Business Statistics: A First

Course
6th Edition

Chapter 4

Basic Probability

Chap 4-1
 Learning Objectives

In this chapter, you learn:

◼ Basic probability concepts

◼ Conditional probability
◼ To use Bayes’ theorem to revise probabilities
◼ Various counting rules

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-2
 Basic Probability Concepts

◼ Probability – the chance that an uncertain event

will occur (always between 0 and 1)

◼ Impossible Event – an event that has no

chance of occurring (probability = 0)

◼ Certain Event – an event that is sure to occur

(probability = 1)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-3
 Assessing Probability

There are three approaches to assessing the

probability of an uncertain event:
1. a priori -- based on prior knowledge of the process
X number of ways the event can occur
probability of occurrence = =
Assuming
T total number of elementary outcomes
all
outcomes 2. empirical probability -- based on observed data
are equally
likely number of ways the event can occur
probability of occurrence =
total number of elementary outcomes
3. subjective probability

based on a combination of an individual’s past experience,

personal opinion, and analysis of a particular situation

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-4
 Example of a priori probability

When randomly selecting a day from the year 2012

what is the probability the day is in January?

X number of days in January

Probability of Day In January = =
T total number of days in 2012

X 31 days in January 31
= =
T 366 days in 2010 366
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-5
 Example of a priori probability

Find the probability of selecting a face card (Jack,

Queen, or King) from a standard deck of 52 cards.

X number of face cards

Probability of Face Card = =
T total number of cards

X 12 face cards 3
= =
T 52 total cards 13

Business Statistics: A First Course. Chap 4-6

 Example of empirical probability

Find the probability of selecting a male taking statistics

from the population described in the following table:

Taking Stats Not Taking Total

Stats
Male 84 145 229
Female 76 134 210
Total 160 279 439

number of males taking stats 84

Probability of male taking stats = = = 0.191
total number of people 439

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-7
 Events

Each possible outcome of a variable is an event.

◼ Simple event
◼ An event described by a single characteristic
◼ e.g., A day in January from all days in 2012
◼ Joint event
◼ An event described by two or more characteristics
◼ e.g. A day in January that is also a Wednesday from all days in 2012
◼ Complement of an event A (denoted A’)
◼ All events that are not part of event A
◼ e.g., All days from 2012 that are not in January

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 Sample Space
The Sample Space is the collection of all
possible events
e.g. All 6 faces of a die:

e.g. All 52 cards of a bridge deck:

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All 52 cards of a bridge deck

Chap 4-10
 Visualizing Events
◼ Contingency Tables -- For All Days in 2012
Jan. Not Jan. Total

Wed. 4 48 52
Not Wed. 27 287 314

Total 31 335 366

◼ Decision Trees Total

4 Number
Sample Of
Space 27 Sample
All Days Space
In 2012 Outcomes
48

287
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 Visualizing Events
◼ Contingency Tables
Ace Not Ace Total

Black 2 24 26
Red 2 24 26

Total 4 48 52

◼ Decision Trees Sample

2 Space
Sample
Space 24
Full Deck
of 52 Cards
2

24
Business Statistics: A First Course. Chap 4-12
 Visualizing Events
◼ Venn Diagrams
◼ Let A = aces
◼ Let B = red cards A ∩ B = ace and red

A U B = ace or red B

Business Statistics: A First Course. Chap 4-13

 Definition: Simple Probability

◼ Simple Probability refers to the probability of a

simple event.
◼ ex. P(Jan.)
◼ ex. P(Wed.)
Jan. Not Jan. Total
P(Wed.) = 52 / 366
Wed. 4 48 52
Not Wed. 27 287 314

Total 31 335 366

P(Jan.) = 31 / 366
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-14
 Definition: Joint Probability
◼ Joint Probability refers to the probability of an
occurrence of two or more events (joint event).
◼ ex. P(Jan. and Wed.)
◼ ex. P(Not Jan. and Not Wed.)

Jan. Not Jan. Total

P(Not Jan. and Not Wed.)
Wed. 4 48 52
= 287 / 365
Not Wed. 27 287 314

Total 31 335 366

P(Jan. and Wed.) = 4 / 366

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 Mutually Exclusive Events

◼ Mutually exclusive events

◼ Events that cannot occur simultaneously

Example: Randomly choosing a day from 2010

A = day in January; B = day in February

◼ Events A and B are mutually exclusive

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-16
 Mutually Exclusive Events

Example: Drawing one card from a deck of cards

A = queen of diamonds; B = queen of clubs

◼ Events A and B are mutually exclusive

Business Statistics: A First Course. Chap 4-17

 Collectively Exhaustive Events
◼ Collectively exhaustive events
◼ One of the events must occur
◼ The set of events covers the entire sample space
Example: Randomly choose a day from 2012

