frequency distribution is an organization of numerical data
about the events in an experiment.
A list of corresponding probabilities for each event is referred
to as a probability distribution.
If two or more events cannot occur at the same time they are
termed mutually exclusive.
A set of events is collectively exhaustive when it includes all
the events that can occur in an experiment.

Chapter 2 - Probability and Statistics 6

Fundamentals of Probability
A Frequency Distribution Example
State University, 3000 students, management science
grades for past four years.

Event Number of Relative

Probability
Grade Students Frequency
A 300 300/3,000 .10
B 600 600/3,000 .20
C 1,500 1,500/3,000 .50
D 450 450/3,000 .15
F 150 150/3,000 .05
3,000 1.00

Chapter 2 - Probability and Statistics 7

Fundamentals of Probability
Mutually Exclusive Events & Marginal Probability
A marginal probability is the probability of a single event
occurring, denoted P(A).
For mutually exclusive events, the probability that one or
the other of several events will occur is found by summing
the individual probabilities of the events:
P(A or B) = P(A) + P(B)
A Venn diagram is used to show mutually exclusive events.

Chapter 2 - Probability and Statistics 8

Fundamentals of Probability
Mutually Exclusive Events & Marginal Probability

Figure 2.1
Venn Diagram for Mutually Exclusive Events

Chapter 2 - Probability and Statistics 9

Fundamentals of Probability
Non-Mutually Exclusive Events & Joint Probability
Probability that non-mutually exclusive events A and B or
both will occur expressed as:
P(A or B) = P(A) + P(B) - P(AB)
A joint probability, P(AB), is the probability that two or more
events that are not mutually exclusive can occur
simultaneously.

Chapter 2 - Probability and Statistics 10

Fundamentals of Probability
Non-Mutually Exclusive Events & Joint Probability

Figure 2.2
Venn Diagram for Non–Mutually Exclusive Events and the Joint Event

Chapter 2 - Probability and Statistics 11

Fundamentals of Probability
Cumulative Probability Distribution
Can be developed by adding the probability of an event to
the sum of all previously listed probabilities in a probability
distribution.
Event Cumulative
Probability
Grade Probability
A .10 .10
B .20 .30
C .50 .80
D .15 .95
F .05 1.00
1.00

Probability that a student will get a grade of C or higher:

P(A or B or C) = P(A) + P(B) + P(C) = .10 + .20 + .50 = .80

Chapter 2 - Probability and Statistics 12

Statistical Independence and Dependence
Independent Events
A succession of events that do not affect each other are
independent.
The probability of independent events occurring in a
succession is computed by multiplying the probabilities of
each event.
A conditional probability is the probability that an event will
occur given that another event has already occurred,
denoted as P(AB). If events A and B are independent,
then:
P(AB) = P(A)  P(B) and P(AB) = P(A)

Chapter 2 - Probability and Statistics 13

Statistical Independence and Dependence
Independent Events – Probability Trees
For coin tossed three consecutive times:

Figure 2.3
Probability Tree for
Coin-Tossing Example

Probability of getting head on first toss, tail on second, tail

on third is .125:
P(HTT) = P(H)  P(T)  P(T) = (.5)(.5)(.5) = .125
Chapter 2 - Probability and Statistics 14
Statistical Independence and Dependence
Independent Events – Bernoulli Process Definition
Properties of a Bernoulli (binomial) Process:
There are two possible outcomes for each trial.
The probability of the outcome remains constant over
time.
The outcomes of the trials are independent.
The number of trials is discrete and integer.
Use the above as a check-list to determine if a given
process is binomial.

Chapter 2 - Probability and Statistics 15

Statistical Independence and Dependence
Independent Events – Binomial Distribution
A binomial probability distribution function is used to
determine the probability of a number of successes in n
trials.
It is a discrete probability distribution since the number of
successes and trials is discrete.
P(r) = n! prqn -r
r!(n -r)!
where: p = probability of a success
q = 1– p = probability of a failure
n = number of trials
r = number of successes in n trials

Chapter 2 - Probability and Statistics 16

Statistical Independence and Dependence
Binomial Distribution Example – Tossed Coins
Determine probability of getting exactly two tails in three
tosses of a coin.

