Course: Business Statistics Author: Anil Kumar

Course Code: MC-106 Vetter: Dr. Karam Pal

Lesson: 08
PROBABILITY THEORY

Objectives : The present lesson is an attempt to overview the concept of

probability, thereby enabling the students to appreciate the
relevance of probability theory in decision-making under
conditions of uncertainty. After successful completion of the lesson
the students will be able to understand and use the different
approaches to probability as well as different probability rules for
calculating probabilities in different situations.
Structure
8.1 Introduction
8.2 Some Basic Concepts
8.3 Approaches to Probability Theory
8.4 Probability Rules
8.5 Bayes’ Theorem
8.6 Some Counting Concepts
8.7 Self-Assessment Questions
8.8 Suggested Readings

8.1 INTRODUCTION
Life is full of uncertainties. ‘Probably’, ‘likely’, ‘possibly’, ‘chance’ etc. is some of the most

commonly used terms in our day-to-day conversation. All these terms more or less convey

the same sense - “the situation under consideration is uncertain and commenting on the

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 future with certainty is impossible”. Decision-making in such areas is facilitated through

formal and precise expressions for the uncertainties involved. For example, product demand

is uncertain but study of demand spelled out in a form amenable for analysis may go a long to

help analyze, and facilitate decisions on sales planning and inventory management.

Intuitively, we see that if there is a high chance of a high demand in the coming year, we may

decide to stock more. We may also take some decisions regarding the price increase, reducing

sales expenses etc. to manage the demand. However, in order to make such decisions, we

need to quantify the chances of different quantities of demand in the coming year. Probability

theory provides us with the ways and means to quantify the uncertainties involved in such

situations.

A probability is a quantitative measure of uncertainty - a number that

conveys the strength of our belief in the occurrence of an uncertain event.

Since uncertainty is an integral part of human life, people have always been interested -

consciously or unconsciously - in evaluating probabilities.

Having its origin associated with gamblers, the theory of probability today is an indispensable

tool in the analysis of situations involving uncertainty. It forms the basis for inferential

statistics as well as for other fields that require quantitative assessments of chance

occurrences, such as quality control, management decision analysis, and almost all areas in

physics, biology, engineering and economics or social life.

8.2 SOME BASIC CONCEPTS

Probability, in common parlance, refers to the chance of occurrence of an event or happening.

In order that we are able to compute it, a proper understanding of certain basic concepts in

probability theory is required. These concepts are an experiment, a sample space, and an

event.

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8.2.1 EXPERIMENT
An experiment is a process that leads to one of several possible outcomes. An

outcome of an experiment is some observation or measurement.

The term experiment is used in probability theory in a much broader sense than in physics or

chemistry. Any action, whether it is the drawing a card out of a deck of 52 cards, or reading

the temperature, or measurement of a product's dimension to ascertain quality, or the

launching of a new product in the market, constitute an experiment in the probability theory

terminology.

The experiments in probability theory have three things in common:

¾ there are two or more outcomes of each experiment

¾ it is possible to specify the outcomes in advance
¾ there is uncertainty about the outcomes

For example, the product we are measuring may turn out to be undersize or right size or

oversize, and we are not certain which way it will be when we measure it. Similarly,

launching a new product involves uncertain outcome of meeting with a success or failure in

the market.

A single outcome of an experiment is called a basic outcome or an elementary event. Any

particular card drawn from a deck is a basic outcome.

8.2.2 SAMPLE SPACE

The sample space is the universal set S pertinent to a given experiment. It is

the set of all possible outcomes of an experiment.

So each outcome is visualized as a sample point in the sample space. The sample spaces for

the above experiments are:

Experiment Sample Space

Drawing a Card {all 52 cards in the deck}
Reading the Temperature {all numbers in the range of temperatures}
Measurement of a Product's Dimension {undersize, outsize, right size}

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 Launching of a New Product {success, failure}

8.2.3 EVENT
An event, in probability theory, constitutes one or more possible outcomes of an experiment.

An event is a subset of a sample space. It is a set of basic outcomes. We say

that the event occurs if the experiment gives rise to a basic outcome belonging

to the event.

For the experiment of drawing a card, we may obtain different events A, B, and C like:

A : The event that card drawn is king of club

B : The event that card drawn is red

C : The event that card drawn is ace

In the first case, out of the 52 sample points that constitute the sample space, only one sample

point or outcome defines the event, whereas the number of outcomes used in the second and

third case is 13 and 4 respectively.

8.3 APPROACHES TO PROBABILITY THEORY

Three different approaches to the definition and interpretation of probability have evolved,

mainly to cater to the three different types of situations under which probability measures are

normally required. We will study these approaches with the help of examples of distinct types

of experiments.

Consider the following situations marked by three distinct types of experiments. The events

that we are interested in, within these experiments, are also given.

