Chapter - Two

Probability and Probability Distribution

2.1 Basic definitions of probability
Probability can be defined as:
 A mathematical means of studying uncertainty and variability.
 A number that conveys the strength of our belief in the occurrence of an uncertain event.
 A numerical measure of the likelihood that an event will occur.
From the above definitions you can differentiate probability to chances or possibilities, as the
latter cannot be quantified.
Probability is a number between zero and one inclusive and the sum of the probabilities of the
outcomes must be 1. The probability of zero represents something that cannot happen and the
probability of one represents something that is certain to happen. The closer a probability is to
zero, the more improbable it is that something will happen the closer the probability is to one the
more sure we are it will happen. When probability is 0.5 uncertainty will reach its maximum.
For example, if we consider the event “rain tomorrow,” we understand that when the weather
report indicates “a near-zero probability of rain,” it means almost no chance of rain. However, if
a 0.90 probability of rain is reported, we know that rain is likely to occur. A 0.50 probability
indicates that rain is just as likely to occur as not.
Important terms:
1. Experiment: - is a process that leads to the occurrence of one and only one of several
possible observations or (a process of observation that has an uncertain outcome). Example,
tossing a coin is answering a question where the answer can be correct or incorrect and
drawing a card from a deck of playing card.
2. Outcome: - is a particular result of an experiment. In case of tossing a coin, if head face up
we will consider head as the outcome of the experiment.
3. Event:- is a collection of one or more outcomes of an experiment or an experimental
outcome that may or may not occur if the experiment is tossing a coin, the events are Head,
or Tail.
2.2 Fundamental Concepts: Experiment and Event, Event and their Relationships,
Conditional and Joint Probability
a) Experiment: An experiment is process (action) that generates well-defined outcomes
(events). On any single repetition of an experiment, one and only one of the possible
experimental outcomes will occur. Several examples of experiments and their associated
outcomes follow.

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 Experiment Experimental outcomes
Toss a coin Head, tail
Select a part for inspection Defective, non-defective
Conduct a sales call Purchase, no purchase
Roll a die 1, 2, 3, 4, 5, 6
Play a football game Win, lose, tie
 A trial is a single performance of the experiment, with a single outcome.
 The sample space consists of all the possible outcomes of the experiment. Alternatively,
sample space is the set of all experimental outcomes. The outcomes for a single toss of a coin
are {heads, tails}, for example, and these constitute the sample space for a toss of a coin. The
outcomes in the sample space are mutually exclusive, which means that the occurrence of
one rules out all the others. One cannot have both heads and tails in a single toss of a coin.
Consider the first experiment in the preceding table—tossing a coin. The upward face of the coin
—a head or a tail—determines the experimental outcomes (sample points). If we let S denote the
sample space, we can use the following notation to describe the sample space.
S= {Head, Tail}
In addition, consider the fourth experiment listed in the table—rolling a die. The possible
experimental outcomes, defined as the number of dots appearing on the upward face of the die,
are the six points in the sample space for this experiment.
S = {1, 2, 3, 4, 5, 6}
Counting Rule, Combinations and Permutations
Being able to identify and count the experimental outcomes is a necessary step in assigning
probabilities. We now discuss three useful counting rules.
Multiple-step experiments: The first counting rule applies to multiple-step experiments.
Consider the experiment of tossing two coins. Let the experimental outcomes be defined in terms
of the pattern of heads and tails appearing on the upward faces of the two coins. How many
experimental outcomes are possible for this experiment? The experiment of tossing two coins
can be thought of as a two-step experiment in which step 1 is the tossing of the first coin and step
2 is the tossing of the second coin. If we use H to denote a head and T to denote a tail, (H, H)
indicates the experimental outcome with a head on the first coin and a head on the second coin.
Continuing this notation, we can describe the sample space (S) for this coin-tossing experiment
as follows:
S = { (H, H), (H, T), (T, H), (T, T)}
Thus, we see that four experimental outcomes are possible. In this case, we can easily list all of
the experimental outcomes. The counting rule for multiple-step experiments makes it possible to
determine the number of experimental outcomes without listing them.
If an experiment can be described as a sequence of k steps with n1 possible outcomes on the first
step, n2 possible outcomes on the second step, and so on, then the total number of experimental
outcomes is given by (n1) (n2) . . . (nk).

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Viewing the experiment of tossing two coins as a sequence of first tossing one coin (n1 = 2) and
then tossing the other coin (n2 = 2), we can see from the counting rule that (2) (2) = 4 distinct
experimental outcomes are possible. As shown, they are S = {(H, H), (H, T), (T, H), (T, T)}. The
number of experimental outcomes in an experiment involving tossing six coins is (2)(2)(2)(2)(2)
(2) = 64.
Let us now see how the counting rule for multiple-step experiments can be used in the analysis
of a capacity expansion project for the Ethiopia Electric Power Corporation (EEPCo). EEPCo is
starting a project designed to increase the generating capacity of one of its plants in Western
Ethiopia. The project is divided into two sequential stages or steps: stage 1 (design) and stage 2
(construction). Even though each stage will be scheduled and controlled as closely as possible,
management cannot predict beforehand the exact time required to complete each stage of the
project. An analysis of similar construction projects revealed possible completion times for the
design stage of 2, 3, or 4 months and possible completion times for the construction stage of 6, 7,
or 8 months. In addition, because of the critical need for additional electrical power, management
set a goal of 10 months for the completion of the entire project.
Because this project has three possible completion times for the design stage (step 1) and three
possible completion times for the construction stage (step 2), the counting rule for multiple-step
experiments can be applied here to determine a total of (3)(3) = 9 experimental outcomes. To
describe the experimental outcomes, we use a two-number notation; for instance, (2, 6) indicates
that the design stage is completed in 2 months and the construction stage is completed in 6
months. This experimental outcome results in a total of 2 + 6 = 8 months to complete the entire
project. Table summarizes the nine experimental outcomes for the EEPCo problem.

Completion time (months)

Stage 1- Design Stage 2- Construction Experimental outcomes Total completion time
2 6 (2, 6) 8
2 7 (2, 7) 9
2 8 (2, 8) 10
3 6 (3, 6) 9
3 7 (3, 7) 10
3 8 (3, 8) 11
4 6 (4, 6) 10
4 7 (4, 7) 11
4 8 (4, 8) 12
We see that the project will be completed in 8 to 12 months, with six of the nine experimental
outcomes providing the desired completion time of 10 months or less. Even though identifying
the experimental outcomes may be helpful, we need to consider how probability values can be
assigned to the experimental outcomes before making an assessment of the probability that the
project will be completed within the desired 10 months.

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Combination: A second useful counting rule allows one to count the number of experimental
outcomes when the experiment involves selecting n objects from a (usually larger) set of N
objects. It is called the counting rule for combinations.
The number of combinations of N objects taken n at a time is

( )
N!
C Nn = N =
n n ! ( N −n ) !

Where, N! = N (N - 1)(N - 2) …. (2)(1)

n! = n(n - 1)(n - 2) … (2)(1) and by definition 0! = 1.

 The notation ! means factorial; for example, 5 factorial is 5! = (5)(4)(3)(2)(1) = 120.