A = Weekday; B = Weekend;
C = January; D = Spring;

◼ Events A, B, C and D are collectively exhaustive

(but not mutually exclusive – a weekday can be in
January or in Spring)
◼ Events A and B are collectively exhaustive and
also mutually exclusive
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-18
 Collectively Exhaustive Events

Example:
A = aces; B = black cards;
C = diamonds; D = hearts

◼ Events A, B, C and D are collectively exhaustive

(but not mutually exclusive – an ace may also be
a heart)
◼ Events B, C and D are collectively exhaustive and
also mutually exclusive

Business Statistics: A First Course. Chap 4-19

 Computing Joint and
Marginal Probabilities

◼ The probability of a joint event, A and B:

number of outcomes satisfying A and B
P( A and B) =
total number of elementary outcomes

◼ Computing a marginal (or simple) probability:

P(A) = P(A and B1 ) + P(A and B2 ) +  + P(A and Bk )

◼ Where B1, B2, …, Bk are k mutually exclusive and collectively
exhaustive events

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-20
 Joint Probability Example

P(Jan. and Wed.)

number of days that are in Jan. and are Wed. 4
= =
total number of days in 2012 366

Jan. Not Jan. Total

Wed. 4 48 52
Not Wed. 27 287 314

Total 31 335 366

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-21
 Joint Probability Example

P(Red and Ace)

number of cards that are red and ace 2
= =
total number of cards 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Business Statistics: A First Course. Chap 4-22

 Marginal Probability Example

P(Wed.)
4 48 52
= P ( Jan. and Wed.) + P(Not Jan. and Wed.) = + =
366 366 366

Jan. Not Jan. Total

Wed. 4 48 52
Not Wed. 27 287 314

Total 31 335 366

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-23
 Marginal Probability Example

P(Ace)
2 2 4
= P( Ace and Re d) + P( Ace and Black ) = + =
52 52 52

Color
Type Red Black Total
Ace 2 2 4
Non-Ace 24 24 48
Total 26 26 52

Business Statistics: A First Course. Chap 4-24

 Marginal & Joint Probabilities In A
Contingency Table

Event
Event B1 B2 Total
A1 P(A1 and B1) P(A1 and B2) P(A1)
A2 P(A2 and B1) P(A2 and B2) P(A2)

Total P(B1) P(B2) 1

Joint Probabilities Marginal (Simple) Probabilities

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 Probability Summary So Far
◼ Probability is the numerical measure
of the likelihood that an event will 1 Certain
occur
◼ The probability of any event must be
between 0 and 1, inclusively
0 ≤ P(A) ≤ 1 For any event A 0.5
◼ The sum of the probabilities of all
mutually exclusive and collectively
exhaustive events is 1
P(A) + P(B) + P(C) = 1
0 Impossible
If A, B, and C are mutually exclusive and
collectively exhaustive
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-26
 Exercise

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-27
 General Addition Rule

General Addition Rule:

P(A or B) = P(A) + P(B) - P(A and B)

If A and B are mutually exclusive, then

P(A and B) = 0, so the rule can be simplified:

P(A or B) = P(A) + P(B)

For mutually exclusive events A and B

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-28
 Exercise

An auto insurance has 10,000 policyholders. Each policyholder is

classified
as
(i) young or old;
(ii) Male or female
(iii) Married or single
Of these policyholders, 3000 are young, 4600 are male, and 7000 are
married. The policyholders can also be classified as 1320 young
males, 3010 married males, and 1400 young married persons. Finally,
600 of the policyholders are young married males.
How many of the company’s policyholders are young, female, and
single?

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-29
 General Addition Rule Example

P(Jan. or Wed.) = P(Jan.) + P(Wed.) - P(Jan. and Wed.)

= 31/366 + 52/366 - 4/366 = 79/366
Don’t count
the four
Wednesdays
in January
Jan. Not Jan. Total twice!
Wed. 4 48 52
Not Wed. 27 287 314

Total 31 335 366

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-30
 General Addition Rule Example

◼ Marble Example 1: A bag contains 4 white, 3

red, 2 black, 2 green, 1 yellow, and 0 blue
marbles. One marble is chosen at random.
Determine the probability of each event.
◼ 1. P(green)=
◼ 2. P(blue)=
◼ 3. P (not white)=
◼ 4. P (red or black)=
 General Addition Rule Example

