Mathematical Statistics with Applications

DEPARTMENT OF FINANCE AND BANKING

BBA Programme

LECTURE NOTE

Topic: The Normal Probability Distribution

(Applied Business Statistics)

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Introduction to Probability Distributions

A random variable is a variable whose value is determined by the outcome of a random (chance) experiment. In
business, examples include the number of defective items in a batch, the number of customers arriving at a bank
counter, or the number of loan applications approved in a day.

A probability distribution is simply a table, formula, or graph that lists every possible value of a random variable
together with the probability of that value occurring.

There are two broad types of random variables:

• Discrete random variable — takes only whole, countable values (0, 1, 2, 3, ...). Example: number of ATM
breakdowns in a week.
• Continuous random variable — can take any value within a range. Example: time taken to process a loan
(covered separately under the Normal Distribution).
This note covers two of the most important discrete probability distributions used in business and finance: the
Binomial Distribution and the Poisson Distribution.

What is a Normal Probability Distribution? Explain its characteristics.

A Normal Probability Distribution is a continuous probability distribution in which values are symmetrically
arranged around the mean, and most of the values cluster near the mean. It is also called the Gaussian
Distribution, after the mathematician Carl Friedrich Gauss.

In simple words: if you plot the data, most observations fall near the average (mean), and fewer observations
fall as you move far away from the average, on either side. The resulting shape looks like a bell — so it is often
called the 'Bell Curve'.

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Figure 1: A normal curve is symmetric, bell-shaped, and centred at the mean.

Characteristics of the Normal Distribution

● Bell-shaped and symmetric: the left half is a mirror image of the right half.
● Mean = Median = Mode, and all three lie exactly at the centre.
● It is a continuous distribution — the variable (X) can take any value, not just whole numbers.
● The curve extends infinitely in both directions but never touches the horizontal axis (it is 'asymptotic').
● The total area under the curve is always equal to 1 (or 100%).
● It is defined completely by two parameters: the mean (μ) and the standard deviation (σ).
● About 68%, 95%, and 99.7% of data lie within 1, 2, and 3 standard deviations of the mean respectively
(Empirical Rule).

State and explain the assumptions of the Normal Distribution.

Before we apply the normal distribution to real business or academic data, certain assumptions should
reasonably hold:

1. The data is continuous — it can take any value within a range (e.g., height, weight, income, exam marks).
2. The distribution is symmetric about the mean — no skewness (data is not lopsided toward one side).
3. The mean, median and mode of the data are approximately equal.
4. Most values cluster around the centre, and extreme values (very high or very low) are rare.
5. The total probability (area under the curve) sums to exactly 1.

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6. The random variable is influenced by many small, independent factors that add up (this is why many
natural and business variables — like returns on stock, heights of people, errors in measurement — tend to
be normal).
If these assumptions are seriously violated (for example, the data is heavily skewed), the normal distribution
should not be used, and another distribution may be more appropriate.

What are the mean, median, and mode in a normal distribution? Why are they equal?

In any distribution:

● Mean (μ): the arithmetic average of all values.

● Median: the middle value when data is arranged in order.
● Mode: the value that occurs most frequently (the peak of the curve).
In a normal distribution, these three measures are always equal: Mean = Median = Mode.

Mean = Median = Mode = μ

Why are they equal?

Because the normal curve is perfectly symmetric. Since the left side is a mirror image of the right side:

● The middle value (median) must be at the centre of symmetry.

● The highest point of the curve (mode) is also exactly at the centre, since frequency rises smoothly to a
single peak and falls smoothly after it.
● Because the distribution balances equally on both sides, the arithmetic mean also falls at this same central
point.
So symmetry is the reason all three central measures collapse onto a single point — the centre of the bell curve.

Draw and explain the shape of the normal curve.

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Figure 1 (repeated for reference): The classic bell-shaped normal curve.

Explanation of the shape

● The curve rises smoothly from both sides and reaches a single peak exactly at the mean (μ).
● It is symmetric: the shape on the left of the mean is a perfect mirror image of the shape on the right.
● The curve is highest at the centre and gradually falls (tapers) as we move away from the mean in either
direction.
● The two tails extend infinitely but get closer and closer to the horizontal axis without ever touching it —
this property is called 'asymptotic'.
● The points where the curve changes from curving-outward to curving-inward (called inflection points)
occur exactly at μ − σ and μ + σ.
This single, smooth, symmetric hump is why it is popularly called the 'Bell Curve'.

What is Standard Normal Distribution? How does it differ from a normal distribution?

A Standard Normal Distribution is a special, 'standardized' version of the normal distribution which always has:

Mean (μ) = 0 and Standard Deviation (σ) = 1

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Figure 2: The standard normal curve is always centred at 0 with spread of 1.

Any normal distribution (with any mean and any standard deviation) can be converted into the standard normal
distribution using the Z-score formula. This conversion is called standardization.