Illustration 1: As an illustration of the counting rule for combinations, consider a quality control
procedure in which an inspector randomly selects two of five parts to test for defects. In a group
of five parts, how many combinations of two parts can be selected? The counting rule in above
equation shows that with N = 5 and n = 2, we have

()
5! 5 x 4 x 3 x 2 x 1 120
C 52= 5 = = = =10
2 2 ! ( 5−2 ) ! 2 x 1 x 3 x 2 x 1 12

Thus, 10 outcomes are possible for the experiment of randomly selecting two parts from a group
of five. If we label the five parts as A, B, C, D, and E, the 10 combinations or experimental
outcomes can be identified as AB, AC, AD, AE, BC, BD, BE, CD, CE, and DE.
Illustration 2: As another example, consider that the National lottery system uses the random
selection of six integers from a group of 53 to determine the weekly winner. The counting rule
for combinations, in above equation, can be used to determine the number of ways six different
integers can be selected from a group of 53.

( )
53 ! 53! 53 x 52 x 51 x 49 x 48
C 6 = 53 =
53
= = =22,957,480
6 6 ! ( 53−6 ) ! 6 ! 47 ! 6 x 5 x 43 x 2 x 1
The counting rule for combinations tells us that almost 23 million experimental outcomes are
possible in the lottery drawing. An individual who buys a lottery ticket has 1 chance in
22,957,480 of winning.
The counting rule for combinations shows that the chance of winning the lottery is very unlikely.
Permutation: A third counting rule that is sometimes useful is the counting rule for
permutations. It allows one to compute the number of experimental outcomes when n objects are
to be selected from a set of N objects where the order of selection is important. The same n
objects selected in a different order are considered a different experimental outcome.
The number of permutations of N objects taken n at a time is given by

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 ( )
N!
Pn =n! N =
N

n ( N−n ) !
The counting rule for permutations closely relates to the one for combinations; however, an
experiment results in more permutations than combinations for the same number of objects
because every selection of n objects can be ordered in n! different ways.
Illustration1: Consider again the quality control process in which an inspector selects
two of five parts to inspect for defects. How many permutations may be selected? The
counting rule in above equation shows that with N = 5 and n = 2, we have

()
5! 5x 4 x 3 x2 x1
P52=2 ! 5 = = =20
2 (5−2 ) ! 3 x 2x 1
Thus, 20 outcomes are possible for the experiment of randomly selecting two parts from a group
of five when the order of selection must be taken into account. If we label the parts A, B, C, D,
and E, the 20 permutations are AB, BA, AC, CA, AD, DA, AE, EA, BC, CB, BD, DB, BE, EB,
CD, DC, CE, EC, DE, and ED.
Assigning Probability
Now let us see how probabilities can be assigned to experimental outcomes. The three
approaches most frequently used are the classical, relative frequency, and subjective methods.
Regardless of the method used, two basic requirements for assigning probabilities must be
met.
Basic Requirements for Assigning Probabilities
I. The probability assigned to each experimental outcome must be between 0 and 1, inclusively.
If we let Ei denote the ith experimental outcome and P(Ei) its probability, then this
requirement can be written as 0 ≤ P(Ei) ≤ 1 for all i.
II. The sum of the probabilities for all the experimental outcomes must equal 1. For n
experimental outcomes, this requirement can be written as P(E1) + P(E2 ) + . . . + P(En) = 1
The classical method of assigning probabilities is appropriate when all the experimental
outcomes are equally likely. If n experimental outcomes are possible, a probability of 1/n is
assigned to each experimental outcome. When using this approach, the two basic requirements
for assigning probabilities are automatically satisfied. For an example, consider the experiment
of tossing a fair coin; the two experimental outcomes—head and tail—are equally likely.
Because one of the two equally likely outcomes is a head, the probability of observing a head is
1/2, or .50. Similarly, the probability of observing a tail is also 1/2, or .50. As another example,
consider the experiment of rolling a die. It would seem reasonable to conclude that the six
possible outcomes are equally likely, and hence each outcome is assigned a probability of 1/6. If
P(1) denotes the probability that one dot appears on the upward face of the die, then P(1) = 1/6.
Similarly, P(2) = 1/6, P(3) = 1/6, P(4) = 1/6, P(5) = 1/6, and P(6) = 1/6. Note that these
probabilities satisfy the two basic requirements of assigning probability because each of the
probabilities is greater than or equal to zero and they sum to 1.
The relative frequency method of assigning probabilities is appropriate when data are available
to estimate the proportion of the time the experimental outcome will occur if the experiment is

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repeated a large number of times. As an example, consider a study of waiting times in the X-ray
department for a local hospital. A clerk recorded the number of patients waiting for service at
9:00 a.m. on 20 successive days and obtained the following results.
Number waiting Number of days outcome occurred
0 2
1 5
2 6
3 4
4 3
Total 20

These data show that on 2 of the 20 days, zero patients were waiting for service; on 5 of the days,
one patient was waiting for service; and so on. Using the relative frequency method, we would
assign a probability of 2/20 = .10 to the experimental outcome of zero patients waiting for
service, 5/20 = .25 to the experimental outcome of one patient waiting, 6/20 = .30 to two patients
waiting, 4/20 = .20 to three patients waiting, and 3/20 = .15 to four patients waiting. As with the
classical method, using the relative frequency method automatically satisfies the two basic
requirements of assigning probability.
The subjective method of assigning probabilities is most appropriate when one cannot
realistically assume that the experimental outcomes are equally likely and when little relevant
data are available. When the subjective method is used to assign probabilities to the experimental
outcomes, we may use any information available, such as our experience or intuition
(perception). After considering all available information, a probability value that expresses our
degree of belief (on a scale from 0 to 1) that the experimental outcome will occur is specified.
Because subjective probability expresses a person’s degree of belief, it is personal. Using the
subjective method, different people can be expected to assign different probabilities to the same
experimental outcome.
The subjective method requires extra care to ensure that the two basic requirements of assigning
probability are satisfied. Regardless of a person’s degree of belief, the probability value assigned
to each experimental outcome must be between 0 and 1, inclusive, and the sum of all the
probabilities for the experimental outcomes must 1.
Consider the case in which Abebe and Alemu make an offer to purchase a house. Two outcomes
are possible: E1 = their offer is accepted and E2 = their offer is rejected.
Abebe believes that the probability their offer will be accepted is 0.8; thus, Abebe would set
P(E1) = 0.8 and P(E2) = 0.2. Alemu, however, believes that the probability that their offer will
be accepted is 0.6; hence, Alemu would set P(E1) = 0.6 and P(E2) = 0.4. Note that Alemu’s
probability estimate for E1 reflects a greater pessimism (doubt) that their offer will be accepted.
Both Abebe and Alemu assigned probabilities that satisfy the two basic requirements. The fact
that their probability estimates are different emphasizes the personal nature of the subjective
method.