◼ Card Example: One card is randomly chosen from

a standard deck of 52 cards. Determine the
probability of each event.
◼ 1. P(king)= 2. P(heart)=
◼ 3. P (face card)= 4. P (not a spade)=
◼ 5. P(king and heart)= 6. P(king or heart)=
◼ 7. P(10 and jack)= 8. P(10 or jack)=
◼ 9. P (diamond or face card)=
◼ 10. P (red card or queen)=
 Computing Conditional
Probabilities
◼ A conditional probability is the probability of one
event, given that another event has occurred:
P(A and B) The conditional
P(A | B) = probability of A given
P(B) that B has occurred

P(A and B) The conditional

P(B | A) = probability of B given
P(A) that A has occurred

Where P(A and B) = joint probability of A and B

P(A) = marginal or simple probability of A
P(B) = marginal or simple probability of B
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-33
 Conditional Probability Example

◼ Of the cars on a used car lot, 90% have air

conditioning (AC) and 40% have a GPS. 35% of
the cars have both.

◼ What is the probability that a car has a GPS

given that it has AC ?

i.e., we want to find P(GPS | AC)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-34
 Conditional Probability Example
(continued)
◼ Of the cars on a used car lot, 90% have air conditioning
(AC) and 40% have a GPS.
35% of the cars have both.
GPS No GPS Total
AC 0.35 0.55 0.90
No AC 0.05 0.05 0.10
Total 0.40 0.60 1.00

P(GPS and AC) 0.35

P(GPS | AC) = = = 0.3889
P(AC) 0.90
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-35
 Conditional Probability Example
(continued)
◼ Given AC, we only consider the top row (90% of the cars). Of these,
35% have a GPS. 35% of 90% is about 38.89%.

GPS No GPS Total

AC 0.35 0.55 0.90
No AC 0.05 0.05 0.10
Total 0.40 0.60 1.00

P(GPS and AC) 0.35

P(GPS | AC) = = = 0.3889
P(AC) 0.90
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-36
 Conditional Probability Example

◼ Of the cars on a used car lot, 70% have air

conditioning (AC) and 40% have a CD player
(CD). 20% of the cars have both.

◼ What is the probability that a car has a CD

player, given that it has AC ?

i.e., we want to find P(CD | AC)

Business Statistics: A First Course, 5e © 2009 Prentice-Hall, Inc. Chap 4-37

 Using Decision Trees
.35
.90 P(AC and GPS) = 0.35
Given AC or
no AC:

.55 P(AC and GPS’) = 0.55

.90
All Conditional
Probabilities
Cars
.05
.10 P(AC’ and GPS) = 0.05

.05 P(AC’ and GPS’) = 0.05

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
.10 Chap 4-38
 Using Decision Trees
(continued)
.35
.40 P(GPS and AC) = 0.35
Given GPS
or no GPS:

.05 P(GPS and AC’) = 0.05

.40
All Conditional
Probabilities
Cars
.55
.60 P(GPS’ and AC) = 0.55

.05 P(GPS’ and AC’) = 0.05

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
.60 Chap 4-39
 Independence
◼ Two events are independent if and only
if:

P(A | B) = P(A)
◼ Events A and B are independent when the probability
of one event is not affected by the fact that the other
event has occurred

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 Multiplication Rules

◼ Multiplication rule for two events A and B:

P(A and B) = P(A | B)P(B)

Note: If A and B are independent, then P(A | B) = P(A)

and the multiplication rule simplifies to

P(A and B) = P(A)P(B)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-41
 Multiplication Rules
◼ Marble Example 2: A bag contains 4 white, 3
red, 2 black, 2 green, 1 yellow, and 0 blue
marbles. One marble is chosen at random. It is
replaced, and then another marble is randomly
chosen. Determine the probability of each event.
◼ 1. P(green is chosen first and red is chosen
second)=
◼ 2. P(black is chosen first and black is chosen
second)=
◼ 3. P (green and red in either order)=
 Multiplication Rules
◼ Marble Example 3: A bag contains 4 white, 3
red, 2 black, 2 green, 1 yellow, and 0 blue
marbles. One marble is chosen at random. It is
not replaced, and then another marble is
randomly chosen. Determine the probability of
each event.
◼ 1. P(green is chosen first and red is chosen
second)=
◼ 2. P(black is chosen first, and black is chosen
second)=
 Marginal Probability

◼ Marginal probability for event A:

P(A) = P(A | B1 ) P(B1 ) + P(A | B2 ) P(B2 ) +  + P(A | Bk ) P(Bk )

◼ Where B1, B2, …, Bk are k mutually exclusive and

collectively exhaustive events

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 Bayes’ Theorem

◼ Bayes’ Theorem is used to revise previously

calculated probabilities based on new
information.

◼ Developed by Thomas Bayes in the 18th

Century.