Situation I
Experiment : Drawing a Card Out of a Deck of 52 Cards
Event A : On any draw, a king is there
Situation II
Experiment : Administering a Taste Test for a New Soup
Event B : A consumer likes the taste
Situation III

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Experiment : Commissioning a Solar Power Plant
Event C : The plant turns out to be a successful venture

Situation I : THE CLASSICAL APPROACH

The first situation is characterized by the fact that for a given experiment we have a sample

space with equally likely basic outcomes. When a card is drawn out of a well-shuffled deck,

every one of the cards (the basic outcomes) is as likely to occur as any other. This type of

situations, marked by the presence of "equally likely" outcomes, gave rise to the Classical

Approach to the probability theory. In the Classical Approach, probability of an event is

defined as the relative size of the event with respect to the size of the sample space. Since

there are 4 kings and there are 52 cards, the size of A is 4 and the size of the sample space is

52. Therefore, the probability of A is equal to 4/52.

The rule we use in computing probabilities, assuming equal likelihood of all basic outcomes,

is as follows:

Probability of the event A:

n( A)
P(A) = …………(8-1)
N (S )

where n(A) = the number of outcomes favorable to the event A

n(S) = total number of outcomes

Situation II : THE RELATIVE FREQUENCY APPROACH

If we try to apply the classical definition of probability in the second experiment, we find that

we cannot say that consumers will equally like the taste of the soup. Moreover, we do not

know as to how many persons have been tested. This implies that we should have the past

data on people who were administered the soup and the number that liked the taste. In the

absence of past data, we have to undertake an experiment, where we administer the taste test

on a group of people to check its effect.

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The Relative Frequency Approach is used to compute probability in such cases. As per this

approach, the probability of occurrence of an event is given by the observed relative

frequency of an event in a very large number of trials. In other words, the probability of

occurrence of an event is the ratio of the number of times the event occurs to the total number

of trials. The probability of the event B:

n
P(B) = …………(8-2)
N

Where n = the number of times the event occurs

N = total number of trials

It is appreciated in this approach that, in order to take such a measure, we should have the

soup tested for a large number of people. In other words, the total number of trials in the

experiment should be very large.

Situation III : THE SUBJECTIVE APPROACH

The third situation seems apparently similar to the second one. We may be tempted here to

apply the Relative Frequency Approach. We may calculate the probability of the event that

the venture is a success as the ratio of number of successful ventures to the total number of

such ventures undertaken i.e. the relative frequency of successes will be a measure of the

probability.

However, the calculation here presupposes that either

(a) it is possible to do an experiment with such ventures, or

(b) that past data on such ventures will be available

In practice, a solar power plant being a relatively new development involving the latest

technology, past experiences are not available. Experimentation is also ruled out because of

high cost and time involved, unlike the taste testing situation. In such cases, the only way out

is the Subjective Approach to probability. In this approach, we try to assess the probability

from our own experiences. We may bring in any information to assess this. In the situation

261
cited, we may, perhaps, look into the performance of the commissioning authority in other

new and related technologies.

Therefore the Subjective Approach involves personal judgment, information, intuition, and

other subjective evaluation criteria. A physician assessing the probability of a patient's

recovery and an expert assessing the probability of success of a merger offer are both making

a personal judgment based upon what they know and feel about the situation. The area of

subjective probability - which is relatively new, having been first developed in the 1930s - is

somewhat controversial. One person's subjective probability may very well be different from

another person's subjective probability of the same event. We may note here that since the

assessment is a purely subjective one, it will vary from person to person and, therefore,

subjective probability is also called Personal Probability.

8.3.1 Three Approaches – A Comparative View

As already noted, the different approaches have evolved to cater to different kinds of

situations. So these approaches are not contradictory to one another. In fact, these

complement each other in the sense that where one fails, the other becomes applicable. These

are identical inasmuch as probability is defined as a ratio or a weight assigned to the

occurrence of an event. However, in contrast to the Subjective measure of the third approach,

the first two approaches - Classical and Relative Frequency - provide an objective measure

of probability in the sense that no personal judgment is involved.

We can bring out the commonality between the Classical Approach and the Relative

Frequency Approach with the help of an example. Let us assume that we are interested in

finding out the chances of getting a head in the toss of a coin. By now, you would have come

up with the answer by the Classical Approach, using the argument, that there are two

outcomes, heads and tails, which are equally likely. Hence, given that a head can occur only

once, the probability is ½ : Consider the following alternative line of argument, where the

262
probability can be estimated using the Relative Frequency Approach. If we toss the coin for a

sufficiently large number of times and note down the number of times the head occurs, the

proportion of times that a head occurs will give us the required probability.

Figure 8-1 P(H) = n/N→1/2 as N→α

Thus, given our definition of the approaches, we find both the arguments to be valid. This

brings out, in a way, the commonality between the Relative Frequency and the Classical

Approach. The difference, however, is that the probability computed by using the Relative

Frequency Approach will be tending to be ½ with a large number of trials; moreover an

experiment is necessary in this case. In comparison, in the Classical Approach, we know

apriori that the chances are ½ , based on our assumption of "equally likely" outcomes.