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Even in business situations where either the classical or the relative frequency approach can be
applied, managers may want to provide subjective probability estimates. In such cases, the best
probability estimates often are obtained by combining the estimates from the classical or relative
frequency approach with subjective probability estimates.
Probabilities for EEPCo. Project
To perform further analysis on the EEPCo. project, we must develop probabilities for each of the
nine experimental outcomes listed in previous Table. On the basis of experience and judgment,
management concluded that the experimental outcomes were not equally likely. Hence, the
classical method of assigning probabilities could not be used. Management then decided to
conduct a study of the completion times for similar projects undertaken by EEPCo over the past
three years. The results of a study of 40 similar projects are summarized in Table below.
After reviewing the results of the study, management decided to employ the relative frequency
method of assigning probabilities. Management could have provided subjective probability
estimates, but felt that the current project was quite similar to the 40 previous projects. Thus, the
relative frequency method was judged best.
In using the data in Table below to compute probabilities, we note that outcome (2, 6)— stage 1
completed in 2 months and stage 2 completed in 6 months—occurred six times in the 40
projects. We can use the relative frequency method to assign a probability of 6/40 = 0.15 to this
outcome. Similarly, outcome (2, 7) also occurred in six of the 40 projects, providing a 6/40 =
0.15 probability. Continuing in this manner, we obtain the probability assignments for the sample
points of the EEP Co project. Note that P(2, 6) represents the probability of the sample point
(2, 6), P(2, 7) represents the probability of the sample point (2, 7), and so on.
Probability Assignment for the EEP Co Project based on Relative Frequency Method
Completion time (months)
Stage 1 Stage 2 Sample Number of past Probability of Project
Design Construction point project having sample point completion time
these completion
time
2 6 (2, 6) 6 P(2, 6)= 6/40= 0.15 8
2 7 (2, 7) 6 P(2, 7)= 6/40 = .15 9
2 8 (2, 8) 2 P(2, 8)=2/40 = 0.05 10
3 6 (3, 6) 4 P(3, 6)= 4/40= 0.10 9
3 7 (3, 7) 8 P(3, 7)=8/40 = 0.20 10
3 8 (3, 8) 2 P(3, 8)=2/40 = 0.05 11
4 6 (4, 6) 2 P(4, 6)=2/40 = 0.05 10
4 7 (4, 7) 4 P(4, 7)=4/40 = 0.10 11
4 8 (4, 8) 6 P(4, 8)=6/40 = 0.15 12
Total 40 1

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 b) Events and their Probabilities
This section will provide the basis for determining the probability of an event. An Event is a
collection of sample points. The probability of any event is equal to the sum of the probabilities
of the sample points in the event.
Using this definition, we calculate the probability of a particular event by adding the
probabilities of the sample points (experimental outcomes) that make up the event. For example,
let us return to the EEPCo project and assume that the project manager is interested in the event
that the entire project can be completed in 10 months or less. Let C denote the event that the
project is completed in 10 months or less; we write C = {(2, 6), (2, 7), (2, 8), (3, 6), (3, 7),
(4, 6)}, the probability of event C, denoted P(C), is given by P(C ) = P(2, 6) + P(2, 7) + P(2, 8) +
P(3, 6) + P(3, 7) + P(4, 6). Therefore,refer to the sample point probabilities in above Table; we
have P(C ) = 0.15 + 0.15 + 0.05 + 0.10 = 0.20 + 0.05 = 0.70.
Similarly we can also compute the probability for the event that the project is completed in more
than 10 months. Let this event is denoted by M, thus M = {(3, 8), (4, 7), (4, 8)} and the
probability of event M is denoted by P(M) = P(3, 8) + P(4, 7) + P(4, 8) = 0.05 + 0.10 + 0.15 = 0.30.
Using these probability results, we can now tell EEPCo management that there is a 0.70
probability that the project will be completed in 10 months or less, and a 0.30 probability that the
project will be completed in more than 10 months.
c) Event and their relationships
Some Basic Relationships of Probability
Complement of an Event
Given an event A, the complement of A is defined to be the event consisting of all sample points
that are not in A. The complement of A is denoted by Ac. A Venn diagram as shown below
illustrates the concept of a complement.

Event A
Ac Sample space

Complement of event A

The rectangular area represents the sample space for the experiment and as such contains all
possible sample points. The circle represents event A and contains only the sample points that
belong to A. The shaded region of the rectangle contains all sample points not in event A and is
by definition the complement of A.
In any probability application, either event A or its complement Ac must occur. Therefore,
we have:
P(A) + P(Ac) = 1
Solving for p(A), we obtain the following result.

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Compute probability using the complement, P(A) = 1-P(Ac)
As an example, consider the case of a sales manager who, after reviewing sales reports, states
that 80% of new customer contacts result in no sale. By allowing A to denote the event of a sale
and Acto denote the event of no sale, the manager is stating that P(Ac) = 0.80. Using the above
equation,
P(A) = 1− P(Ac) = 1− 0.80 = 0.20
We can conclude that a new customer contact has a .20 probability of resulting in a sale.
Addition Law
The addition law is helpful when we are interested in knowing the probability that at least
one of two events occurs. That is, with events A and B we are interested in knowing the
probability that event A or event B or both occur.
Before we present the addition law, we need to discuss two concepts related to the combination
of events: the union of events and the intersection of events. Given two events A and B, the
union of A and B is defined as follows.
 The union of A and B is the event containing all sample points belonging to A or B or both.
The union is denoted by A ∪B.
The Venn diagram (below) depicts the union of events A and B. Note that the two circles contain
all the sample points in event A as well as all the sample points in event B.

Sample space

Event Event
A B

 The fact that the circles overlap indicates that some sample points are contained in both A
and B.
The definition of the intersection of A and B follows.
 Given two events A and B, the intersection of A and B is the event containing the sample
points belonging to both A and B. The intersection is denoted by A ∩B.
Let us now continue with a discussion of the addition law. The addition law provides a way to
compute the probability that event A or event B or both occur. The addition law is written as
follows.
P(A ∪B) = P(A) + P(B) - P(A ∩B)
Illustration:- Assume that 180 students took examinations in English and Mathematics. Their
results were as follows, number of students passing English and Mathematics are 80 and 70
respectively. Moreover, the numbers of students passing both subjects are 40. What is the
probability that randomly selected student at least pass one subject?
Let E be the event of passing English, and M be the event of passing Mathematics. Therefore,

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 80 4
=
The probability that a randomly selected student passed English, P(E) = 180 9 = 0.444
70 7
= = =0 .389
The probability that a randomly selected student passed Mathematics, P(M) 180 18
The probability that a randomly selected student passed both subjects,
40 2
∩M = = =0 . 222
P(E ) 180 9
Given the above probability, from addition law we know that
P(E ∪ M ) = P(E) + P(M) – P(E∩ M )
Thus, P(E ∪ M ) = 0.444 + 0.389 – 0.222 = 0.611
Mutually Exclusive Events
Two events are said to be mutually exclusive if the events have no sample points in common.
Events A and B are mutually exclusive if, when one event occurs, the other cannot occur. Thus, a
requirement for A and B to be mutually exclusive is that their intersection must contain no
sample points. In other words, P(A ∩B) = 0. Therefore, the addition law for mutually exclusive
events would be P(A ∪B) = P(A) + P(B).
Example: What is the probability of getting a total of '7' or '11' when a pair of dice are tossed?
Solution:
Total number of possible outcomes = (6)(6) = 36
Possible outcomes of getting a total of '7' :{1,6; 2,5; 3,4; 4,3; 5,2; 6,1}
Possible outcomes of getting a total of '11' : {5,6; 6,5}
Let A be the event of getting a total of '7', and B be the event of getting a total of '11'.
The probability of getting a total of '7' or '11' is P( A∪B ) .