P(2 tails) =P(r =2) = 3! (.5)2(.5)3 −2

2! (3 - 2)!
= (3⋅2⋅1) (.25)(.5)
(2⋅1)(1)
=6 (.125)
2
P(r =2) =.375
Excel’s function BINOMDIST(r,n,p,FALSE) returns the value of
P(r); COMBIN(n,r) is the combinatorial prefactor. In turn,
BINOMDIST(r,n,p,TRUE) returns P(s≤r) = Σs≤rP(s).

Chapter 2 - Probability and Statistics 17

Statistical Independence and Dependence
Binomial Distribution Example – Quality Control
Microchip production; sample of four items/batch, 20% of all
microchips are defective.
What is probability that each batch will contain exactly two
defectives?

P(r=2 defectives)= 4! (.2)2(.8)2

2!(4-2)!
= (4⋅3⋅2⋅1)(.04)(.64)
(2⋅1)(1)
=24 (.0256)
2
= .1536

Chapter 2 - Probability and Statistics 18

Statistical Independence and Dependence
Binomial Distribution Example – Quality Control
Four microchips tested/batch; if two or more found
defective, batch is rejected.
What is probability of rejecting entire batch if batch in fact
has 20% defective?
P(r ≥2) = 4! (.2)2(.8)2 + 4! (.2)3(.8)1 + 4! (.2)4(.8)0
2!(4 - 2)! 3!(4 −3)! 4!(4 - 4)!
=.1536 + .0256 + .0016
=.1808
Probability of less than two defectives:
P(r<2) = P(r=0) + P(r=1) = 1.0 - [P(r=2) + P(r=3) + P(r=4)]
= 1.0 - .1808 = .8192
Also calculated by BINOMDIST(1,4,0.2,TRUE).
Chapter 2 - Probability and Statistics 19
Statistical Independence and Dependence
Dependent Events (1 of 2)
If the occurrence of one event affects the probability of the
occurrence of another event, the events are dependent.
Coin toss to select bucket, draw for blue ball.
If tail occurs, 1/6 chance of drawing blue ball from bucket 2;
if head results, no possibility of drawing blue ball from
bucket 1.
Probability of event “drawing a blue ball” dependent on
event “flipping a coin.”

Chapter 2 - Probability and Statistics 20

Statistical Independence and Dependence
Dependent Events (2 of 2)

Figure 2.4
Dependent Events

Chapter 2 - Probability and Statistics 21

Statistical Independence and Dependence
Dependent Events – Unconditional Probabilities
Unconditional: P(H) = .5; P(T) = .5, must sum to one.

“B” changed
into “W”!

Figure 2.5
Another Set of Dependent Events

Chapter 2 - Probability and Statistics 22

Statistical Independence and Dependence
Dependent Events – Conditional Probabilities
Conditional: P(RH) =.33, P(WH) = .67, P(RT) = .83,
P(WT) = .17

.3333

.5 .6667

.5
.8333

.1667

Figure 2.6
Probability tree for dependent events

Chapter 2 - Probability and Statistics 23

Statistical Independence and Dependence
Math Formulation of Conditional Probabilities
Given two dependent events A and B:
P(AB) = P(AB)/P(B)
With data from previous example:
P(RH) = P(RH)  P(H) = (.33)(.5) = .165
P(WH) = P(WH)  P(H) = (.67)(.5) = .335
P(RT) = P(RT)  P(T) = (.83)(.5) = .415
P(WT) = P(WT)  P(T) = (.17)(.5) = .085

Chapter 2 - Probability and Statistics 24

Statistical Independence and Dependence
Summary of Example Problem Probabilities

Figure 2.7
Probability Tree with Marginal, Conditional, and Joint Probabilities

Chapter 2 - Probability and Statistics 25

Statistical Independence and Dependence
Summary of Example Problem Probabilities

Table 2.1
Joint Probability Table

Chapter 2 - Probability and Statistics 26

Statistical Independence and Dependence
Bayesian Analysis
In Bayesian analysis, additional information is used to alter
the marginal probability of the occurrence of an event.
A posterior probability is the altered marginal probability of
an event based on additional information.
Bayes’ Rule for two events, A and B, and third event, C,
conditionally dependent on A and B:
P(C A)P(A)
P(A C) =
P(C A)P(A) + P(CB)P(B)

It simplifies to P(A|C) = P(AC)/[P(CA)+P(CB)] = P(AC)/P(C), which is simpler to calculate,

if the joint probability P(AC) and the marginal probability P(C) are both already known.

