Managerial Statistics

Probability theory: Self-assessment exercises

1. An experiment with three outcomes has been repeated 50 times, and it was learned that
E1 occurred 20 times, E2 occurred 13 times, and E3 occurred 17 times. Assign
probabilities to the outcomes. What method did you use?

Ans1:
P(E1) = 0.40
P(E2) = 0.26
P(E3) = 0.34
The relative frequency method was used.

2. Fortune magazine publishes an annual list of the 500 largest companies in the US. The
following data show the five states with the largest number of Fortune 500 companies
(The NY times Almanac, 2006)

State Number of companies

New York 54
California 52
Texas 48
Illinois 33
Ohio 30

Suppose a Fortune 500 company is chosen for a follow-up questionnaire. What are the
probabilities of the following events?

a) Let N be the event the company is headquartered in New York. Find P(N).

b) Let T be the event the company is headquartered in Texas. Find P(T).

c) Let B be the event the company is headquartered in one of these five states. Find P(B).

Ans2:

a) 0.108

b) 0.096

c) 0.434

Prof. Ritu Gupta [Link]@[Link] TAPMI

 Managerial Statistics

3. A survey of magazine subscribers showed that 45.8% rented a car in the last 12 months
for business reasons, 54% rented a car during the past 12 months for personal reasons,
and 30% rented a car during the past 12 months for both business and personal
reasons.

a) What is the probability that a subscriber rented a car during the last 12 months for
business or personal reasons?

b) What is the probability that a subscriber did not rent a car during the last 12 months
for either business or personal reasons?

Ans3:
a. 0.698

b. 0.302

4. Jamal Crawford of the NBA’s Portland Trail Blazers is the best free-show thrower on the
team, making 93% of his shots (ESPN Website, 2102). Assume that late in a basketball
game, Jamal Crawford is fouled and is awarded 2 shots:

a) What is the probability that he will make both shots?

b) What is the probability that he will make atleast one shot?

c) What is the probability that he will miss both shots?

Ans4:

a. P(hit both) = 0.8649

b. 0.9951
[ Hint: P(miss) = 1 – P(hit)=1 – 0.93 = 0.07

P(hit 1) X P(miss 2) = 0.0651

P(miss 1) X P(hit 2) = 0.0651
P(hit 1) X P(hit 2) = 0.8649 ]
c. Probability of missing both P(miss 1) X P(miss 2) = 0.07 X 0.07 = 0.0049

Prof. Ritu Gupta [Link]@[Link] TAPMI

 Managerial Statistics

5. The prior probabilities for events A1 and A2 are P(A1) = 0.40 and P(A2) = 0.60. It is also
known that P(A1 ∩ A2) = 0. Suppose P(B | A1) = 0.20 and P(B | A2) = 0.05.

a) Are A1 and A2 mutually exclusive? Explain.

b) Compute P(A1 ∩ B) and P(A2 ∩ B)

c) Compute P(B)

d) Apply Bayes’ theorem to compute P(A1 | B) and P(A2 | B)

Ans5:
a. Yes.

b. 0.08 , 0.03

c. P(B) = 0.11

d. P(A1|B) =0.7273 , 0.2727

6. The prior probabilities of events A1, A2, and A3 are P(A1) = 0.20, P(A2) = 0.50, and P(A3)
= 0.30. The conditional probabilities of event B given A1, A2, and A3 are P(B | A1) = 0.50,
P(B | A2) = 0.40, and P(B | A3) = 0.30

a) Compute P(B ∩ A1), P(B ∩ A2), and P(B ∩ A3)

b) Apply Bayes’ theorem, to compute the posterior probability P(A2 | B)

c) Use the tabular approach to applying Bayes’ theorem to compute P(A1 | B), P(A2 | B)
and P(A3 | B)

Ans6:

a. 0.10, 0.20, 0.09

b. 0.51

c. 0.26, 0.51, 0.23

Prof. Ritu Gupta [Link]@[Link] TAPMI

 Managerial Statistics

7. According to the Open doors 2011 report, 9.5% of all full-time US undergraduate
students studied abroad during the 2009-2010 academic year (Institute of International
Education, November 2011). Assume that participation records show that women make
up 60% of the students who studied abroad during the 2009-2010 academic year, but
women make up only 49% of the students who didn’t participate.

a) Let A1 = the student studied abroad during 2009-2010 academic year

A2 = the student didn’t study abroad during the 2009-2010 academic year

W = the student is a female student

Using the above information, what are the values of P(A1), P(A2), and P(W|A1), and
P(W|A2)?

b) What is the probability that a female student studied abroad during the 2009-2010
academic year?

c) What is the probability that a male student studied abroad during the 2009-2010
academic year?

d) Given the preceding results, what were the percentage of women and the
percentage of men studying full time during the 2009-2010 academic year?