P( A∪B )=P( A )+P( B)−P ( A∩B )=P( A )+P (B ) ; Because A and B are mutually exclusive

6 2 2
∪B = + =
P(A ) 36 36 9
d) Conditional and Joint Probability
Conditional Probability
We frequently need to know how two events are related. In particular, we would like to know the
probability of one event given the occurrence of another related event. For example, we would
certainly like to know the probability that a fund managed by a graduate of a top-20 Accounting
and finance program will outperform the market. Such a probability will allow us to make an
informed decision about where to invest our money. This probability is called a conditional
probability because we want to know the probability that a fund will outperform the market
given the condition that the manager graduated from a top-20 Accounting and finance program.
A conditional probability is written as P(A│B) and read as the “probability of A given B.”
The conditional probability for event A and event B can be computed through the following
formulas:

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 P ( A ∩B) P ( A ∩B)
P(A│B) = OR P(B│A) =
P( B) P( A )

Example 1. Suppose that we randomly select a household, and that the chosen house hold
reports it subscribes to Herald. Given this new information we wish to find the probability that
this household subscribes to Addis Zemen. The new probability is called a conditional
probability.
The probability of event A (Addis Zemen), given the condition that event H (Herald) has
occurred, is written :
P(A/H) = the probability of A given H. We often refer to such a probability as the conditional
probability of A given H.
In order to find the conditional probability that a household subscribes to Addis Zemen given
that it subscribes to Herald we know that we are considering one of 500,000 households. Since
250,000 of these 500,000 Herald subscribers also subscribe to Addis Zemen we have:
P(A/H) = 250,000 =0.5i.e 50% of the Herald subscribers also subscribe to Addis Zemen:
500,000
Example 2: Suppose that a computer lab has 4 new and 2 old desktops running Windows as well
as 3 new and 1 old desktops running Linux. What is the probability of a student to randomly sit
in front of desktop running windows? What is the likelihood that this particular desktop runs
window given it is new? What is the likelihood that this particular desktop is new given that it
runs window? Well, there are 10 computers in the lab of which 6 run Windows. This means that
the answer for the first question is 3/5, whereas the answers for the second and third questions look,
P (Window ∩ New) 4 7 4
P(Window│New) = = ⁄ =
P(New ) 10 10 7
P ( New ∩ Windows) 4 6 2
P(New│Windows) = = ⁄ =
P(Windows) 10 10 3
Joint and Marginal Probability
Joint probability is a probability of intersection of two events while Marginal probabilities are
computed by adding across rows or down columns, are so named because they are found in the
margins of the table.
Example: Why are some mutual fund managers more successful than others? One possible factor
is the university program where the manager earned his or her master of business administration
(MBA). Suppose that a potential investor examined the relationship between how well the
mutual fund performs and where the fund manager earned his or her MBA. After the analysis,
the following table with joint and marginal probabilities were developed.
Mutual fund Mutual fund does not
outperforms market (B1) outperform market (B2) Total
Top-20 MBA program (A1) 0.11** 0.29** 0.40*
Not top-20 MBA program (A2) 0.06** 0.54** 0.60*
Total 0.17* 0.83* 1.00
** = Joint probabilities and * = Marginal probabilities

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From the joint probabilities the following analysis can be drawn.
- The probability that a mutual fund outperforms the market and that its manager graduated
from a top-20 MBA program is 0.11= P(A1 & B1).
- The probability that a mutual fund outperforms the market and its manager did not graduate
from a top-20 MBA program is 0.06 = P(A2 & B1).
- The probability that a mutual fund does not outperform the market and its manager graduated
from a top-20 MBA program is 0.29 = P(A1 & B2).
- The probability that a mutual fund does not outperform the market and its manager did not
graduate from a top-20 MBA program is 0.54 = (A2 & B2).
From the marginal probabilities the following analysis can be drawn.
 P(A1 and B1) + P(A1and B2) = 0.11 + 0.29 = 0.40 (Row)
 P(A2 and B1) + P(A2 and B2) = 0.06 + 0.54 = 0.60 (Row)
 P(A1 and B1) + P(A2 and B1) = 0.11 + 0.06 = 0.17 (Column)
 P(A1 and B2) + P(A2 and B2) = 0.29 + 0.54 = 0.83 (Column)
Independent Events
One of the objectives of calculating conditional probability is to determine whether two events
are related. In particular, if the occurrence or existence of one event does not alter or affect the
existence or occurrence the other event, then the events are Independent Events.
Two events A and B are said to be independent if P(A│B) = P(A) or P(B│A) = P(B).
Multiplication Law
Whereas the addition law of probability is used to compute the probability of a union of two
events, the multiplication law is used to compute the probability of the intersection of two
events. The multiplication law is based on the definition of conditional probability as shown
below.
P(A ∩B) = P(B)P(A │B) or P(A ∩B) = P(A)P(B │ A)
BAYE’s THEOREM (self-study)
Baye’s Theorem is a very important theorem to revise probabilities using some additional
information.
2.3 Definitions of probability distribution
Probability distribution is listing of all possible values of the random variable with
corresponding probabilities. The outcome of an experiment is either a success or failure. The
number of ways to get certain number of successes will determine the value that the random
variable will assume.
A probability distribution is a table, formula, or graph that describes the values of a random
variable and the probability associated with these values.
2.4 Basic concepts: Discrete and continuous random variables,
expected value and variance of discrete random variable
Random Variable
Random variable is a variable whose value is determined by the outcome of an experiment.
That is random variable represents an uncertain outcome or it can be defined as a quantity
resulting from a random experiment by chance, can assume different values.
A random variable may be either discrete or continuous

12
2.4.1 Discrete Random Variable
Discrete random variable is a variable that can assume only certain clearly separated values
resulting from account of some item of interest.
Example:
- The No. of employees absent in a given day
- Toss two coins and count the number of heads
- Number of defective products produced in a factory at a given shift or day or month.
- Number of customers entering to a bank in an hour time.
It should be noted that a discrete random variable can in some cases assume fractional or decimal
values. These values must be separated i.e. have distance between them example, the score of a
student in a given test can be 8.5 or 7.5 such values are discrete b/se there is a distance b/n
scores. There is a fixed gap between scores. You can easily list all possible values clearly and
separately. If the number of students in a classroom is 35, you know the next succeeding value
will be 36 there is no another value in between.
In other words, a random variable that may assume either a finite number of values or an infinite
sequence of values such as 0, 1, 2, . . . is referred to as a discrete random variable. For
example, if we define X as the number of heads observed in an experiment that tosses a coin 10
times, then the values of X are 0, 1, 2, . . . , 10. The variable X can assume a total of 11 values.
Obviously, we counted the number of values; hence, X is discrete.
2.4.2 Continuous Random Variable
A variable that can assume any value in an interval, it can assume one of an infinitely large
number of values. Mostly results of measurement
Example, - The distance b/n two cities
- The weight of a person.
- The rate of return on investment
- The time that a customer must wait to receive his changes.
The values are not clearly separated. It is not possible to exhaustively list possible values of the
random variable. If the distance between two cities is 300 km, you cannot estimate or identify the
next higher distance. So, there is infinitely very large number of values.
Based on the value of the random variable, probability distribution is classified in to discrete
and continuous(normal) probability distributions.
For example, let X = time to write a statistics exam in a university where the time limit is 3 hours
and students cannot leave before 30 minutes. The smallest value of X is 30 minutes. If we
attempt to count the number of values that X can take on, we need to identify the next value. Is it
30.1 minutes? 30.01 minutes? 30.001 minutes? None of these is the second possible value of X
because there exist other numerous numbers larger than 30 and smaller than 30.001. It becomes
clear that we cannot identify the second, or third, or any other values of X (except for the largest
value 180 minutes or 3 hours). Thus, we cannot count the number of values, and X is continuous.