Chapter 2 - Probability and Statistics 27

Statistical Independence and Dependence
Bayesian Analysis – Example (1 of 2)
Machine setup; if correct 10% chance of defective part; if
incorrect, 40%.
50% chance setup will be correct or incorrect.
What is probability that machine setup is incorrect if sample
part is defective?
Solution: P(C) = .50, P(IC) = .50 -- marginal;
P(D|C) = .10, P(D|IC) = .40 -- conditional;
where C = correct, IC = incorrect, D = defective

Chapter 2 - Probability and Statistics 28

Statistical Independence and Dependence
Bayesian Analysis – Example (2 of 2)
Posterior probabilities:
P(DIC)P(IC)
P(ICD) =
P(DIC)P(IC) + P(DC)P(C)

= (.40)(.50)
(.40)(.50) + (.10)(.50)
=.80

Chapter 2 - Probability and Statistics 29

Expected Value
Random Variables
When the values of variables occur in no particular order or
sequence, the variables are referred to as random
variables.
Random variables are represented symbolically by a letter
x, y, z, etc.
Although exact values of random variables are not known
prior to events, it is possible to assign a probability to the
occurrence of possible values.

Chapter 2 - Probability and Statistics 30

Expected Value
Example (1 of 4)
Machines break down 0, 1, 2, 3, or 4 times per month.
Relative frequency of breakdowns , or a probability
distribution:

Random Variable x
(Number of Breakdowns) P(x)
0 .10
1 .20
2 .30
3 .25
4 .15
1.00

Chapter 2 - Probability and Statistics 31

Expected Value
Example (2 of 4)
The expected value of a random variable is computed by
multiplying each possible value of the variable by its
probability and summing these products.
The expected value is the weighted average, or mean, of
the probability distribution of the random variable.
Expected value of number of breakdowns per month:
E(x) = (0)(.10) + (1)(.20) + (2)(.30) + (3)(.25) + (4)(.15)
= 0 + .20 + .60 + .75 + .60
= 2.15 breakdowns
the weights = the probabilities
a weighted average

Chapter 2 - Probability and Statistics 32

Expected Value
Example (3 of 4)
Variance is a measure of the dispersion of random variable
values about the mean.
Variance computed as follows:
Square the difference between each value and the expected value.
Multiply resulting amounts by the probability of each value.
Sum the values compiled in step 2.

General formula:
2 = i {[xi - E(xi)]2 ⋅ P(xi)}

Chapter 2 - Probability and Statistics 33

Expected Value
Example (4 of 4)
Standard deviation computed by taking the square root of
the variance.
For example data:
xi P(xi) xi - E(x) [xi - E(xi)]2 [xi - E(x)]2 P(xi)
0 .10 -2.15 4.62 .462
1 .20 -1.15 1.32 .264
2 .30 -0.15 0.02 .006
3 .25 0.85 0.72 .180
4 .15 1.85 3.42 .513
1.00 1.425

2 = 1.425 breakdowns per month

standard deviation =  = sqrt(1.425)
= 1.19 breakdowns per month
Chapter 2 - Probability and Statistics 34
The Normal Distribution
Continuous Random Variables
A continuous random variable can take on an infinite
number of values within some interval.
Continuous random variables have values that are not
specifically countable and are often fractional.
Cannot assign a unique probability to each value of a
continuous random variable.
In a continuous probability distribution the probability refers
to a value of the random variable being within some range.

Chapter 2 - Probability and Statistics 35

The Normal Distribution
Definition
The normal distribution is a continuous probability
distribution that is symmetrical on both sides of the mean.
The center of a normal distribution is its mean .
The area under the normal curve represents probability,
and total area under the curve sums to one.