Example 8-1

A fair coin is tossed twice. Find the probabilities of the following events:

(a) A, getting two heads

(b) B, getting one head and one tail

(c) C, getting at least one head or one tail

(d) D, getting four heads

Solution: Being a Two-Trial Coin Tossing Experiment, it gives rise to the following On = 2n

= 4, possible equally likely outcomes:

HH HT TH TT

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Thus, for the sample space N(S) = 4

We can use the Classical Approach to find out the required probabilities.

(a) For the event A, the number of favourable cases are:

n(A) = 1 { HH }

So the required probability

n( A)
P(A) =
N (S )

1
=
4

(b) For the event B, the number of favourable cases are:

n(B) = 2 { HT, TH }

So the required probability

n(B )
P(B) =
N (S )

2
=
4

1
=
2

(c) For the event C, the number of favourable cases are:

n(C) = 4 { HH, HT, TH, TT }

So the required probability

n( A)
P(C) =
N (S )

4
=
4

=1

(d) For the event D, the number of favourable cases are:

n(D) = 0

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 So the required probability

n(D )
P(D) =
N (S )

0
=
4

=0

It may be noted that the occurrence of C is certainty, whereas D is an impossible event.

Example 8-2

A newspaper boy wants to find out the chances that on any day he will be able to sell more

than 90 copies of The Times of India. From his dairy where he recorded the daily sales of the

last year, he finds out that out of 365 days, on 75 days he had sold 80 copies, on 144 days he

had sold 85 copies, on 62 days he had sold 95 copies and on 84 days he had sold 100 copies

of The Times of India. Find out the required probability for the newspaper boy.

Solution: Taking the Relative Frequency Approach, we find:

Sales(Event) No. of Days (Frequency) Relative Frequency

80 75 75/365
85 144 144/365
95 62 62/365
100 84 84/365

Thus, the number of days when his sales were more than 90 = (62 + 84) days = 146 days

So the required probability

n
P(Sales > 90) =
N

146
=
365

= 0.4

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8.3.2 Probability Axioms
All the three approaches to probability theory share the same basic axioms. These axioms are

fundamental to probability theory and provide us with unified approach to probability.

The axioms are:

(a) The probability of an event A, written as P(A), must be a number between zero
and one, both values inclusive. Thus
0 ≤ P(A) ≤ 1 …………(8-3)

(b) The probability of occurrence of one or the other of all possible events is equal
to one. As S denotes the sample space or the set of all possible events, we
write
P(S) = 1. …………(8-4)

Thus in tossing a coin once; P(a head or a tail) = 1.

(c) If two events are such that occurrence of one implies that the other cannot
occur, then the probability that either one or the other will occur is equal to the
sum of their individual probabilities. Thus, in a coin-tossing situation, the
occurrence of a head rules out the possibility of occurrence of tail. These
events are called mutually exclusive events. In such cases then, if A and B are
the two events respectively, then
P (A or B) = P (A) + P (B)
i.e. P(Head or Tail) = P (Head) + P (Tail)
It follows from the last two axioms that if two mutually exclusive events form the sample

space of the experiment, then

P(A or B) = P(A) + P(B) = 1; thus P (Head) + P (Tail) = 1

If two or more events together define the total sample space, the events are said to be

collectively exhaustive.

Given the above axioms, we may now define probability as a function, which assigns

probability value P to each sample point of an experiment abiding by the above axioms.

Thus, the axioms themselves define probability.

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8.3.3 Interpretation of a Probability
From our discussion so far, we can give a general definition of probability:

Probability is a measure of uncertainty. The probability of event A is a

quantitative measure of the likelihood of the event's occurring.

We have also seen that 0 and 1, both values inclusive, sets the range of values that the proba-

bility measure may take. In other words 0 ≤ P(A) ≤ 1

When an event cannot occur (impossible event), its probability is zero. The probability of the

empty set is zero: P(Φ) = 0. In a deck where half the cards are red and half are black, the

probability of drawing a green card is zero because the set corresponding to that event is the

empty set: there are no green cards.

Events that are certain to occur have probability 1.00. The probability of the entire sample

space S is equal to 1.00: P(S) = 1.00. If we draw a card out of a deck, 1 of the 52 cards in the

deck will certainly be drawn, and so the probability of the sample space, the set of all 52

cards, is equal to 1.00.

Within the range of values 0 to 1, the greater the probability, the more confidence we have in

the occurrence of the event in question. A probability of 0.95 implies a very high confidence

in the occurrence of the event. A probability of 0.80 implies a high confidence. When the

probability is 0.5, the event is as likely to occur as it is not to occur. When the probability is

0.2, the event is not very likely to occur. When we assign a probability of 0.05, we believe

the event is unlikely to occur, and so on. Figure 8-2 is an informal aid in interpreting

probability.