Difference between Normal Distribution and Standard Normal Distribution

Basis Normal Distribution Standard Normal Distribution
Mean Can be any value (μ) Always 0
Standard Deviation Can be any positive value (σ) Always 1
Variable used X (original units, e.g. Taka, marks, kg) Z (no units — a pure score)
Purpose Describes the real-world data Used to find probabilities via the Z-table

Define the Z-score. How is it calculated?

A Z-score (also called a standard score) tells us how many standard deviations a particular value (X) is away from
the mean (μ). It converts any normal variable into the standard normal scale.

Z = (X − μ) / σ
Where:

● X = the given value (raw score)

● μ = the population mean
● σ = the population standard deviation

Interpretation
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● Z = 0 means the value is exactly equal to the mean.

● Z = +1 means the value is 1 standard deviation above the mean.
● Z = −2 means the value is 2 standard devia ons below the mean.

Example
If the average exam mark (μ) is 60, standard deviation (σ) is 10, and a student scores X = 75, then:

Z = (75 − 60) / 10 = 1.5

This means the student's score is 1.5 standard deviations above the class average.

Explain the importance and applications of the Z-table.

The Z-table (Standard Normal Table) lists the cumulative probability — the area under the standard normal
curve — to the left of any given Z-value. Since it is difficult to calculate this area using calculus in an exam, we
simply look it up in the table.

Why the Z-table is important

● It saves time — no need to solve complex integration for the normal curve every time.
● It gives a standardized reference that works for any normal distribution (after converting X to Z).
● It allows us to directly find probabilities, percentiles, and proportions.

Applications of the Z-table

● Finding the probability that a variable is less than, greater than, or between certain values.
● Quality control — checking the proportion of products within an acceptable range.
● Finance — estimating the probability of returns falling below/above a target level.
● Education — finding what percentage of students scored above or below a certain mark.
● HR / business — analysing salaries, performance scores, and customer satisfaction ratings.

How to read the Z-table

The row gives the Z-value up to one decimal place, and the column gives the second decimal place. The cell
where the row and column meet gives the cumulative area (probability) to the left of that Z.

A short extract of the standard normal table is shown below (full table is normally attached at the end of the
textbook):

Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.5279 0.5319 0.5359
0.1 0.5398 0.5438 0.5478 0.5517 0.5557 0.5596 0.5636 0.5675 0.5714 0.5753
0.2 0.5793 0.5832 0.5871 0.5910 0.5948 0.5987 0.6026 0.6064 0.6103 0.6141
0.3 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.6443 0.6480 0.6517

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Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.4 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.6808 0.6844 0.6879
0.5 0.6915 0.6950 0.6985 0.7019 0.7054 0.7088 0.7123 0.7157 0.7190 0.7224
0.6 0.7257 0.7291 0.7324 0.7357 0.7389 0.7422 0.7454 0.7486 0.7517 0.7549
0.7 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.7823 0.7852
0.8 0.7881 0.7910 0.7939 0.7967 0.7995 0.8023 0.8051 0.8078 0.8106 0.8133
0.9 0.8159 0.8186 0.8212 0.8238 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389
1.0 0.8413 0.8438 0.8461 0.8485 0.8508 0.8531 0.8554 0.8577 0.8599 0.8621

(Table shows cumulative area to the left of Z, for Z = 0.00 to 1.10. The complete table continues up to Z = 3.49 in the same pattern.)

How do you find the probability that a variable is less than a given value using the
normal distribution?

To find P(X < a), follow these steps:

7. Convert X to Z using: Z = (X − μ) / σ
8. Look up this Z-value in the Z-table.
9. The value you find directly IS the probability P(Z < z), which equals P(X < a).

P(X < a) = P(Z < z) = value from Z-table

Example
Suppose μ = 50, σ = 5. Find P(X < 55).

Z = (55 − 50) / 5 = 1.00

From the Z-table, the area to the left of Z = 1.00 is 0.8413.

P(X < 55) = 0.8413 (i.e. 84.13%)

How do you find the probability that a variable is greater than a given value?

Since the total area under the curve is 1, and the Z-table gives the area to the LEFT of Z, for 'greater than' we
subtract from 1:

P(X > a) = 1 − P(Z < z)

Example
Using the same data: μ = 50, σ = 5. Find P(X > 55).

Z = (55 − 50) / 5 = 1.00

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From the Z-table, P(Z < 1.00) = 0.8413

P(X > 55) = 1 − 0.8413 = 0.1587 (i.e. 15.87%)

Tip for students: 'less than' → read the table directly. 'Greater than' → always do (1 − table value).

How do you calculate the probability that a variable lies between two values?

To find P(a < X < b), we find the Z-score for both values, look up both areas in the Z-table, and subtract the
smaller cumulative area from the larger one:

P(a < X < b) = P(Z < z₂) − P(Z < z₁)

Example
Suppose μ = 50, σ = 5. Find the probability that X lies between 45 and 55.