Figure 2.8
The Normal Curve

Chapter 2 - Probability and Statistics 36

The Normal Distribution
Example (1 of 5)
Mean weekly carpet sales of 4,200 yards, with standard
deviation of 1,400 yards.
What is probability of sales exceeding 6,000 yards?
 = 4,200 yd;  = 1,400 yd; probability that number of yards
of carpet will be equal to or greater than 6,000 expressed
as: P(x6,000).

Chapter 2 - Probability and Statistics 37

The Normal Distribution
Example (2 of 5)

Figure 2.9
The Normal Distribution for Carpet Demand

Chapter 2 - Probability and Statistics 38

 The Normal Distribution
Standard Normal Curve (1 of 2)
The area or probability under a normal curve is measured
by determining the number of standard deviations the value
of a random variable x is from the mean.
Number of standard deviations a value is from the mean
designated as Z.
Z = (x - )/

Chapter 2 - Probability and Statistics 39

The Normal Distribution
Standard Normal Curve (2 of 2)

Figure 2.10
The Standard Normal Distribution
Chapter 2 - Probability and Statistics 40
The Normal Distribution
Example (3 of 5)
Z = (x - )/  = (6,000 - 4,200)/1,400
= 1.29 standard deviations
P(x 6,000) = .5000 - .4015 = .0985

Figure 2.11
Determination of the Z Value

Chapter 2 - Probability and Statistics 41

The Normal Distribution
Example (4 of 5)
Determine probability that demand will be 5,000 yards or
less.
Z = (x - )/ = (5,000 - 4,200)/1,400 = .57 standard deviations
P(x 5,000) = .5000 + .2157 = .7157

Figure 2.12
Normal distribution for
P(x  5,000 yards)

Chapter 2 - Probability and Statistics 42

The Normal Distribution
Example (5 of 5)
Determine probability that demand will be between 3,000
yards and 5,000 yards.
Z = (3,000 - 4,200)/1,400 = -1,200/1,400 = -.86
P(3,000  x  5,000) = .2157 + .3051= .5208

Figure 2.13
Normal Distribution with
P(3,000 yards  x  5,000
yards)

Chapter 2 - Probability and Statistics 43

The Normal Distribution
Sample Mean and Variance
The population mean and variance are for the entire set of
data being analyzed.
The sample mean and variance are derived from a subset
of the population data and are used to make inferences
about the population.

Chapter 2 - Probability and Statistics 44

The Normal Distribution
Computing the Sample Mean and Variance

n
∑ xi
Sample mean =x = i =n1
n
∑ (x - x)2
2 i=1 i
Sample variance = σ =
n-1

Sample standard deviation = σ = σ 2

Chapter 2 - Probability and Statistics 45

The Normal Distribution
Example Problem Re-Done
Sample mean = 42,000/10 = 4,200 yd
Sample variance = [(190,060,000) - (1,764,000,000/10)]/9
= 1,517,777
Week Demand
Sample std. dev. = sqrt(1,517,777) i xi
1 2,900
= 1,232 yd 2 5,400
3 3,100
4 4,700
5 3,800
6 4,300
7 6,800
8 2,900
9 3,600
10 4,500
42,000

Chapter 2 - Probability and Statistics 46

The Normal Distribution
Chi-Square Test for Normality (1 of 2)
It can never be simply assumed that data are normally
distributed.
A statistical test must be performed to determine the exact
distribution.
The Chi-square test is used to determine if a set of data fit a
particular distribution.
It compares an observed frequency distribution with a
theoretical frequency distribution that would be expected to
occur if the data followed a particular distribution (testing
the goodness-of-fit).

Chapter 2 - Probability and Statistics 47

The Normal Distribution
Chi-Square Test for Normality (2 of 2)
In the test, the actual number of frequencies in each range
of frequency distribution is compared to the theoretical
frequencies that should occur in each range if the data
follow a particular distribution.
A Chi-square statistic is then calculated and compared to a
number, called a critical value, from a chi-square table.
If the test statistic is greater than the critical value, the
distribution does not follow the distribution being tested; if it
is less, the distribution does exist.
Chi-square test is a form of hypothesis testing.