Ans7:

a. P(A1) = 0.095, P(A2) = 0.905, P(W|A1) = 0.60, P(W|A2) = 0.49

b. P(A1|W) = 0.1139
c. P(A1|M) = 0.0761
d. P(W) = 0.50045, P(M) = 0.49965

8. Intent to Pursue MBA: Students taking the Graduate Management Admissions Test
(GMAT) were asked about their undergraduate major and intent to pursue their MBA as a
full-time or part-time student. A summary of their responses follows.
Undergraduate Major
Business Engineering Other Totals
Intended Full-Time 352 197 251 800
Enrollment Part-Time 150 161 194 505
Status
Totals 502 358 445 1305

Prof. Ritu Gupta [Link]@[Link] TAPMI

 Managerial Statistics

a) Develop a joint probability table for these data.

b) Use the marginal probabilities of undergraduate major (business, engineering, or other) to

comment on which undergraduate major produces the most potential MBA students.

c) If a student intends to attend classes full-time in pursuit of an MBA degree, what is the
probability that the student was an undergraduate engineering major?

d) If a student was an undergraduate business major, what is the probability that the student
intends to attend classes full-time in pursuit of an MBA degree?

e) Let A denote the event that the student intends to attend classes full-time in pursuit of an
MBA degree, and let B denote the event that the student was an undergraduate business
major. Are events A and B independent?

Ans8:
a)
Undergraduate Major
Business Engineering Other Totals
Intended Full-Time 0.270 0.151 0.192 0.613
Enrollment Part-Time 0.115 0.123 0.149 0.387
Status
Totals 0.385 0.274 0.341 1.000

b) Business undergraduate major

c) 𝑃(Engineering|Full-Time) = 0.246

d) 𝑃(Full-Time|Business) = 0.701

e) A and B are not independent.

9. Credit Card Defaults. A local bank reviewed its credit card policy with the intention of
recalling some of its credit cards. In the past approximately 5% of cardholders defaulted,
leaving the bank unable to collect the outstanding balance. Hence, management
established a prior probability of 0.05 that any particular cardholder will default. The bank
also found that the probability of missing a monthly payment is 0.20 for customers who do
not default. Of course, the probability of missing a monthly payment for those who default
is 1.
Prof. Ritu Gupta [Link]@[Link] TAPMI
 Managerial Statistics

a) Given that a customer missed one or more monthly payments, compute the posterior
probability that the customer will default.

b) The bank would like to recall its card if the probability that a customer will default is greater
than 0.20. Should the bank recall its card if the customer misses a monthly payment? Why
or why not?

Ans9:

[Hint: P(customer defaults) = 0.05

P(customer does not default) = 0.95
P(missed payment |customer does not default) = 0.2
P(missed payment | customer defaults) = 1 ]
a) P(customer defaults/missed payment) = 0.21
b) Yes, the probability of default is greater than 0.20.

10. Prostate Cancer Screening. According to a 2018 article in Esquire magazine, approximately
70% of males over age 70 will develop cancerous cells in their prostate. Prostate cancer is second
only to skin cancer as the most common form of cancer for males in the United States. One of the
most common tests for the detection of prostate cancer is the prostate-specific antigen (PSA) test.
However, this test is known to have a high false-positive rate (tests that come back positive for
cancer when no cancer is present). Suppose there is a 0.02 probability that a male patient has
prostate cancer before testing. The probability of a false-positive test is 0.75, and the probability of
a false-negative (no indication of cancer when cancer is actually present) is 0.20.
a) What is the probability that the male patient has prostate cancer if the PSA test comes back
positive?
b) What is the probability that the male patient has prostate cancer if the PSA test comes back
negative?
c) For older males, the prior probability of having cancer increases. Suppose that the prior
probability of the male patient is 0.30 rather than 0.02. What is the probability that the male
patient has prostate cancer if the PSA test comes back positive? What is the probability that
the male patient has prostate cancer if the PSA test comes back negative?
d) What can you infer about the PSA test from the results of parts (a), (b), and (c)?

Prof. Ritu Gupta [Link]@[Link] TAPMI

 Managerial Statistics

Ans10:
[Hint: Let C = event male patient has prostate cancer
+ = positive PSA test for prostate cancer
– = negative PSA test for prostate cancer
𝑃(𝐶) = 0.02 ; 𝑃(+|𝐶 𝐶 ) = 0.75 ; 𝑃(−|𝐶) = 0.20 ]

a) 𝑃(𝐶|+) = 0.0213
b) 𝑃(𝐶|−) = 0.0161
c) Now 𝑃(𝐶) = 0.30 ; then 𝑃(𝐶|+) = 0.3137 and 𝑃(𝐶|−) = 0.2553

d) The difference between 𝑃(𝐶|+) and 𝑃(𝐶|−) in parts (a) and (b) is relatively small.
When the prior probability increases in part c, 𝑃(𝐶|+) increases to 0.3137, but
𝑃(𝐶|−) is also relatively high at 0.2553. Results similar to these are why the
guidelines for when males are tested for prostate cancer and how they are treated if
they test positive have changed in recent years.

Prof. Ritu Gupta [Link]@[Link] TAPMI