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Chapter 6 Normal Distribution

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Chapter 6 Learning Objectives (LOs)


LO 6.1 Describe a continuous random variable.
LO 6.2 Calculate and interpret probabilities for a random
variable that follows the continuous uniform
distribution.
LO 6.3 Explain the characteristics of the normal distribution.
LO 6.4 Use the standard normal table (z table).
LO 6.5 Calculate and interpret probabilities for a random
variable that follows the normal distribution.
LO 6.6 Calculate and interpret probabilities for a random
variable that follows the exponential distribution.
LO 6.7 Calculate and interpret probabilities for a random
variable that follows the lognormal distribution.

Continuous Probability
Distributions
Business Statistics:
Communicating with Numbers, 2e
By Sanjiv Jaggia and Alison Kelly

11/13/2016

BUSINESS STATISTICS | Jaggia, Kelly


6-2

6.1 Continuous Random Variables and


the Uniform Probability Distribution

6.2 The Standard Normal Distribution


LO6.3Explainthecharacteristicsofthenormaldistribution.

LO6.1Describeacontinuousrandomvariable.

The Normal Distribution

Remember that random variables may be


classified as
Discrete

The random variable assumes a countable


number of distinct values.

Continuous

The random variable is characterized by


(infinitely) uncountable values within any
interval.

LO6.1

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LO6.3

Characteristics of the Normal Distribution

Symmetric about its mean

Mean = Median = Mode


Asymptoticthat is, the
tails get closer and
closer to the
P(X < ) = 0.5
horizontal axis,
but never touch it.

Business Statistics, 2nd Ed.

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Characteristics of the Normal Distribution

P(X > ) = 0.5

LO6.3

BUSINESS STATISTICS | Jaggia, Kelly

6.2 The Standard Normal Distribution

6.2 The Standard Normal Distribution

Symmetric
Bell-shaped
Closely approximates the probability distribution of a
wide range of random variables, such as the

Heights and weights of newborn babies

Scores on SAT

Cumulative debt of college graduates


Serves as the cornerstone of statistical inference.

The normal distribution is completely described


by two parameters: and 2.

is the population mean which describes the


central location of the distribution.

is the population variance which describes


the dispersion of the distribution.

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LO6.3

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SOM@USM

Chapter 6 Normal Distribution

6-2

6.2 The Standard Normal Distribution

6.2 The Standard Normal Distribution

Example:SupposetheagesofemployeesinIndustriesA,
B,andCarenormallydistributed.

Herearetherelevantparameters:

LetscompareindustriesusingtheNormalcurves.

is the same, is different.

LO6.3

LO6.4Usethestandardnormaltable(ztable).

Aspecialcaseofthenormaldistribution:
Mean()isequaltozero(E(Z)=0).
Standarddeviation()isequaltoone
(SD(Z)=1).

is the same, is different.


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LO6.4

6.2 The Standard Normal Distribution

TheStandardNormal(Z)Distribution.

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6.2 The Standard Normal Distribution

StandardNormalTable(Z Table).

Standard Normal Table (Z Table).

GivesthecumulativeprobabilitiesP(Z < z)forpositive


andnegativevaluesofz.

SincetherandomvariableZissymmetricaboutits
meanof0,

Table for positive z values.

Table for negative z values.

P(Z <0)=P(Z >0) =0.5.

ToobtaintheP(Z <z),readdownthez columnfirst,


thenacrossthetop.

LO6.4

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LO6.4

Finding the Probability for a Given z Value.

Transform normally distributed random variables into


standard normal random variables and use the z
table to compute the relevant probabilities.
The z table provides cumulative probabilities
P(Z < z) for a given z.

Finding the Probability for a Given z Value.

Portion of right-hand page of z table.


If z = 1.52, then look up

LO6.4

Business Statistics, 2nd Ed.

6-10

6.2 The Standard Normal Distribution

6.2 The Standard Normal Distribution

BUSINESS STATISTICS | Jaggia, Kelly

BUSINESS STATISTICS | Jaggia, Kelly


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Remember that the z table provides cumulative


probabilities P(Z < z) for a given z.
Since z is negative, we can look up this
probability from the left-hand page of the z table.
Portion of left-hand page of Z Table.
If z = -1.96, then look up

LO6.4

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SOM@USM

Chapter 6 Normal Distribution

6-3

6.2 The Standard Normal Distribution

6.2 The Standard Normal Distribution

Find P(-1.52 < Z < 1.96) =


P(Z < 1.96) P(Z < -1.52 ) =
P(Z < 1.96) = 0.9750

P(Z < 1.52 ) = 0.0643

LO6.4

0.9750 0.0643 = 0.9107

Note the 1s are for


cumulative! A 0 would
be nonsensical for a
continuous distribution.

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LO6.4

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LO6.4

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6.2 The Standard Normal Distribution


Example: The Empirical Rule

Revisiting the Empirical Rule.

LO6.4

Business Statistics, 2nd Ed.

For a standard normal variable Z, find the z


values that satisfy P(Z < z) = 0.6808.

Round NORM.S.INVs output


to 2 decimal places in your
HW BEFORE doing other
calculations!

6.2 The Standard Normal Distribution

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Example: Alternately, use Excel to find a z


value for a given probability.

For a standard normal variable Z, find the z


values that satisfy P(Z < z) = 0.6808.
Go to the standard normal table and find 0.6808
in the body of the table.
Find the corresponding
z value from the
row/column of z.
z = 0.47.