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 Figure 8-2 Interpretation of a Probability

Note that probability is a measure that goes from 0 to 1. In everyday conversation we often

describe probability in less formal terms. For example, people sometimes talk about odds. If

the odds are 1 to 1, the probability is 1 1 ; if the odds are 1 to 2, the probability is
i .e .
1 + 1 2

1 1 ; and so on. Also, people sometimes say, "The probability is 80 percent."

i .e .
1 + 2 3

Mathematically, this probability is 0.80.

8.4 PROBABILITY RULES

We have seen how to compute probabilities in certain situations. The nature of the events

were relatively simple, so that direct application of the definition of probability could be used

for computation. Quite often, we are interested in the probability of occurrence of more

complex events. Consider for example, that you want to find the probability that a king or a

club will occur in a draw from a deck of 52 cards. Similarly, on examining couples with two

children, if one child is known as a boy, you may be interested in the probability of the event

of both the children being boys. These two situations, we find, are not as simple as those

discussed in the earlier section. As a sequel to the theoretical development in the field of

probability, certain results are available which help us in computing probabilities in such

situations. Now we will explore these results through examples.

8.4.1 THE UNION RULE

A very important rule in probability theory, the Rule of Unions (also called Addition

Theorem) allows us to write the probability of the union of two events in terms of the

probabilities of the two events and the probability of their intersection.

Consider two events A and B defined over the sample space S, as shone in Figure 8-3

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 Figure 8-3 Two Overlapping Events A and B

We may define

n( A ∪ B )
P(A ∪ B) =
N (S )

n( A) + n(B ) − n( A ∩ B )
=
N (S )

n( A) n(B ) n( A ∩ B )
= + −
N (S ) N (S ) N (S )

= P ( A) + P (B ) − P ( A ∩ B )

Thus, the rule of unions is:

P ( A ∪ B ) = P ( A) + P (B ) − P ( A ∩ B ) …………(8-5)

The probability of the intersection of two events P ( A ∩ B ) is called their joint probability.

The meaning of this rule is very simple and intuitive: When we add the probabilities of A and

B, we are measuring, or counting, the probability of their intersection twice—once when

measuring the relative size of A within the sample space and once when doing this with B.

Since the relative size, or probability, of the intersection of the two sets is counted twice, we

subtract it once so that we are left with the true probability of the union of the two events.

The rule of unions is especially useful when we do not have the sample space for the union of

events but do have the separate probabilities.

Example 8-3

A card is drawn from a well-shuffled pack of playing cards. Find the probability that the card

drawn is either a club or a king.

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Solution: Let A be the event that a club is drawn and B the event that a king is drawn. Then,

P ( A ∪ B ) = P ( A) + P (B ) − P ( A ∩ B )

= 13/52 + 4/52 – 1/52

= 16/52

= 4/13

Example 8-4

Suppose your chance of being offered a certain job is 0.45, your probability of getting

another job is 0.55, and your probability of being offered both jobs is 0.30. What is the

probability that you will be offered at least one of the two jobs?

Solution: Let A be the event that the first job is offered and B the event that the second job is

offered. Then,

P ( A ) = 0 . 45 P ( B ) = 0 . 55 and P ( A ∩ B ) = 0 . 30

So, the required probability is given as:

P ( A ∪ B ) = P ( A) + P (B ) − P ( A ∩ B )

= 0.45 + 0.55 – 0.30

= 0.70

Mutually Exclusive Events

When the sets corresponding to two events are disjoint (i.e., have no intersection), the two

events are called mutually exclusive (see Figure 8-4).

Figure 8-4 Two Mutually Exclusive Events A and B

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For mutually exclusive events, the probability of the intersection of the events is zero. This is

so because the intersection of the events is the empty set, and we know that the probability of

the empty set is zero.

For mutually exclusive events A and B:

P(A ∩ B) = 0 …………(8.6)

This fact gives us a special rule for unions of mutually exclusive events. Since the probability

of the intersection of the two events is zero, there is no need to subtract P ( A ∩ B ) when

the probability of the union of the two events is computed. Therefore,

For mutually exclusive events A and B:

P ( A ∪ B ) = P ( A) + P (B ) …………(8.7)

This is not really a new rule since we can always use the rule of unions for the union of two

events: If the events happen to be mutually exclusive, we subtract zero as the probability of

the intersection.

Example 8-5

A card is drawn from a well-shuffled pack of playing cards. Find the probability that the card

drawn is either a king or a queen.