13
 Discrete Probability Distributions
The probability distribution for a random variable describes how probabilities are distributed
over the values of the random variable. For a discrete random variable x, the probability
distribution is defined by a probability function, denoted by f (x). The probability function
provides the probability for each value of the random variable.
The value assumed by a discrete random variable depends upon the outcome of an experiment.
Since the outcome of the experiment will be uncertain the value assumed by the random variable
will also be uncertain.
The probability distribution of a discrete random variable is listing of all the outcomes of an
experiment and the probabilities associated with each outcome. The probability distribution of a
discrete random variable can be described by a table, graph or formula that gives the probability
associated with each possible value that a random variable can assume or if we organize the
value of a discrete random variable in a probability distribution the distribution is called a
Discrete Probability distribution. Based on value of the random variable, there are three types of
discrete probability distributions. These are: Binomial, Poisson and Hyper geometric
distributions.
Requirements for a Distribution of a Discrete Random Variable
1. 0 ≤ f(x) ≤ 1 for all x
2. ∑ f (x )= 1
Where the random variable can assume values x and f(x) is the probability that the random
variable is equal to x.
As an illustration of a discrete random variable and its probability distribution, consider the sales
of automobiles at Bishofitu Automobile Assembly Center. Over the past 300 days of operation,
sales data show 54 days with no automobiles sold, 117 days with 1 automobile sold, 72 days
with 2 automobiles sold, 42 days with 3 automobiles sold, 12 days with 4 automobiles sold, and
3 days with 5 automobiles sold. Suppose we consider the experiment of selecting a day of
operation at Bishofitu Automobiles and define the random variable of interest as x = the number
of automobiles sold during a day. From historical data, we know x is a discrete random variable
that can assume the values 0, 1, 2, 3, 4, or 5. In probability function notation, f (0) provides the
probability of 0 automobiles sold, f (1) provides the probability of 1 automobile sold, and so
[Link] historical data show 54 of 300 days with 0 automobiles sold, we assign the value
54/300 = 0.18 to f (0), indicating that the probability of 0 automobiles being sold during a day is
0.18. Similarly, because 117 of 300 days had 1 automobile sold, we assign the value 117/300 =
0.39 to f (1), indicating that the probability of exactly 1 automobile being sold during a day is
0.39. Continuing in this way for the other values of the random variable, we compute the values
for f (2), f (3), f (4), and f (5) as shown in Table below, the probability distribution for the
number of automobiles sold during a day at Bishofitu Automobile.

14
 x f(x)
0 0.18
1 0.39
2 0 .24
3 0.14
4 0.04
5 0.01
Total 1.00

A primary advantage of defining a random variable and its probability distribution is that once
the probability distribution is known, it is relatively easy to determine the probability of a variety
of events that may be of interest to a decision maker. For instance, there is an f (3) + f (4) + f (5)
= 0.14 + 0.04 + 0.01 = 0.19 probability of selling 3 or more automobiles during a day.
Furthermore, wecan also present probability distributions graphically as shown below.
0.45

0.4

0.35

0.3
Probability

0.25

0.2

0.15

0.1

0.05

0
0 1 2 3 4 5
Number of automobile sold during a day

2.4.3 Expected Value and Variance of Discrete Random Variable

a) Expected Value
The expected value, or mean, of a random variable is a measure of the central location for the
random variable. The population mean is the weighted average of all of its values. The weights
are the probabilities. The expected value is a weighted averages of the values of random variable
where the weights are the probabilities. This parameter is also called the expected value of X
and is represented by E(X).
The formula for the expected value of a discrete random variable x follows.
E(x) = μ = Σ xf (x)
Both the notations E(x) and μ are used to denote the expected value of a random variable.

15
The above equation shows that to compute the expected value of a discrete random variable, we
must multiply each value of the random variable by the corresponding probability f (x) and then
add the resulting products. Using the Bishofitu automobile sales example from the above section,
we show the calculation of the expected value for the number of automobiles sold during a day
in table below. The sum of the entries in the Xf (x) column shows that the expected value is 1.50
automobiles per day. We therefore know that although sales of 0, 1, 2, 3, 4, or 5 automobiles are
possible on any one day, over time Bishofitu can anticipate selling an average of 1.50
automobiles per day. Assuming 30 days of operation during a month, we can use the expected
value of 1.50 to forecast average monthly sales of 30(1.50) = 45 automobiles.

x f(x) xf(x) x-μ (x- μ)2 (x- μ)2f(x)

0 0.18 0(0.18) = 0 0 - 1.50 = - 1.50 2.25 2.25(0.18) = 0.4050
1 0.39 1(0.39) = 0.39 1-1.50 = -0.50 0.25 0.25(0.39) = 0.0975
2 0 .24 2(0.24) = 0.48 2- 1.50 = 0.50 0.25 0.25(0.24) = 0.0600
3 0.14 3(0.14) = 0.42 3- 1.50 = 1.50 2.25 2.25(0.14) = 0.3150
4 0.04 4(0.04) = 0.16 4- 1.50 = 2.50 6.25 6.25(0.04) = 0.2500
5 0.01 5(0.01) = 0.05 5- 1.50 = 3.50 12.25 12.25(0.01) = 0.1225
Total 1.00 E(x) = μ = σ2 = Σ(x -μ)2f (x) = 1.25
1.50
b) Variance
Even though the expected value provides the mean value for the random variable, we often need
a measure of variability, or dispersion. Just as we used the variance in Chapter 1 to summarize
the variability in data, we now use variance to summarize the variability in the values of a
random variable.
The variance is a weighted average of the squared deviations of a random variable from its
mean. The weights are the probabilities.
The formula for the variance of a discrete random variable follows.
Var(x) = σ2 = Σ(x - μ)2f (x)
The above equation shows, an essential part of the variance formula is the deviation, x - μ, which
measures how far a particular value of the random variable is from the expected value, or mean,
μ. In computing the variance of a random variable, the deviations are squared and then weighted
by the corresponding value of the probability function. The sum of these weighted squared
deviations for all values of the random variable is referred to as the variance. As summarized in
above table the variance for Bishofitu Automobiles is 1.25. The notations Var(x) and σ2 are both
used to denote the variance of a random variable.
The standard deviation (σ ), is defined as the positive square root of the variance. Thus, the
standard deviation for the number of automobiles sold during a day is σ =√ σ 2 = √ 1.25 = 1.118

16
 The standard deviation is measured in the same units as the random variable (σ = 1.118
automobiles) and therefore is often preferred in describing the variability of a random variable.
The variance σ2 is measured in squared units and is thus more difficult to interpret.
Binomial Probability Distribution
The binomial probability distribution is a discrete probability distribution that provides many
applications. It is associated with a multiple-step experiment that we call the binomial
experiment. In a binomial experiment with a constant probability “p” of success at each trial, the
probability distribution of the binomial random variable X, the number of successes in n
independent trials, is called the binomial distribution.
A binomial experiment exhibits the following four properties.
i. The experiment consists of a sequence of n identical trials.
ii. Two outcomes are possible on each trial. We refer to one outcome as a success and the other
outcome as a failure.
iii. The probability of a success, denoted by p, does not change from trial to trial. Consequently,
the probability of a failure, denoted by 1 ─ p, does not change from trial to trial.
iv. The trials are independent.
In a binomial experiment, our interest is in the number of successes occurring in the “n” trials.
If we let x denote the number of successes occurring in the n trials, we see that x can assume the
values of 0, 1, 2, 3, . . . , n. Because the number of values is finite, x is a discrete random
variable. The probability distribution associated with this random variable is called the binomial
probability distribution.
The number of experimental outcomes resulting in exactly x successes in n trials can be
computed using the following formula.