Z₁ = (45 − 50)/5 = −1.00 Z₂ = (55 − 50)/5 = +1.00

From the Z-table: P(Z < 1.00) = 0.8413 and P(Z < −1.00) = 0.1587

P(45 < X < 55) = 0.8413 − 0.1587 = 0.6826 (i.e. 68.26%)

This result matches the Empirical Rule: about 68% of values lie within 1 standard deviation of the mean (see
Q12).

How do you determine the value of a variable (X) from a given Z-score?

Sometimes we are given a probability (or a Z-score) and asked to find the corresponding raw value X. We simply
rearrange the Z-score formula:

X=μ+Z×σ

Example
Suppose in an exam, μ = 60, σ = 8, and a student's Z-score is 1.25. Find the student's mark (X).

X = 60 + (1.25 × 8) = 60 + 10 = 70
So the student's actual mark is 70.

This reverse process is especially useful when a question gives a percentile or probability (e.g., 'find the mark
below which 90% of students scored') — first find the Z-value corresponding to that probability from the Z-table,
then convert it to X using the formula above (this is solved fully in Q20).

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Explain the 68–95–99.7 Empirical Rule with a diagram.

The Empirical Rule (also called the 68–95–99.7 Rule) describes how data is distributed in a normal distribution,
in terms of standard deviations from the mean.

Figure 3: Empirical Rule — proportions of data within 1, 2 and 3 standard deviations.

● About 68% of all values lie within ±1 standard deviation of the mean (μ − σ to μ + σ).
● About 95% of all values lie within ±2 standard deviations of the mean (μ − 2σ to μ + 2σ).
● About 99.7% of all values lie within ±3 standard deviations of the mean (μ − 3σ to μ + 3σ).
This rule gives students and managers a very quick way to judge how 'normal' or 'extreme' a particular value is,
without even using the Z-table.

What is the difference between Standardization and Normalization?

Both are techniques used to rescale data, but they work differently and are used for different purposes.

Basis Standardization Normalization

Rescales data to have mean = 0 and standard Rescales data to fit within a fixed range,
Meaning
deviation = 1 usually 0 to 1
Formula Z = (X − μ) / σ X′ = (X − Xmin) / (Xmax − Xmin)
Very sensitive to outliers (min/max change
Effect of outliers Less sensitive to outliers
the whole scale)
Used when data follows (or is assumed to Used when we need all values on a common
Typical use follow) a normal distribution — e.g. Z-scores, bounded scale — e.g. comparing variables of
hypothesis testing different units before machine learning

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In short: Standardization is about the shape/spread relative to the mean; Normalization is about squeezing
values into a fixed boundary.

Discuss the business applications of the Normal Probability Distribution.

The normal distribution is one of the most widely used tools in business, finance, and management. Some key
applications:

● Finance & Investment: Stock returns are often assumed to be normally distributed, helping analysts
estimate risk (standard deviation) and the probability of gains or losses.
● Quality Control: Manufacturing firms use the normal distribution to check whether product weight, size, or
strength falls within an acceptable tolerance range.
● Inventory & Demand Forecasting: Businesses model daily/weekly product demand as normal to decide
safety stock levels and avoid stock-outs.
● Human Resource Management: Employee performance scores, appraisal ratings, and salary distributions
are often analysed using the normal curve.
● Marketing & Customer Analysis: Customer spending amounts, satisfaction scores, and response times are
frequently modelled as normal to identify typical vs. unusual customer behaviour.
● Insurance & Actuarial Science: Insurers use the normal distribution to estimate the probability of claims
and to set premiums.
● Banking & Credit Risk: Banks use it to model loan default risk and to set credit limits based on probability of
repayment.
In all these cases, the normal distribution helps decision-makers convert everyday business data into
probabilities — allowing them to make informed, risk-based decisions.

Why is the Normal Distribution called a continuous probability distribution?

A distribution is called continuous when the variable being measured (X) can take any value within a given
range, including fractions and decimals — not just whole/counted numbers.

For example: height, weight, time, temperature, income, and exam scores (measured precisely) can all take
infinite possible values between any two points (e.g., a height of 5.671 feet is possible).

Because X can take infinitely many values, we cannot assign a probability to one exact single point (that
probability is technically zero). Instead, we always talk about the probability that X falls within a range or interval
— this is exactly how we use the normal distribution (e.g., P(X < 55), P(45 < X < 55)).

This is different from a discrete distribution (like the Binomial distribution), where the variable can only take
specific separate values, such as the number of defective items (0, 1, 2, 3...).

Since the normal distribution deals with a continuously measurable variable and expresses probability as area
under a smooth curve, it is classified as a continuous probability distribution.

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What is the total area under the normal curve? Explain its significance.

Total Area Under the Normal Curve = 1 (or 100%)

This is a fundamental property of every probability distribution — the total probability of all possible outcomes
must add up to exactly 1 (100%).