Solution: Let A be the event that a king is drawn and B the event that a queen is drawn. Since

A and B are two mutually exclusive events, we have,

P ( A ∪ B ) = P ( A) + P (B )

= 4/52 + 4/52

= 8/52

= 2/13

We can extend the Rule of Unions to three (or more) events. Let A, B, and C be the three

events defined over the sample space S, as shown in Figure 8-5

Then, the Rule of Unions is

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P(A ∪ B ∪ C ) =

P ( A ) + P ( B ) + P (C ) − P ( A ∩ B ) − P ( B ∩ C ) − P ( A ∩ C ) + P ( A ∩ B ∩ C )
…………(8.8)

Figure 8-5 Three Overlapping Events A, B and C

When the three events are mutually exclusive (see Figure 8-6), the Rule of Unions is

P ( A ∪ B ∪ C ) = P ( A ) + P ( B ) + P (C ) …………(8.9)

Figure 8-6 Three Mutually Exclusive Events A, B and C

Example 8-6

A card is drawn from a well-shuffled pack of playing cards. Find the probability that the card

drawn is

(a) either a heart or an honour or king

(b) either an ace or a king or a queen

Solution: (a) Let A be the event that a heart is drawn, B the event that an honour is drawn

and C the event that a king is drawn. So we have

n(A) = 13 n(B) = 20 n(C) = 4

n( A ∩ B ) = 5 n(B ∩ C ) = 4 n( A ∩ C ) = 1

and n( A ∩ B ∩ C ) = 1

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The required probability (using Eq. (8.8) is

P ( A ∪ B ∪ C ) = 13/52 + 20/52 + 4/52 – 5/52 – 4/52 – 1/52 +1/52

= 28/52

= 7/13

(b) Let A be the event that an ace is drawn, B the event that a king is drawn and C the

event that a queen is drawn. So we have

n(A) = 4 n(B) = 4 n(C) = 4

Since A, B and C are mutually exclusive events, the required probability (using Eq. (8.9) is

P ( A ∪ B ∪ C ) = 4/52 + 4/52 + 4/52

= 12/52

= 3/13

8.4.2 THE COMPLEMENT RULE

The Rule of Complements defines the probability of the complement of an event in terms of

the probability of the original event. Consider event A defined over the sample space S. The

complement of set A, denoted by A , is a subset, which contains all outcomes, which do not

belong to A (see Figure 8-7).

Figure 8-7 Complement of an Event

In other words A+ A =S

so P(A + A ) = P(S)

or P(A) + P( A ) = 1

or P( A ) = 1 - P(A) …………(8.10)

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 Eq. (8.10) is our Rule of Complements. As a simple example, if the probability of rain

tomorrow is 0.3, then the probability of no rain tomorrow must be 1 - 0.3 = 0.7. If the

probability of drawing a king is 4/52, then the probability of the drawn card's not being a

king is 1 - 4/52 = 48/52.

Example 8-7

Find the probability of the event of getting a total of less than 12 in the experiment of

throwing a die twice.

Solution: Let A be the event of getting a total 12.

Then we have,

A = {6,6} and P(A) = 1/36

The event of getting a total of less than 12 is the complement of A, so the required probability

is

P( A ) = 1 - P(A)

P( A ) = 1 – 1/36

P( A ) = 35/36

8.4.3 THE CONDITIONAL PROBABILITY RULE

As a measure of uncertainty, probability depends on information. We often face situations

where the probability of an event A is influenced by the information that another event B has

occurred. Thus, the probability we would give the event "Xerox stock price will go up

tomorrow" depends on what we know about the company and its performance; the

probability is conditional upon our information set. If we know much about the company, we

may assign a different probability to the event than if we know little about the company. We

may define the probability of event A conditional upon the occurrence of event B. In this

example, event A may be the event that the stock will go up tomorrow, and event B may be a

favorable quarterly report.

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Consider two events A and B defined over the sample space S, as shown in Figure 8-8

Figure 8-8 Conditional Probability of Event A

Thus, the probability of event A given the occurrence of event B is

n( A ∩ B )
P(A / B) =
n(B)

n( A ∩ B )
P(A / B) = N
n(B)
N

P(A ∩ B)
P(A / B) = …………(8.11)
P(B)

The vertical line in P ( A / B ) is read given, or conditional upon.

Therefore, the probability of event A given the occurrence of event B is defined as the

probability of the intersection of A and B, divided by the probability of event B.

Example 8-8

For an experiment of throwing a die twice, find the probability:

(a) of the event of getting a total of 9, given that the die has shown up points between

4 and 6 (both inclusive)

(b) of the event of getting points between 4 and 6 (both inclusive), given that a total

of 9 has already been obtained

Solution: Let getting a total 9 be the event A and the die showing points between 4 and 6

(both inclusive) be the event B

Thus, N(S) = 36 and A = {(3,6) (4,5) (5,4) (6,3)}

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B = {(4,4) (4,5) (4,6) (5,4) (5,5) (5,6) (6,4) (6,5) (6,6)}

and P ( A ∩ B ) = {(4,5) (5,4)}

So n(A) = 4 n(B) = 9 n( A ∩ B ) = 2

So the required probabilities are

P(A ∩ B)
(a) P(A / B) =
P(B)

2 / 36
P(A / B) =
9 / 36

2
P(A / B) =
9

P (B ∩ A)
(b) P (B / A) =
P ( A)

2 / 36
P (B / A) =
4 / 36

1
P (B / A) =
2

8.4.4 THE PRODUCT RULE

The Product Rule (also called Multiplication Theorem) allows us to write the probability of

the simultaneous occurrence of two (or more) events.