() n= n!
x x ! ( n−x ) !
Where, n! = n(n - 1)(n - 2) . . . (2)(1) and by definition 0! = 1

Whereas, the probability of x successes in a binomial experiment with n trials and probability of
success = p is computed through the following formula.

n! x (n− x)
f ( x )= p (1− p) , for x = 0, 1, 2, 3, …. N
x ! ( n−x ) !
Where, x = the number of successes, p = the probability of a success on one trial, n = the number
of trials, f (x) = the probability of x successes in n trials.

Example: Let us assume that Y is a student taking a statistics course. Unfortunately, Y is not a
good student. Y does not read the textbook before class, does not do homework, and regularly
misses class. Y intends to rely on luck to pass the next quiz. The quiz consists of 10 multiple-
choice questions. Each question has five possible answers, only one of which is correct. Y plans
to guess the answer to each question.
a. What is the probability that Y gets no answers correct?
b. What is the probability that Y gets two answers correct?
Solution:
The experiment consists of 10 identical trials, each with two possible outcomes and where
success is defined as a correct answer. Because Y intends to guess, the probability of success is
1/5 or 0.2. Finally, the trials are independent because the outcome of any of the questions does

17
not affect the outcomes of any other questions. These four properties tell us that the experiment
is binomial with n = 10 and p =0.2.
a. From we produce the probability of no success by letting n = 10, p = 0.20, and x = 0.
Hence
10 ! 0 (10−0)
f ( 0 )= 0.20 (1−0.20) =0.1074
0 ! ( 10−0 ) !
b. The probability of two correct answers is computed similarly by substituting n = 10, p =
0.20, and x = 2:
10 ! 2 ( 10−2)
f ( 2 )= 0.20 ( 1−0.20 )
2 ! ( 10−2 ) !

10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1
= (0.04)(0.1678) = (45)(0.006712) = 0.3020
2x 1x 8 x7 x1 x 6x 5 x 4 x3 x2 x

In this calculation, we discovered that there are 45 ways to get exactly two correct and eight
incorrect answers, and that each such outcome has probability 0.006712. Multiplying the two
numbers produces a probability of 0.3020.
Cumulative Probability
The formula of the binomial distribution allows us to determine the probability that X equals
individual values. In above example, the values of interest were 0 and 2. There are many
circumstances where we wish to find the probability that a random variable is less than or equal
to a value; that is, we want to determine f(X ≤ x), where x is that value. Such a probability is
called a cumulative probability.
Example: From the above example what is probability that Y fails the quiz.
Solution:
A mark is considered a failure if it is less than 50%. In this quiz, a mark of less than 5 is a failure.
Because the marks must be integers, a mark of 4 or less is a failure. We wish to determine
f(x ≤ 4). So, f(X≤ 4) = f(0) + f(1) + f(2) + f(3) + f(4)
From the above example, we know P(0) = 0.1074 and P(2) = 0.3020. Using the binomial
formula, we find f(1) = 0.2684 , f(3) = 0.2013, and f(4) = 0.0881. Thus
f(X ≤ 4) = 0.1074 + 0.2684 + 0.3020 + 0.2013 + 0.0881 = 0.9672
There is a 96.72% probability that Y will fail the quiz by guessing the answer for each question.
Mean and Variance of a Binomial Distribution
Statisticians have developed general formulas for the mean, variance, and standard deviation of a
binomial random variable. They are
Mean ( μ ¿=np ,
Variance (σ 2 ¿=np ( 1− p ) ,∧¿
Standard Deviation (σ ¿=√ np ( 1− p )
Illustration: Suppose that a teacher has a class full of students like Y (a nightmare!). What is the
mean mark? What is the standard deviation?
The mean mark for a class of Y is μ = np = 10(0.20) = 2
The standard deviation is σ =√ np(1−p) = √ 10 ( 0.2 ) (0.8) = 1.26
Poisson Probability Distribution
Like the binomial random variable, the Poisson random variable is the number of occurrences
of events, which we’ll continue to call successes. The difference between the two random
variables is that a binomial random variable is the number of successes in a set number of trials,

18
whereas a Poisson random variable is the number of successes in an interval of time or specific
region of space. Therefore, experiments yielding numerical values of a random variable X, the
number of successes (observations) occurring during a given time interval (or in a specified
region) are often called Poisson experiments.
Here are several examples of Poisson random variables.
- The number of cars arriving at a service station in 1 hour. (The interval of time is
1 hour.)
- The number of flaws in a bolt of cloth. (The specific region is a bolt of cloth.)
- The number of customers arrived during a time period of length t.
- The number of telephone calls per hour received by an office.
- The number of typing errors per page.
- The number of accidents occurred at a junction per day.
- The number of accidents in 1 day on a particular stretch of highway. (The interval is defined
by both time, 1 day, and space, the particular stretch of highway.)
A Poisson experiment has the following properties:
i. The number of successes in any interval is independent of the number of successes in
other interval.
ii. The probability of a single success occurring during a short interval is proportional to the
length of the time interval and does not depend on the number of successes occurring
outside this time interval.
iii. The probability of more than one success in a very small interval is negligible.
iv. The probability of a success in an interval is the same for all equal-size intervals.
v. The probability of a success in an interval is proportional to the size of the interval.
Poisson probability function
The probability that a Poisson random variable assumes a value of x in a specific interval is
x −μ
μ e
f(x) =
x!
Where: f (x) = the probability of x occurrences in an interval
μ = expected value or mean number of success (occurrence)
e = the base of the natural logarithm (approximately 2.71828)
X = the number of success in the interval
o Incidentally, the variance of a Poisson random variable is equal to its mean; that is, σ 2 = μ .
Example1. Assume that billing clerks rarely make errors in data entry on the billing statements
of a co. Many statements have no mistakes; some have one, a very few have two mistakes; rarely
will a statement have three mistakes; and so on. A random sample of 1000 statements revealed
300 errors. What is the probability of no mistakes appearing in a statement  = 300/1000=0.3
P(0) = 0.30(2.7183)-0.3 = 0.7408
0!
Example 2: A bank manger wants to provide prompt service for customers at the banks drive up window.
The bank currently can serve up to 10 customers per 15-minute period without significant delay. The
average arrival rate is 7 customers per 15 minute period. Assuming X has a Poisson distribution find the
probability that 10 customers. Will arrive in a particular 15-minute period.
 = 7 , X= 10 P(10) = 710 2.7183-7 = 0.710
10!