LO6.4

BUSINESS STATISTICS | Jaggia, Kelly

6.2 The Standard Normal Distribution

Example: Finding a z value for a given


probability.

Find P(-1.52 < Z < 1.96) = P(Z < 1.96) P(Z < -1.52 )

Round NORM.S.INVs
output to 4 decimal places in
your HW BEFORE
doing other
calculations!

6.2 The Standard Normal Distribution

Example: Alternately, use Excel to look up


probabilities for standard normal variables.

Example: Finding Probabilities for a


Standard Normal Random Variable Z.

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LO6.4

An investment strategy has an expected return of


4% and a standard deviation of 6%. Assume that
investment returns are normally distributed.
What is the probability of earning a return greater
than 10%?

A return of 10% is one standard deviation


above the mean, or 10 = + 1 = 4 + 6.

Since about 68% of observations fall within


one standard deviation of the mean, 32%
(100% 68%) are outside the range.
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SOM@USM

Chapter 6 Normal Distribution

6-4

6.3 Solving Problems with


the Normal Distribution

6.2 The Standard Normal Distribution


Example: The Empirical Rule

An investment strategy has an expected return of


4% and a standard deviation of 6%. Assume that
investment returns are normally distributed.
What is the probability of earning a return greater
than 10%?

Using symmetry, we
conclude that 16%
(half of 32%) of the
observations are
greater than 10%.

The Normal Transformation


Any normally distributed random variable X with
mean and standard deviation can be
transformed into the standard normal random
variable Z as:

16%

16%
68%

with corresponding values


2
( )

LO6.4

LO6.5Calculateandinterpretprobabilitiesforarandomvariable
thatfollowsthenormaldistribution.

As constructed: E(Z) = 0 and SD(Z) = 1.

( + )

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LO6.5

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6.3 Solving Problems with


the Normal Distribution

6.3 Solving Problems with


the Normal Distribution

A z value specifies by how many standard


deviations the corresponding x value falls
above (z > 0) or below (z < 0) the mean.

Use the Inverse Transformation to compute


probabilities for given x values.

LO6.5

with corresponding values

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LO6.5

6.3 Solving Problems with


the Normal Distribution

A standard normal variable Z can be transformed


to the normally distributed random variable X
with mean and standard deviation as

A positive z indicates by how many standard


deviations the corresponding x lies above .
A zero z indicates that the corresponding x
equals
A negative z indicates by how many standard
deviations the corresponding x lies below

First transform the random variable X to Z using the


transformation formula:

Using the standard normal table, find


P(Z > -1.5) = 1 P(Z < -1.5) = 1 0.0668 = 0.9332

LO6.5

Business Statistics, 2nd Ed.

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6.3 Solving Problems with


the Normal Distribution - Excel

Example: Scores on a management aptitude exam


are normally distributed with a mean of 72 () and
a standard deviation of 8 ().
What is the probability that a randomly selected
manager will score above 60?

BUSINESS STATISTICS | Jaggia, Kelly

Example: Scores on a management aptitude exam


are normally distributed with a mean of 72 () and
a standard deviation of 8 ().
What is the probability that a randomly selected
manager will score above 60?

BUSINESS STATISTICS | Jaggia, Kelly


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LO6.5

Alternately, Excel will return the probability directly if


you use NORM.DIST() and give it the mean and
standard deviation.

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Chapter 6 Normal Distribution

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Introductory Case: Demand for Salmon

Introductory Case: Demand for Salmon


Based on this information, Akiko would like to:
Calculate the proportion of days that demand for
salmon at Little Ginza was above her earlier
purchase of 20 pounds.
Calculate the proportion of days that demand for
salmon at Little Ginza was below 15 pounds.
Determine the amount of salmon that should be
bought daily so that it meets demand on 90% of
the days.

Akiko Hamaguchi, manager of a small sushi


restaurant, Little Ginza, in Phoenix, Arizona, has to
estimate the daily amount of salmon needed.
Akiko has estimated the daily consumption of
salmon to be normally distributed with a mean of
12 pounds and a standard deviation of 3.2 pounds.
Buying 20 lbs of salmon every day has resulted in
too much wastage.
Therefore, Akiko will buy salmon that meets the
daily demand of customers on 90% of the days.

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6-26

6.3 Solving Problems with


the Normal Distribution
Case Solution: Akiko is concerned about buying the right
amount of salmon for Little Ginza. The daily consumption is
normally distributed with a mean of 12 pounds and a
standard deviation of 3.2 pounds.

a. What proportion of days was demand above 20 pounds?

c. How much salmon should she buy so she meets customer


demand on 90% of the days?
In order to answer this, solve for the z-score of a 90%
probability and then plug that z into the equation:
or just use NORM.INV() in Excel:

b. What proportion of days was demand below 15 pounds?

App A Table 1. Standard Normal Curve

LO6.5

Business Statistics, 2nd Ed.

Case Solution: Akiko is concerned about buying the right


amount of salmon for Little Ginza. The daily consumption is
normally distributed with a mean of 12 pounds and a
standard deviation of 3.2 pounds.

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LO6.5

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App A Table 1. Standard Normal Curve

6.3 Solving Problems with


the Normal Distribution

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Chapter 6 Normal Distribution

6-6

End of Chapter 6

Business Statistics, 2nd Ed.

SOM@USM