In the conditional probability rules

P(A ∩ B)
P(A / B) =
P(B)

P (B ∩ A)
and P (B / A) =
P ( A)

A ∩ B or B ∩ A is the event A and B occur simultaneously. So rearranging the

conditional probability rules, we have our Product Rule

P ( A ∩ B ) = P ( A / B ). P ( B )

and P ( A ∩ B ) = P ( B / A ). P ( A ) …………(8.12)

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The Product Rule states that the probability that both A and B will occur simultaneously is

equal to the probability that B (or A) will occur multiplied by the conditional probability that

A (or B) will occur, when it is known that B (or A) is certain to occur or has already

occurred.

Example 8-9

A box contains 10 balls out of which 2 are green, 5 are red and 3 are black. If two balls are

drawn at random, one after the other without replacement, from the box. Find the

probabilities that:

(a) both the balls are of green color

(b) both the balls are of black color

(c) both the balls are of red color

(d) the first ball is red and the second one is black

(e) the first ball is green and the second one is red

Solution: (a) P ( G 1 ∩ G 2 ) = P ( G 2 / G 1 ). P ( G 1 )
1 2
= x
9 10
1
=
45

(b) P ( B 1 ∩ B 2 ) = P ( B 2 / B 1 ). P ( B 1 )

2 3
= x
9 10
1
=
15

(c) P ( R 1 ∩ R 2 ) = P ( R 2 / R 1 ). P ( R 1 )

4 5
= x
9 10
2
=
9

(d) P ( R 1 ∩ B 2 ) = P ( B 2 / R 1 ). P ( R 1 )

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 3 5
= x
9 10
1
=
6

(e) P ( G 1 ∩ R 2 ) = P ( R 2 / G 1 ). P ( G 1 )

5 2
= x
9 10
1
=
9

Example 8-10

A consulting firm is bidding for two jobs, one with each of two large multinational

corporations. The company executives estimate that the probability of obtaining the

consulting job with firm A, event A, is 0.45. The executives also feel that if the company

should get the job with firm A, then there is a 0.90 probability that firm B will also give the

company the consulting job. What are the company's chances of getting both jobs?

Solution: We are given P(A) = 0.45. We also know that P(B / A) = 0.90, and we are looking

for P ( A ∩ B ) , which is the probability that both A and B will occur.

So P ( A ∩ B ) = P ( B / A ). P ( A )

P ( A ∩ B ) = 0 . 90 x 0 . 45
= 0 . 405

Independent Events
Two events are said to be independent of each other if the occurrence or non-occurrence of

one event in any trial does not affect the occurrence of the other event in any trial. Events A

and B are independent of each other if and only if the following three conditions hold:

Conditions for the independence of two events A and B:

P ( A / B ) = P ( A) …………(8.13a)

P (B / A) = P (B ) …………(8.13b)

and P ( A ∩ B ) = P ( A ). P ( B ) …………(8.14)

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The first two equations have a clear, intuitive appeal. The top equation says that when A and

B are independent of each other, then the probability of A stays the same even when we know

that B has occurred - it is a simple way of saying that knowledge of B tells us nothing about

A when the two events are independent. Similarly, when A and B are independent, then

knowledge that A has occurred gives us absolutely no information about B and its likelihood

of occurring.

The third equation, however, is the most useful in applications. It tells us that when A and B

are independent (and only when they are independent), we can obtain the probability of the

joint occurrence of A and B (i.e. the probability of their intersection) simply by multiplying

the two separate probabilities. This rule is thus called the Product Rule for Independent

Events.

As an example of independent events, consider the following: Suppose I roll a single die.

What is the probability that the number 5 will turn up? The answer is 1/6. Now suppose that I

told you that I just tossed a coin and it turned up heads. What is now the probability that the

die will show the number 5? The answer is unchanged, 1/6, because events of the die and the

coin are independent of each other. We see that P ( 6 / H ) = P ( 6 ) , which is the first rule

above.

The rules for union and intersection of two independent events can be extended to sequences

of more than two events.

Intersection Rule

The probability of the intersection of several independent events A1, A2, ……is just the

product of separate probabilities i.e.

P ( A1 ∩ A 2 ∩ A 3 ) = P ( A1 ). P ( A 2 ). P ( A 3 )......... …………(8.15)

Union Rule

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 The probability of the union of several independent events A1, A2, ……is given by the

following equation

P ( A1 ∪ A 2 ∪ A 3 ∪ .........) = 1 − P ( A1 ). P ( A 2 ). P ( A 3 )......... …………(8.16)

The union of several events is the event that at least one of the events happens.