19
2.5 Continuous Probability distribution: Normal distribution
As noted earlier in this unit a continuous random variable is one that can assume an infinite
number of possible values within a specified range. It usually results from measuring something.
It is not possible to list every possible value of the continuous random variable along with a
corresponding probability.
The most convenient approach is to construct a probability curve. The proportion of area
included between any two points under the probability curve identified the probability that a
randomly selected continuous variable has a value between those points.
Characteristics of a normal probability distribution and its accompanying normal curve
1. The normal curve is bell – shaped and has a single peak at the exact center of the
distribution. The arithmetic mean, median and the mode are equal and are located at
peak. Thus half the area under the curve is above this center point, and the other half is
below it.
2. The normal probability distribution is symmetrical about its mean. If we cut the normal
curve vertically at this central value, the two halves will be mirror images.
3. The normal curve falls of smoothly in either direction from the central value. It is
asymptotic, meaning that the curve gets closer and closer to the X – axis but never
actually touches it. In real world problems, however, this is somewhat unrealistic.
f(x)

The Normal Curve X

The normal probability distribution is important in statistical inference for three distinct
reasons:
1. The measurements produced in many random processes are known to follow this
distribution.
2. Normal probability can often be used to approximate other probability distribution, such
as the binomial and Poisson distributions.
3. Distribution of such statistics as the sample mean and sample proportion often follow the
normal distribution regardless of the distribution of the population.
Constructing the Probability Curve:
There is not just one normal probability distribution. There is a family of them we Might has one
of the following:

20
a) Equal means and different standard deviations. For example, assume the average age of
students in three sections S1, S2, S3 is equal 24 years. However, the standard deviation for S 1
=2.5, S2 = 3.1 and S3 = 4.

σ =3 .1

σ =4
σ =2 .5
μ=24 years
The shape of the curves is determined by the standard deviation. The smaller the standard
deviation the more peacked the curve will be and the larger the standard deviation the more flat
and wider the curve will be
b) Different means but equal standard deviation. Both sections have equal standard deviation
3.1 but different means S1=23 S2=26 S3=28
σ =3 .1 σ =3 .1 σ =3 .1

μ=23 μ=26 μ=28

c) Different means and different standard deviations

For S1  = 22 and  =2.8
S2  =24 and  =2.1
S3  =27 and  =3.1

μ=22 years μ=24 years μ=27 years

21
The number of normal distributions is unlimited, each having a different mean (), standard
deviation (), or both. While it is possible to provide probability tables for discrete distributions
such as the binomial and the Poisson, providing tables for the infinite number of normal
distributions is impossible. Fortunately, one member of the family can be used to determine the
probabilities for all normal distributions. It is called the standard normal distribution, and it is
unique because it has a mean of 0 and a standard deviation of 1.
Any normal distribution can be converted into a standard normal distribution by subtracting the
mean from each observation and dividing this difference by the standard deviation. The results
are called Z values. They are also referred to as z scores, the z statistics, the standard normal
deviates, the standard normal values, or just the normal deviate.
First it is necessary to convert or standardize the actual distribution to a standard normal
distribution using Z value. Z is called the normal deviate. In other words, Z value is the distance
between a selected value and the population mean in units of the standard deviation.
Transformation of Random Variable to Standard Normal value
Since there are infinitely many possible normal random variables, one of them is selected to
serve as our standard. We want to transform X in to the standard normal random variable Z.
Example1. We have a normal random variable X with  =50 and  =10 we want to convert this
random variable with  =0 and  =1.
We move the distribution from its center of 50 to a center of 0. This is done by subtracting 50
from all the values of X. Thus we shift the distribution 50 units back so that its new center is 0. If
we subtract the mean from all values of X, the new distribution (X-) will have a mean of zero.
The second thing we need to do is to make the width of the distribution, standard deviation equal
to 1. This is done by squeezing the width of the distribution down from 10 to 1. Because the total
probability under the curve must remain 1 and the distribution must grow up ward to maintain
the same area.
Mathematically, squeezing the curve to make the width 1 is equivalent to dividing the random
variable by its standard deviation. The area under the curve adjusted so that the total remains the same.
The mathematical transformation from X to Z is thus achieved by first subtracting  from X and
then dividing the result by .
Z=X–


μ=1

σ =10

μ=50 μ=0

22
Example – The weekly incomes of a large group of middle managers are normally distributed
with a mean of 1000 Br. and standard deviation of Br. 100. What is the Z value for an income of
a) Br. 1100? Z=X-  = 1000
  = 100
Z = 1100 – 1000 = 1
100
This means an income of 1100 is one standard deviation above the mean.
b) Br 900?
Z = 900 – 1000 = -1
100
This implies that an income of Br. 900 is one standard deviation (Br. 100) below the mean.
c) Br. 1250?
Z = 1250 – 1000 = 2.5
100
This implies that an income of Br. 1250 is 2.5 standard deviations above the mean
d) Br. 850?
Z = 850 – 1000 = -1.5
100
This means an income of Br. 850 is 1.5 standard deviations below the mean
Finding probabilities using the normal probability table
For any value of Z calculated the corresponding probability can be easily found from the Z table.
Example 1: The lifetime of an electrical component is known to follow normal distribution with
mean 2000 hr and standard deviation 200 hr
(a) What is the probability that a randomly selected component will last between 2000 and
2400 hr?

X hrs

1400 1600 1800 μ=2000 2200 2400 2600

Z (Standard
Normal Unit)
-3 -2 -1 μ=0 +1 +2 +3
The lower boundary of the interval is at the mean of the distribution and therefore at Z = 0. The
upper boundary of the interval in terms of Z is

23
 χ−μ 2400−2000
= =2
Z= σ 200
By reference to the probability table
p(0  Z  + 2) = 0.4772
p(2000  x  2400) = 0.4772
This means a randomly selected component will have a probability of 0.4772 to last between
2000 to 2400 hr. Or we can say 47.72% of all components will last between 2000 to 2400 hr.
(b) What is the probability that a randomly selected component will last more than 2200 hrs?
Note that the total area to the right of the mean 2000 is 0.5. Therefore if we determine the
proportion between the mean and 2200, we can subtract this value from 0.50 to obtain the
probability of the hrs x being greater than 2200.
Z = 2200 – 2000 = 1
200
p(0  Z  +1.0) = 0.3413
p(Z > +1) = 0.5000 – 0.3413= 0.1587
This means 15.87% of the components will last more than 2200 hrs.

2,000 2200
Example 2: The amount of time required for a certain type of car repair at a service garage is
normally distributed with the  = 45 min. And the standard deviation  = 8 min. The service
manager plans to have work begin on a customer’s car 10 min after the car is dropped off and he
tells the customer that the car will be ready within 1 hrs total time.
a) What is the probability that he will be wrong?
P(error) = p ( x > 50 min) , since actually work is to begin in 10 min, the actual repair must
be completed in the remaining 50 min. And the manager will be wrong if the repair takes
more than 50 minutes.
Z = X –  = 50-40= + 0.62 p(Z = 0.62) = 0.2324 then,
 8
P( x > 50) = P (Z > + 0.62 )= 0.5000 –0.2324 = 0.2676
b) What is the required working time allotment such that there is a 90%chance that the repair
will be completed within that time?
If the proportion of the area is 0.90, then because a proportion of 0.5 is to the left of the mean, it
follows that a proportion of 0.4 is between the mean and the unknown value of X.