Significance of this property

● It allows the area under any part of the curve to be directly read as a probability or percentage.
● Because the curve is symmetric, exactly 0.5 (50%) of the area lies to the left of the mean, and 0.5 (50%) lies
to the right.
● Any calculated probability, such as P(X < a) or P(a < X < b), will always be a value between 0 and 1 — never
negative, and never more than 1.
● It provides the logical basis for the 'greater than' rule: P(X > a) = 1 − P(X < a), since both areas together must
equal the whole area, which is 1.

How does changing the mean (μ) affect the normal curve?

The mean (μ) determines the location (position) of the normal curve along the horizontal axis. Changing μ does
NOT change the shape or spread of the curve — it only slides the entire curve left or right.

Figure 4: Increasing μ shifts the curve to the right; decreasing μ shifts it to the left. The shape stays identical.

● If μ increases, the whole curve moves to the right (values become larger on average).
● If μ decreases, the whole curve moves to the left (values become smaller on average).
● The height, width, and spread of the curve remain exactly the same — only its central position changes.
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How does changing the standard deviation (σ) affect the normal curve?

The standard deviation (σ) controls the spread (width) and height of the normal curve. It does NOT change the
central location — the mean stays fixed.

Figure 5: A smaller σ produces a tall, narrow curve; a larger σ produces a short, wide curve.

● If σ is small, data is closely packed around the mean → the curve becomes tall and narrow (less
variability/risk).
● If σ is large, data is spread out widely from the mean → the curve becomes short and wide (more
variability/risk).
● In business terms: a smaller σ means more consistent/predictable outcomes (e.g., stable returns); a larger
σ means more risk/uncertainty.

Solve a numerical problem involving Z-score and probability using the Z-table.

Problem: The monthly electricity bill of households in a locality is normally distributed with a mean of Tk. 1,200
and a standard deviation of Tk. 150. Find the probability that a randomly selected household has a bill less than
Tk. 1,425.

Solution
Step 1: Identify the given values.

● μ = 1200, σ = 150, X = 1425

Step 2: Compute the Z-score.

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Z = (X − μ) / σ = (1425 − 1200) / 150 = 225 / 150 = 1.50

Step 3: Look up Z = 1.50 in the Z-table (row 1.5, column 0.00).

P(Z < 1.50) = 0.9332

Figure 6: Shaded area represents P(Z < 1.50) = 0.9332.

Step 4: Conclusion.

P(X < 1425) = 0.9332 → 93.32%

Interpretation: There is a 93.32% probability (chance) that a randomly chosen household's electricity bill is less
than Tk. 1,425. Equivalently, about 93.32% of households have a bill below Tk. 1,425.

Solve a numerical problem where the mean and standard deviation are given, and
you must find the corresponding value (X) for a specified probability.

Problem: The scores of students in a Finance course are normally distributed with a mean of 65 marks and a
standard deviation of 8 marks. The top 10% of students will receive an 'A' grade. Find the minimum mark
required to obtain an 'A' grade.

Solution
Step 1: Identify the given values.

● μ = 65, σ = 8
● Top 10% means we need the mark below which 90% of students fall, i.e. P(X < x) = 0.90

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Step 2: Find the Z-value corresponding to a cumulative probability of 0.90 from the Z-table.

Searching the body of the Z-table for the value closest to 0.9000, we find it at approximately Z = 1.28 (P(Z < 1.28)
= 0.8997, very close to 0.90).

Z = 1.28
Step 3: Convert this Z-value back to the raw score (X) using: X = μ + Z × σ

X = 65 + (1.28 × 8) = 65 + 10.24 = 75.24

Step 4: Conclusion.

Minimum mark required for an 'A' grade ≈ 75.24 (rounded to 75 or 76 marks)

Interpretation: A student needs to score approximately 75.24 marks or above to be in the top 10% of the class
and secure an 'A' grade.

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Quick Revision — Formula Sheet

Concept Formula
Z-score (standardization) Z = (X − μ) / σ
Finding X from Z X=μ+Z×σ
P(X < a) = P(Z < z), read directly from Z-table
P(X > a) = 1 − P(Z < z)
P(a < X < b) = P(Z < z₂) − P(Z < z₁)
Empirical Rule 68% within ±1σ, 95% within ±2σ, 99.7% within ±3σ
Total area under curve = 1 (100%)

BUSINESS STATISTICS — LECTURE NOTE

Department of Finance and Banking — BBA Program

DISCRETE PROBABILITY DISTRIBUTIONS

A Complete Question–Answer Based Study Note
Binomial Distribution • Poisson Distribution

Covers theory, derivations, proofs, properties, comparisons,

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and fully worked numerical problems — 30 questions in total

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How to Use This Note

This note is organised as a set of 15 questions on the Binomial Distribution and 15 questions on the Poisson
Distribution. Together these 30 questions cover the entire chapter — definitions, assumptions, derivations,
mathematical proofs, properties, comparisons, real-life applications, and numerical problems.