Example 8-11

A problem in mathematics is given to five students A, B,C, D and E. Their chances of solving

it are 1/2, 1/3, 1/3, 1/4 and 1/5 respectively. Find the probability that the problem will

(a) not be solved

(b) be solved

Solution: (a) The problem will not be solved when none of the students solve it. So the

required probability is:

P ( problem will not be solved ) = P ( A ). P ( B ). P ( C ). P ( D ). P ( E )

= (1 − 1 / 2 ).( 1 − 1 / 3 ).( 1 − 1 / 3 ).( 1 − 1 / 4 ).( 1 − 1 / 5 )
= 2 / 15

(b) The problem will be solved when at least one of the students solve it. So the required

probability is:

P ( A ∪ B ∪ C ∪ D ∪ E ) = 1 − P ( A ). P ( B ). P ( C ). P ( D ). P ( E )
= 1 − 2 / 15
= 13 / 15

8.5 BAYES’ THEOREM

As we have already noted in the introduction, the basic objective behind calculating

probabilities is to help us in making decisions by quantifying the uncertainties involved in the

situations. Quite often, whether it is in our personal life or our work life, decision-making is

an ongoing process. Consider for example, a seller of winter garments, who is interested in

the demand of the product. In deciding on the amount he should stock for this winter, he has

280
computed the probability of selling different quantities and has noted that the chance of

selling a large quantity is very high. Accordingly, he has taken the decision to stock a large

quantity of the product. Suppose, when finally the winter comes and the season ends, he

discovers that he is left with a large quantity of stock. Assuming that he is in this business, he

feels that the earlier probability calculation should be updated given the new experience to

help him decide on the stock for the next winter.

Similar to the situation of the seller of winter garment, situations exist where we are

interested in an event on an ongoing basis. Every time some new information is available, we

do revise our odds mentally. This revision of probability with added information is

formalised in probability theory with the help of famous Bayes' Theorem. The theorem,

discovered in 1761 by the English clergyman Thomas Bayes, has had a profound impact on

the development of statistics and is responsible for the emergence of a new philosophy of

science. Bayes himself is said to have been unsure of his extraordinary result, which was

presented to the Royal Society by a friend in 1763 - after Bayes' death. We will first

understand The Law of Total Probability, which is helpful for derivation of Bayes' Theorem.

8.5.1 The Law of Total Probability

Consider two events A and B. Whatever may be the relation between the two events, we can

always say that the probability of A is equal to the probability of the intersection of A and B,

plus the probability of the intersection of A and the complement of B (event B ).

P ( A) = P ( A ∩ B ) + P ( A ∩ B )

or P ( A ) = P ( A / B ). P ( B ) + P ( A / B ). P ( B ) …………(8.17)

The sets B and B form a partition of the sample space. A partition of a space is the division

of the sample space into a set of events that are mutually exclusive (disjoint sets) and cover

the whole space. Whatever event B may be, either B or B must occur, but not both. Figure

8-9 demonstrates this situation and the law of total probability.

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 Figure 8-9 Total Probability of Event A

The law of total probability may be extended to more complex situations, where the sample

space X is partitioned into more than two events. Say, we have partition of the space into a

collection of n sets B1, B2,………Bn .The law of total probability in this situation is:

n
P ( A) = ∑
i =1
P ( A ∩ Bi )

n
or P ( A) = ∑
i =1
P ( A / B i ). P ( B i ) …………(8.18)

Figure 8-10 shows the partition of a sample space into five events B1, B2, B3, B4 and B5 ; and

shows their intersections with set A.

Figure 8-10 Total Probability of Event A

We can demonstrate the rule with a more specific example. Let us define A as the event that

an honour card is drawn out of a deck of 52 cards (the honour cards are the aces, kings,

queens, jacks and 10). Letting H, C, D, and S denote the events that the card drawn is a heart,

club, diamond, or spade, respectively, we find that the probability of an honour card is:

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 Figure 8-11 Total Probability of Event A: An Honour Card

P ( A) = P ( A ∩ H ) + P ( A ∩ C ) + P ( A ∩ D ) + P ( A ∩ S )

= 5/52 + 5/52 + 5/52 + 5/52

= 20/52

= 5/13

which is what we know the probability of an honour card to be just by counting 20 honour

cards out of a total of 52 cards in the deck. The situation is shown in Figure 8-11.

As can be seen from the figure, the event A is the set addition of the intersections of A with

each of the four sets H, D, C, and S.

Example 8-12

A market analyst believes that the stock market has a 0.70 probability of going up in the next

year if the economy should do well, and a 0.20 probability of going up if the economy should

not do well during the year. The analyst believes that there is a 0.80 probability that the

economy will do well in the coming year. What is the probability that stock market will go up

next year?

Solution: Let U be the event that the stock market will go and W is the event that the

economy will do well in the coming year.