Chapter 2 - Probability and Statistics 48

The Normal Distribution
Example of Chi-Square Test (1 of 6)
Assume sample mean = 4,200 yards, and sample standard
deviation =1,232 yards.

Range, Frequency
Weekly Demand (yds) (weeks)
0 – 1,000 2
1,000 – 2,000 5
2,000 – 3,000 22
3,000 – 4,000 50
4,000 – 5,000 62
5,000 – 6,000 40
6,000 – 7,000 15
7,000 – 8,000 3
8,000 + 1
-----
200

Chapter 2 - Probability and Statistics 49

The Normal Distribution
Example of Chi-Square Test (2 of 6)

Figure 2.14
The Theoretical Normal Distribution

Chapter 2 - Probability and Statistics 50

The Normal Distribution
Example of Chi-Square Test (3 of 6)

(1,000–4,200)/1,232 = –2.60

= 2 events
= 5 events

= 15 events
= 3 events
= 1 event

Table 2.2 Must combine for ≥ 5 events

The Determination of the Theoretical Range Frequencies

Chapter 2 - Probability and Statistics 51

The Normal Distribution
Example of Chi-Square Test (4 of 6)
Comparing theoretical frequencies with actual frequencies:
2k-p-1 = (fo - ft)2/10
where: fo = observed frequency
ft = theoretical frequency
k = the number of classes,
p = the number of estimated parameters
k-p-1 = degrees of freedom.

Chapter 2 - Probability and Statistics 52

The Normal Distribution
Example of Chi-Square Test (5 of 6)

Table 2.3
k = 6 classes of events Computation of 2 Test Statistic

p = 2 parameters ( μ & σ )

Chapter 2 - Probability and Statistics 53

The Normal Distribution
Example of Chi-Square Test (6 of 6)
2k-p-1 = (fo - ft)2/10 = 2.588
k – p –1 = 6 – 2 – 1 = 3 degrees of freedom,
with level of significance (deg of confidence) of .05 ( = .05).
from Table A.2, 2.05,3 = 7.815; because 7.815 > 2.588,
accept hypothesis that distribution is normal.

Chapter 2 - Probability and Statistics 54

Statistical Analysis with Excel (1 of 3)

Exhibit 2.1

Chapter 2 - Probability and Statistics 55

Statistical Analysis with Excel (2 of 3)

Exhibit 2.2

Chapter 2 - Probability and Statistics 56

Statistical Analysis with Excel (3 of 3)

Exhibit 2.3

Chapter 2 - Probability and Statistics 57

Example Problem Solution
Data
Radcliff Chemical Company and Arsenal.
Annual number of accidents normally distributed with mean
of 8.3 and standard deviation of 1.8 accidents.
What is the probability that the company will have
fewer than five accidents next year? More than ten?
The government will fine the company $200,000 if
the number of accidents exceeds 12 in a one-year
period. What average annual fine can the
company expect?

Chapter 2 - Probability and Statistics 58

Example Problem Solution
Solution (1 of 3)
Step 1.
Set up the Normal Distribution.

Chapter 2 - Probability and Statistics 59

Example Problem Solution
Solution (2 of 3)
Step 2.
Solve Part A: P(x  5 accidents) and P(x  10 accidents).
Z = (x - )/ = (5 - 8.3)/1.8 = -1.83. From Table A.1, Z = -1.83
corresponds to probability of .4664, and
P(x  5) = .5000 - .4664 = .0336
Z = (10 - 8.3)/1.8 = .94. From Table A.1, Z = .94 corresponds
to probability of .3264 and
P(x  10) = .5000 - .3264 = .1736

Chapter 2 - Probability and Statistics 60

Example Problem Solution
Solution (3 of 3)
Step 3.
Solve Part B: P(x  12 accidents): Z = 2.06, corresponding
to probability of .4803.
P(x  12) = .5000 - .4803 = .0197, expected annual fine
= $200,000(.0197) = $3,940

Chapter 2 - Probability and Statistics 61

Chapter 2 - Probability and Statistics 62