Part A (Q1–Q7): Theory of the Binomial Distribution

Part B (Q8–Q15): Numerical Problems on the Binomial Distribution

Part C (Q1–Q8): Theory of the Poisson Distribution

Part D (Q9–Q15): Numerical Problems on the Poisson Distribution

Note: Every numerical answer in this note has been calculated precisely and rounded to 4 decimal places (i.e.,
to percentage form where useful).

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PART A: Theory of the Binomial Distribution

Binomial Distribution
The Binomial Distribution is a discrete probability distribution that gives the probability of obtaining exactly x
successes out of n independent trials of a random experiment, where each trial results in only one of two
possible outcomes — success or failure — and the probability of success p is the same in every trial.

Characteristics
• It is a discrete distribution (x takes whole-number values 0, 1, 2, ..., n).
• It has two parameters: n (number of trials) and p (probability of success).
• The total number of trials is fixed in advance.
• The distribution can be symmetric or skewed depending on the value of p.

Three real-life applications

• Banking: probability that a given number of loan applicants, out of a fixed sample, default on repayment.
• Quality control: probability that a fixed batch of manufactured items contains a certain number of
defectives.
• Marketing: probability that a fixed number of customers, out of those contacted, respond positively to a
campaign.

The assumptions (conditions) of a Binomial Distribution

1. Fixed number of trials (n): The experiment is repeated a fixed, predetermined number of times. Example:
exactly 20 bulbs are tested — not a variable, open-ended number.
2. Only two possible outcomes: Every trial results in either “success” or “failure”. Example: a loan application
is either “approved” or “rejected” — there is no third outcome.
3. Constant probability of success (p): The probability of success p is the same in every trial, and does not
change from one trial to the next. Example: if a coin has P(head) = 0.5, this stays 0.5 on every toss.
4. Independence of trials: The outcome of any one trial does not influence the outcome of any other trial.
Example: whether one customer buys a product does not affect whether another customer buys it.

Derive the Binomial Probability Mass Function (PMF).

Consider an experiment with n independent trials. On each trial the probability of success is p and the
probability of failure is q = 1 − p. We want the probability of ge ng exactly x successes (and therefore n − x
failures), in any order.

Step 1 — Probability of one particular arrangement: Consider a specific sequence in which the first x trials are
successes and the remaining (n − x) trials are failures:

P(S S S ... S F F F ... F) = p × p × ... × p × q × q × ... × q = pˣ q⁽ⁿ⁻ˣ⁾

Because the trials are independent, the probabilities simply multiply. This is true for this one specific ordering of
x successes and (n − x) failures.

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Step 2 — Number of possible arrangements: The x successes can occur in any of the n trial positions. The
number of distinct ways of choosing which x (out of n) trials are successes is given by the combination:

ⁿCₓ = n! / [x! (n − x)!]

Step 3 — Combine: Since every one of these ⁿCₓ arrangements has exactly the same probability pˣq⁽ⁿ⁻ˣ⁾ (by Step
1), and the arrangements are mutually exclusive (an outcome cannot correspond to two different arrangements
at once), we add the probability pˣq⁽ⁿ⁻ˣ⁾ once for each arrangement:

P(X = x) = ⁿCₓ · pˣ · q⁽ⁿ⁻ˣ⁾ , x = 0, 1, 2, ..., n

This is the Binomial Probability Mass Function. Here n and p are the parameters of the distribution, x is the
number of successes, and q = 1 − p.

properties of the Binomial Distribution.

Property Formula Meaning

Average / expected number of

Mean (μ) μ = n·p
successes

Spread of the distribution around

Variance (σ²) σ² = n·p·q
the mean

Typical deviation from the mean, in

Standard Deviation (σ) σ = √(n·p·q)
same unit as x

Most likely (most frequent) value of

Mode Largest integer ≤ (n+1)p
x

Skewness (q − p) / √(n·p·q) Degree and direction of asymmetry

Shape Depends on p (see below) Symmetric, right- or left-skewed

Shape of the distribution:

• If p = 0.5 → the distribu on is exactly symmetric (skewness = 0).

• If p < 0.5 → the distribu on is posi vely (right) skewed — a long tail toward higher x.
• If p > 0.5 → the distribu on is nega vely (le ) skewed — a long tail toward lower x.
• As n increases, the Binomial distribution becomes increasingly bell-shaped and approaches the Normal
distribution (regardless of p).
The chart below shows how the shape of the Binomial distribution changes with p, for a fixed n = 12:

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Figure 1: Binomial distribution shape for p = 0.2, 0.5, and 0.8 (n = 12)

Comparison of the Binomial Distribution and the Poisson Distribution.

(A full comparison is given in Question 8, Part D, once both distributions have been introduced. A quick preview
is given below.)

Basis Binomial Poisson

Parameters n and p λ (average rate)

No fixed number — events over

Trials Fixed number, n
time/space

Mean n·p λ

Variance n·p·q (< mean) λ (= mean)

Simple — only one parameter (λ)

Advantage Exact for any n, p
needed

Only a good model when events are

Limitation Hard to compute for very large n
rare

Practical applications of the Binomial Distribution.