◼ It is an extension of conditional probability.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-45
 Bayes’ Theorem

P(A | B i )P(B i )
P(B i | A) =
P(A | B 1 )P(B 1 ) + P(A | B 2 )P(B 2 ) +    + P(A | B k )P(B k )

◼ where:
Bi = ith event of k mutually exclusive and collectively
exhaustive events
A = new event that might impact P(Bi)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-46
 Bayes’ Theorem Example

◼ A drilling company has estimated a 40%

chance of striking oil for their new well.
◼ A detailed test has been scheduled for more
information. Historically, 60% of successful
wells have had detailed tests, and 20% of
unsuccessful wells have had detailed tests.
◼ Given that this well has been scheduled for a
detailed test, what is the probability
that the well will be successful?

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-47
 Bayes’ Theorem Example
(continued)

◼ Let S = successful well

U = unsuccessful well
◼ P(S) = 0.4 , P(U) = 0.6 (prior probabilities)
◼ Define the detailed test event as D
◼ Conditional probabilities:
P(D|S) = 0.6 P(D|U) = 0.2
◼ Goal is to find P(S|D)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-48
 Bayes’ Theorem Example
(continued)

Apply Bayes’ Theorem:

P(D | S)P(S)
P(S | D) =
P(D | S)P(S) + P(D | U)P(U)
(0.6)(0.4)
=
(0.6)(0.4) + (0.2)(0.6)
0.24
= = 0.667
0.24 + 0.12

So the revised probability of success, given that this well

has been scheduled for a detailed test, is 0.667
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-49
 Bayes’ Theorem Example
(continued)

◼ Given the detailed test, the revised probability

of a successful well has risen to 0.667 from
the original estimate of 0.4

Prior Conditional Joint Revised

Event
Prob. Prob. Prob. Prob.
S (successful) 0.4 0.6 (0.4)(0.6) = 0.24 0.24/0.36 = 0.667
U (unsuccessful) 0.6 0.2 (0.6)(0.2) = 0.12 0.12/0.36 = 0.333

Sum = 0.36

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 Counting Rules

◼ Rules for counting the number of possible

outcomes
◼ Counting Rule 1:
◼ If any one of k different mutually exclusive and
collectively exhaustive events can occur on each of
n trials, the number of possible outcomes is equal to

kn
◼ Example
◼ If you roll a fair die 3 times then there are 63 = 216 possible
outcomes

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-51
 Counting Rules
(continued)

◼ Counting Rule 2:
◼ If there are k1 events on the first trial, k2 events on
the second trial, … and kn events on the nth trial, the
number of possible outcomes is
(k1)(k2)…(kn)
◼ Example:
◼ You want to go to a park, eat at a restaurant, and see a
movie. There are 3 parks, 4 restaurants, and 6 movie
choices. How many different possible combinations are
there?
◼ Answer: (3)(4)(6) = 72 different possibilities
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-52
 Counting Rules
(continued)

◼ Counting Rule 3:
◼ The number of ways that n items can be arranged in
order is
n! = (n)(n – 1)…(1)

◼ Example:
◼ You have five books to put on a bookshelf. How many
different ways can these books be placed on the shelf?

◼ Answer: 5! = (5)(4)(3)(2)(1) = 120 different possibilities

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-53
 Counting Rules
(continued)
◼ Counting Rule 4:
◼ Permutations: The number of ways of arranging X
objects selected from n objects in order is

n!
n Px =
(n − X)!
◼ Example:
◼ You have five books and are going to put three on a
bookshelf. How many different ways can the books be
ordered on the bookshelf?

◼ Answer: different possibilities

n! 5! 120
P
n x = = = = 60
(n − X)! (5 − 3)! 2
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 Counting Rules
(continued)

◼ Counting Rule 5:
◼ Combinations: The number of ways of selecting X
objects from n objects, irrespective of order, is
n!
n Cx =
X!(n − X)!
◼ Example:
◼ You have five books and are going to randomly select three
to read. How many different combinations of books might
you select?
n! 5! 120
◼ Answer: Cx = = = = 10 different possibilities
X!(n − X)! 3! (5 − 3)! (6)(2)
n

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-55
 Chapter Summary

◼ Discussed basic probability concepts

◼ Sample spaces and events, contingency tables, simple
probability, and joint probability
◼ Examined basic probability rules
◼ General addition rule, addition rule for mutually exclusive events,
rule for collectively exhaustive events
◼ Defined conditional probability
◼ Statistical independence, marginal probability, decision trees,
and the multiplication rule
◼ Discussed Bayes’ theorem
◼ Discussed various counting rules
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Chap 4-56