Then

P (U ) = P (U / W ). P (W ) + P (U / W ). P (W )
= ( 0 . 70 )( 0 . 80 ) + ( 0 . 20 )( 0 . 20 )
= 0 . 56 + 0 . 04
. = 0 . 60

BAYES’ THEOREM

We will now develop the Bayes’ theorem. Bayes' theorem is easily derived from the law of

total probability and the definition of conditional probability.

By definition of conditional probability, we have

283
 P (B ∩ A)
P (B / A) = …………(8.19)
P ( A)

By product rule, we have

P ( B ∩ A ) = P ( A ∩ B ) = P ( A / B ). P ( B ) …………(8.20)

Substituting Eq.(8.19) in Eq.(8.20), we have

P ( A / B ). P ( B )
P (B / A) = …………(8.21)
P ( A)

By the law of total probability, we have

P ( A ) = P ( A / B ). P ( B ) + P ( A / B ). P ( B )

Substituting this expression for P(A) in the denominator of Eq.(8.21), we have the Bayes’

theorem

P ( A / B ). P ( B )
P (B / A) = …………(8.22)
P ( A / B ). P ( B ) + P ( A / B ). P ( B )

Thus the theorem allows us to reverse the conditionality of events: we can obtain the

probability of B given A from the probability of A given B(and other information).

As we see from the theorem, the probability of B given A is obtained from the probabilities

of B and B and from the conditional probabilities of A given B and A given B .

The probabilities P(B) and P( B ) are called prior probabilities of the events B and B ; the

probability P(B /A) is called the posterior probability of B. It is possible to write Bayes'

theorem in terms of B and A, thus giving the posterior probability of B , P( B /A). Bayes'

theorem may be viewed as a means of transforming our prior probability of an event B into a

posterior probability of the event B - posterior to the known occurrence of event A.

The Bayes' theorem can be extended to a partition of more than two sets. This is done by

using the law of total probability involving a partition in sets B1, B2, ……… Bn .The resulting

form of Bayes' theorem is:

284
 P ( A / B i ). P ( B i )
P (Bi / A) = n
…………(8.23)
∑ i =1
P ( A / B i ). P ( B i )

The theorem gives the probability of one of the sets in the partition Bi, given the occurrence of

event A.

Example 8-13

An Economist believes that during periods of high economic growth, the Indian Rupee

appreciates with probability 0.70; in periods of moderate economic growth, it appreciates

with probability 0.40; and during periods of low economic growth, the Rupee appreciates

with probability [Link] any period of time the probability of high economic growth is

0.30; the probability of moderate economic growth is 0.50 and the probability of low

economic growth is 0.20. Suppose the Rupee value has been appreciating during the present

period. What is the probability that we are experiencing the period of (a) high, (b) moderate,

and (c) low, economic growth?

Solution: Our partition consists of three events: high economic growth (event H), moderate

economic growth (event M) and low economic growth (event L). The prior probabilities of

these events are:

P(H) = 0.30 P(M) = 0.50 P(L) = 0.20

Let A be the event that the rupee appreciates. We have the conditional probabilities

P(A / H) = 0.70 P(A / M) = 0.40 P(A / L) = 0.20

By using the Bayes’ theorem we can find out the required probabilities

P(H /A), P(M / A) and P(L / A)

(a) P(H /A)

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 P ( A / H ). P ( H )
P (H / A) =
P ( A / H ). P ( H ) + P ( A / M ). P ( M ) + P ( A / L ). P ( L )
( 0 . 70 )( 0 . 30 )
=
( 0 . 70 )( 0 . 30 ) + ( 0 . 40 )( 0 . 50 ) + ( 0 . 20 )( 0 . 20 )
= 0 . 467

(b) P(M /A)

P ( A / M ). P ( M )
P (M / A) =
P ( A / H ). P ( H ) + P ( A / M ). P ( M ) + P ( A / L ). P ( L )
( 0 . 40 )( 0 . 50 )
=
( 0 . 70 )( 0 . 30 ) + ( 0 . 40 )( 0 . 50 ) + ( 0 . 20 )( 0 . 20 )
= 0 . 444

(c) P(L /A)

P ( A / L ). P ( L )
P (L / A) =
P ( A / H ). P ( H ) + P ( A / M ). P ( M ) + P ( A / L ). P ( L )
( 0 . 20 )( 0 . 20 )
=
( 0 . 70 )( 0 . 30 ) + ( 0 . 40 )( 0 . 50 ) + ( 0 . 20 )( 0 . 20 )
= 0 . 089

8.6 SOME COUNTING CONCEPTS

If there are n events and event i can occur in Ni possible ways, then the number of ways in

which the sequence of n events may occur is

N1. N2. N3 .……….Nn …………(8.24)

Suppose that a bank has two branches, each branch has two departments, and each

department has four employees. Then there are (2)(2)(4) choices of employees, and the

probability that a particular one will be randomly selected is 1/(2)(2)(4) = 1/16.

We may view the choice as done sequentially: First a branch is randomly chosen, then a

department within the branch, and then the employee within the department. This is

demonstrated in the tree diagram in Figure 8-12.

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