• Business & Marketing: probability that a fixed number of customers respond to an advertisement or
promotional offer.
• Finance & Banking: probability that a fixed number of loan applicants (out of a sample) default; probability
that a fixed number of transactions are fraudulent.
• Medicine: probability that a fixed number of patients (out of a sample) respond positively to a treatment or
vaccine.
• Quality Control: probability that a fixed sample of manufactured items contains a given number of
defective units.
• Engineering: probability that a fixed number of components (out of a batch) fail within a warranty period.

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PART B: Numerical Problems on the Binomial Distribution

General formula used throughout this part:

P(X = x) = ⁿCₓ · pˣ · q⁽ⁿ⁻ˣ⁾ , q = 1 − p

A fair coin is tossed 8 times. Find (a) P(exactly 5 heads), (b) P(at least 6 heads), (c) P(at most 3 heads).
Given: n = 8, p = 0.5 (probability of a head), q = 0.5

Part Required Calculation Answer

(a) P(X = 5) ⁸C₅(0.5)⁵(0.5)³ = 56 × 0.03125 × 0.125 0.2188

(b) P(X ≥ 6) P(6) + P(7) + P(8) 0.1445

(c) P(X ≤ 3) P(0) + P(1) + P(2) + P(3) 0.3633

A die is rolled 10 times. Find (a) P(exactly three 6's), (b) P(no 6's), (c) P(more than four 6's).
Given: n = 10, p = 1/6 = 0.1667 (probability of rolling a six), q = 5/6 = 0.8333

Part Required Calculation Answer

(a) P(X = 3) ¹⁰C₃(1/6)³(5/6)⁷ 0.1550

(b) P(X = 0) ¹⁰C₀(1/6)⁰(5/6)¹⁰ 0.1615

(c) P(X > 4) 1 − [P(0)+P(1)+P(2)+P(3)+P(4)] 0.0155

A 12-question MCQ exam has 4 choices per question. A student guesses every answer. Find (a)
P(exactly 4 correct), (b) P(at least 3 correct), (c) P(fewer than 2 correct).
Given: n = 12, p = 1/4 = 0.25 (probability of guessing correctly), q = 0.75

Part Required Calculation Answer

(a) P(X = 4) ¹²C₄(0.25)⁴(0.75)⁸ 0.1936

(b) P(X ≥ 3) 1 − [P(0)+P(1)+P(2)] 0.6093

(c) P(X < 2) P(0) + P(1) 0.1584

A factory produces bulbs with a 5% defect rate. A sample of 20 bulbs is chosen. Find (a) P(no
defectives), (b) P(exactly 1 defective), (c) P(at most 2 defectives).
Given: n = 20, p = 0.05, q = 0.95

Part Required Calculation Answer

(a) P(X = 0) ²⁰C₀(0.05)⁰(0.95)²⁰ 0.3585

(b) P(X = 1) ²⁰C₁(0.05)¹(0.95)¹⁹ 0.3774

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Part Required Calculation Answer

(c) P(X ≤ 2) P(0) + P(1) + P(2) 0.9245

A basketball player makes free throws with probability 0.8. He attempts 10 free throws. Find (a)
P(exactly 8 successful), (b) P(at least 9 successful), (c) P(fewer than 7 successful).
Given: n = 10, p = 0.8, q = 0.2

Part Required Calculation Answer

(a) P(X = 8) ¹⁰C₈(0.8)⁸(0.2)² 0.3020

(b) P(X ≥ 9) P(9) + P(10) 0.3758

(c) P(X < 7) P(0) + P(1) + ... + P(6) 0.1209

A salesperson has a 60% chance of closing a sale per visit. She visits 8 customers. Find (a) P(exactly 5
sales), (b) P(at least 6 sales), (c) P(no sales).
Given: n = 8, p = 0.6, q = 0.4

Part Required Calculation Answer

(a) P(X = 5) ⁸C₅(0.6)⁵(0.4)³ 0.2787

(b) P(X ≥ 6) P(6) + P(7) + P(8) 0.3154

(c) P(X = 0) ⁸C₀(0.6)⁰(0.4)⁸ 0.0007

Each chip made by a company has a 2% chance of being defective. In a batch of 50 chips, find (a)
P(exactly 2 defective), (b) P(more than 3 defective), (c) P(at most 1 defective).
Given: n = 50, p = 0.02, q = 0.98

Part Required Calculation Answer

(a) P(X = 2) ⁵⁰C₂(0.02)²(0.98)⁴⁸ 0.1858

(b) P(X > 3) 1 − [P(0)+P(1)+P(2)+P(3)] 0.0178

(c) P(X ≤ 1) P(0) + P(1) 0.7358

A cricket player hits a boundary with probability 0.4 per ball. He faces 12 balls. Find (a) P(exactly 5
boundaries), (b) P(at least 7 boundaries), (c) expected boundaries, (d) variance and SD.
Given: n = 12, p = 0.4, q = 0.6

Part Required Calculation Answer

(a) P(X = 5) ¹²C₅(0.4)⁵(0.6)⁷ 0.2270

(b) P(X ≥ 7) 1 − [P(0)+P(1)+...+P(6)] 0.1582

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Part Required Calculation Answer

(c) E(X) = n·p 12 × 0.4 4.80

(d) Var, SD Var = np q = 12(0.4)(0.6) = 2.88; SD = √2.88 SD = 1.6971

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PART C: Theory of the Poisson Distribution

Poisson Distribution
The Poisson Distribution is a discrete probability distribution that gives the probability of a given number of
events occurring in a fixed interval of time or space, when these events happen independently of one another
and at a constant average rate λ (“lambda”).