24
By looking the table the closest we can come to a proportion of 0.40 is 0.3997 and the Z value
associated with this proportion is Z = + 1.28
Now convert Z value to a value of X
Z=X–, Z () = x - , x =  + Z

X = 45 + (+1.28) (8.00)= 45 +10.24 = 55.24 min

p = 0.90
p = 40

45 X X
0 1 Z
This means if the service manager allots 55.24 minutes for the repair he will have a 90% chance
to complete the repair within 55.24 minutes.
C) What is the working time allotment such that there is a probability of just 30% that the repair
can be completed within that time?
Since a proportion of area of 0.3 is to the left of the unknown value of X it follows that a portion
of 0.20 is between the unknown value and the mean. By reference to the table the proportion of
area closest to this is 0.1985 and the Z value corresponding to this probability is 0.52. The Z
value is negative because the unknown value is to the left of the mean.
X =  + Z
X = 45 + (-0.52)(8) = 40.84 min. The service manager will have a 30% chance to complete the
repair within 40.84 min.
Example3. Returning again to the weekly incomes illustration,  = 1000 and  =100
(a) What percent of the executive earn weekly incomes of 1245 or more?
X  1245
Z= 1245 – 1000 = 2.45
100
The area associated with Z = 2.45 is 0.4929. This is the probability between 1000 and 1245. The
probability for 1245 and beyond is found by subtracting 0.4929 from 0.5. This is equals to
0.0071. That only 0.71% of the executives earns weekly incomes of 1245 or more.
(b) What is the probability of selecting an income between 840 and 1200
This problem is divided in to two parts

1) For the probability between 840 and the mean

25
 Z = 840 – 1000 = -1.60
100
2) For the probability between the mean 1000 and 1200
Z = 1200 – 1000 = 2
100
The probability of Z = -1.60 is 0.4452
The probability of Z = 2 is 0.4772
0.4452 + 0.4772 = 0.9224 or 92.24% i.e.,
92.24% of the managers have weekly incomes between 840 and 1200.

0.4452 0.4772

840 1000 1200 X Birr

0.9224
a) What is the probability that a randomly selected middle manager will have an income
between 1150 and 1250
This problem is separated in two parts. First find the Z value associated with 1250
Z = 1250 –100 = 2.5
100
Next find the Z value for 1150  Z = 1150 – 1000 = 1.5
100
p(Z = 2.5) = 0.4938
Similarly p(Z = 1.5) = 0.4332
So the probability between 1150 and 1250 equals 0.4938 – 0.4332 = 0.0606

0.0606

1000 1500 1250

Computing unknown Mean and unknown Standard deviation

26
Sometimes the mean and the standard deviation of normal probability distribution may not be
given or known. In such situations the probability of two unknown variables (x 1 and x2) is used
to compute the mean and standard deviation.
Example 1: The construction time for a certain building is normally distributed with an
unknown mean and unknown variance. We do know, however, that 75% of the time construction
takes less than 12 months and 45% of the time construction takes less than 10 months. We have
p(x < 12) = 0.75 and p(x < 10) = 0.45, this follows that

p
( 12−μ
Z 1<
δ )
= 0.75 and

p
(Z 2<
10−μ
δ )
= 0.45

0.75
0.45

10 μ 12 X
Z2 Z1 Z
From the table we find that Z2 = -0.12 and Z1 = 0.67 substituting these two values for  and  we
10−μ
get: σ = -0.12 and
10−μ
σ = 0.67
by cross multiplication,
-0.12 = 10 - 
0.67 = 12 - 
 = 10 + 0.12
 = 12 – 0.67
We have two equations with two unknown and it follows that
10 + 0.12 = 12 – 0.67
0.79 = 2
 = 2/79 = 2.53
 = 10 + 0.12 (2.53) = 10.30

Normal Approximation

27
One of the reasons why we apply the normal probability distribution is that it is more efficient
than the binomial or Poisson when these distributions involve larger n or  values respectively.
The Normal approximation to the Binomial
The table of the binomial probabilities goes successively from an n of 1 to n of 25 or 30. Suppose
a problem involved taking a sample of 60. Generating a binomial distribution for that large a
number using the formula would be very time consuming. A more efficient approach is to apply
the normal approximation. This seems reasonable because as n increases, a binomial distribution
gets closer and closer to a normal distribution.
The normal probability distribution is generally deemed a good approximation to the binomial
probability distribution when np and nq are both greater than 5.
Since there is no area under the normal curve at a single point, we assign interval on the real line
to the discrete value of X by making what we call a continuity correction factor. Continuity
correction factor is subtracting or adding, depending on the problem, the value 0.5 to a selected
value when a binomial probability distribution is being approximated by a normal distribution.
We add 0.5 to x when x  and x > a certain value we subtract 0.5 from x when x < and  a
certain value.
Example1: supposes that the management of a restaurant found that 70% of their new customers
return for another meal. For a week in which 80 new (first time) customers dined at the
restaurant, what is the probability that 60 or more will return for another meal?
Notice that the binomial conditions are met.
To calculate this probability using the binomial formula means computing the probabilities of 60,
61, 62 ….. 80, and adding them to arrive at probability of 60 or more. This is quick hard the
practically impossible. So the most appropriate solution is the normal approximation.
Step 1: compute the arithmetic mean and the standard deviation of the binomial distribution
 = np = 80 (0.70) = 56
√
 = √ npq= 80(0.7)(0.3) = 4.0988
Step2. Apply continuity correction factor for x. x = 60 for the discrete random variable
60 or more means 60 inclusive. Since the lower limit for 60 is 59.5, Sixty starts from 59.5. This
is similar to rounding number between 59.5 and 60.5 to 60. 60 is a value b/n 59.5 and 60.5
Step 3: Determine the standard normal value, Z,
59 .5−56
X− ¿ ¿
Z= ❑ = 4 .0998 = 0.85
Step 4: calculate the probability of a Z value greater than 0.85
The probability of Z value between 0 and 0.85 is 0.3023
To determine the probability of a Z value greater than 0.85 subtract 0.3023 from 0.50,
0.5000–0.3023 = 0.1977. So the probability that 60 or more customers will come again is
19.77%
Example 2: For a large group of sales prospects it is known that 20% of those contacted
personally by a sales representative will make a purchase. If a sales representative contacts 30
prospects, what is the probability that 10 or more will make a purchase?
 = np = (30) (0.2) = 6.00
√
 = √ npq= (30)(0.2)( 0.8) = 2.19
10 or more is assumed to begin at 9.5. i.e., x = 9.5

28
Z = 9.5 – 6.00 = 3.5 = + 1.60
2.19 2.19
The probability for Z = 1.60 = 0.4452
p(1.6) = 0.5000 – 0.4452 =0.0548
Normal approximation of Poisson distribution
When the mean of a Poisson distribution is relatively large, the normal probability distribution
can be used to approximate the Poisson distribution. For a good normal approximation to the
Poisson  must be greater than or equal to 10.
Example: The average number of calls for a service received by a machine repair shop per 8 hr
shift is 10.00. What is the probability that more than 15 calls will be received during a randomly
selected 8 hr shift?
 = 10
 = √ 10 = 3.16
Z = 15.5 – 10 = 5.5 = 1.74
3.16 6 3.16
The probability for Z = 1.74 = 0.4591
p(Z> 1.74) = 0.5000 – 0.4591 = 0.0409

29