Characteristics
• It is a discrete distribution used to model counts of rare or random events.
• It has only ONE parameter, λ, which is both the mean and the variance.
• There is no fixed upper limit on x — theoretically x can be any non-negative integer.

Three real-life applications

• The number of customer complaints received by a bank per day.
• The number of customers arriving at an ATM or service counter per hour.
• The number of insurance claims filed per month.

Assumptions (conditions) of a Poisson Distribution

1. Events occur one at a time: Two events cannot occur at exactly the same instant. Example: two customers
cannot “arrive” at literally the same second at a single-teller counter.
2. Independence: The occurrence of one event does not affect the probability of another event occurring.
Example: one machine breakdown does not make another breakdown more or less likely.
3. Constant average rate: Events occur at a constant average rate λ over the interval being studied — the rate
does not change within that interval. Example: average calls per minute stays the same throughout the
hour studied.
4. Non-overlapping intervals are independent: The number of events in one interval does not depend on the
number of events in a different, non-overlapping interval.

Derive the Poisson Distribution from the Binomial Distribution.

The Poisson distribution is called the limiting form of the Binomial distribution because it can be derived by
letting the number of trials n become very large while the probability of success p becomes very small, in such a
way that their product n·p = λ remains fixed (moderate).

Start with the Binomial PMF and substitute p = λ/n:

P(X=x) = ⁿCₓ (λ/n)ˣ (1 − λ/n)⁽ⁿ⁻ˣ⁾

Expand ⁿCₓ = n(n−1)(n−2)...(n−x+1) / x! and rearrange:

P(X=x) = [n(n−1)...(n−x+1)/nˣ] · (λˣ/x!) · (1−λ/n)ⁿ · (1−λ/n)⁻ˣ

Now let n → ∞ (with λ = n·p held fixed). Three limits are used:

• n(n−1)(n−2)...(n−x+1) / nˣ → 1 (ra o of x terms, each close to n, divided by nˣ)

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• (1 − λ/n)ⁿ → e^(−λ) (this is the standard calculus limit defining e)

• (1 − λ/n)⁻ˣ → 1 (since x is fixed while n → ∞)
Substituting these three limits back in, everything simplifies to:

P(X = x) = (e^(−λ) · λˣ) / x! , x = 0, 1, 2, 3, ...

This is exactly the Poisson PMF. It shows that when n is large and p is small, the Binomial distribution can be
replaced by the much simpler, single-parameter Poisson distribution using λ = n·p.

Write the Poisson Probability Mass Function and explain its parameters.

P(X = x) = (e^(−λ) · λˣ) / x! , x = 0, 1, 2, 3, ...

• λ (lambda) = the average / expected number of occurrences in the given interval of time or space.
• e = Euler's number ≈ 2.71828, a mathematical constant.
• x = the specific number of occurrences whose probability we want to find.
• x! = x factorial = x × (x−1) × (x−2) × ... × 1.

State and explain the properties of the Poisson Distribution.

Property Formula Meaning

Mean (μ) μ=λ Average number of occurrences

Equal to the mean — a unique

Variance (σ²) σ² = λ
Poisson feature

Standard Deviation (σ) σ = √λ Typical deviation from the mean

Mode Largest integer ≤ λ Most likely value of x

Always positively skewed; skew

Skewness 1 / √λ
shrinks as λ grows

“Peakedness” relative to Normal;

Kurtosis (excess) 1/λ
falls toward 0 as λ grows
Shape of the distribution:

• For small λ, the distribution is strongly skewed to the right.

• As λ increases, the distribution becomes progressively more symmetric and bell-shaped.
• For large λ (roughly λ > 10), the Poisson distribution closely resembles the Normal distribution.

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Figure 2: Poisson distribution shape for λ = 1, 4, and 10

Under what conditions can the Binomial Distribution be approximated by the Poisson Distribution?
The Poisson approximation to the Binomial works well when:

• The number of trials n is large — commonly taken as n ≥ 20 (some textbooks use n ≥ 100 for a safer
approximation).
• The probability of success p is small — commonly taken as p ≤ 0.05 (a “rare event”).
• The product n·p = λ is used as the Poisson mean.
Business example: Instead of using the Binomial formula for the probability that 3 out of 2,000 transactions are
fraudulent when the fraud rate is 0.1% (n = 2000, p = 0.001), it is far simpler to use a Poisson distribution with λ
= n·p = 2. The two answers will be nearly identical.

Discuss the practical applications of the Poisson Distribution in business, finance, engineering,
healthcare, and quality control.
• Telephone/call-centre traffic: number of calls received per minute or per hour.
• Website analytics: number of visitors arriving at a website per minute.
• Banking transactions: number of fraudulent transactions detected per day out of thousands processed.
• Queueing/customer service: number of customers arriving at a service counter or ATM in a given period.
• Insurance & risk management: number of claims filed per month; used in premium-setting and reserve
calculation.
• Manufacturing/quality control: number of defects found per unit of product or per production run.
• Healthcare: number of patients arriving at an emergency room per hour.
• Inventory & demand forecasting: number of units of a slow-moving product sold per day, used to set
reorder levels.

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PART D: Numerical Problems on the Poisson Distribution

General formula used throughout this part:

P(X = x) = (e^(−λ) · λˣ) / x!

A call centre receives an average of 4 calls per minute. Find (a) P(exactly 3 calls), (b) P(no calls), (c)
P(at least 5 calls).
Given: λ = 4

Part Required Calculation Answer

(a) P(X = 3) (e⁻⁴ × 4³) / 3! = (0.0183 × 64) / 6 0.1954

(b) P(X = 0) (e⁻⁴ × 4⁰) / 0! = e⁻⁴ 0.0183

(c) P(X ≥ 5) 1 − [P(0)+P(1)+P(2)+P(3)+P(4)] 0.3712

A machine produces an average of 2 defective items per day. Find (a) P(exactly 2 defectives), (b) P(at
most 2 defectives), (c) P(more than 2 defectives).
Given: λ = 2

Part Required Calculation Answer

(a) P(X = 2) (e⁻² × 2²) / 2! 0.2707

(b) P(X ≤ 2) P(0) + P(1) + P(2) 0.6767

(c) P(X > 2) 1 − P(X ≤ 2) 0.3233

A hospital emergency room receives an average of 5 patients per hour. Find (a) P(exactly 4 patients),
(b) P(at least 6 patients), (c) P(between 3 and 7 patients, inclusive).
Given: λ = 5

Part Required Calculation Answer

(a) P(X = 4) (e⁻⁵ × 5⁴) / 4! 0.1755

(b) P(X ≥ 6) 1 − [P(0)+P(1)+...+P(5)] 0.3840

(c) P(3≤X≤7) P(3)+P(4)+P(5)+P(6)+P(7) 0.7420

The average number of accidents at a road intersection is 3 per month. Find (a) P(no accidents), (b)
P(fewer than 3 accidents), (c) P(at least 2 accidents).
Given: λ = 3

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Part Required Calculation Answer

(a) P(X = 0) (e⁻³ × 3⁰) / 0! = e⁻³ 0.0498

(b) P(X < 3) P(0) + P(1) + P(2) 0.4232

(c) P(X ≥ 2) 1 − [P(0)+P(1)] 0.8009

A bookstore sells an average of 6 copies of a book daily. Find (a) P(exactly 8 copies), (b) P(at most 5
copies), (c) P(more than 6 copies).
Given: λ = 6

Part Required Calculation Answer

(a) P(X = 8) (e⁻⁶ × 6⁸) / 8! 0.1033

(b) P(X ≤ 5) P(0) + P(1) + ... + P(5) 0.4457

(c) P(X > 6) 1 − [P(0)+P(1)+...+P(6)] 0.3937

A website receives an average of 8 visitors per minute. Find (a) P(exactly 10 visitors), (b) P(less than 5
visitors), (c) P(at least 8 visitors).
Given: λ = 8

Part Required Calculation Answer

(a) P(X = 10) (e⁻⁸ × 8¹⁰) / 10! 0.0993

(b) P(X < 5) P(0) + P(1) + P(2) + P(3) + P(4) 0.0996

(c) P(X ≥ 8) 1 − [P(0)+P(1)+...+P(7)] 0.5470

A factory produces bolts with an average of 0.5 defective bolts per box. Find (a) P(no defective
bolts), (b) P(exactly one defective bolt), (c) P(more than one defective bolt), (d) interpret the results
for quality control.
Given: λ = 0.5

Part Required Calculation Answer

(a) P(X = 0) (e^(−0.5) × 0.5⁰) / 0! 0.6065

(b) P(X = 1) (e^(−0.5) × 0.5¹) / 1! 0.3033

(c) P(X > 1) 1 − [P(0)+P(1)] 0.0902

(d) Interpretation: About 60.7% of boxes are expected to be completely free of defective bolts, about 30.3% will
contain exactly one defective bolt, and only about 9.0% of boxes will contain more than one defective bolt. This
tells the quality control team that a very small proportion of boxes (under 10%) need closer inspection, so the
process is running at an acceptable defect rate.

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