International University IU

STATISTICS FOR BUSINESS

CHAPTER 02

PROBABILITY
1. Definition of Intersection and Union

Intersection Union
The intersection of A and B, denoted A ∩ The union of A and B, denoted A ∪ B, is
B, is the set containing all elements that the set containing all elements that are
are members of both A and B. members of either A or B or both.

2. Probability of event and complement

Probability of event Probability of complement

( )

Statistics for Business | Chapter 02: Probability

( )= ℎ0≤ ( )≤1 ( ̅) = 1 − ( )
( )

3. Rule of Intersection and Union

Rule of Intersection
Two events ( ∩ )= ( ) ( )
More two events ( ∩ ∩ …∩ ) = ( ) ( )… ( )

Rule of Union
Two events ( ∪ )= ( )+ ( )− ( ∩ )
More two events ( ∪ ∪…∪ ) = 1− ( ̅ ) ( ̅ )… ( ̅ )

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Example 2.1: (Case of Intersection Rule for two events)

PROBLEM: A financial analyst believes that if interest rates decrease in a given period, then the
probability that the stock market will go up is 0.80. The analyst further believes that
interest rates have a 0.40 chance of decreasing during the period in question. Given
the above information, what is the probability that the market will go up and interest
rates will go down during the period in question?

SOLUTION: Let A be the event that the stock market will go up

B be the event that the interest rates will go down

( ) = 0.80, ( ) = 0.40

The probability that the market will go up and interest rates will go down during the
period in question:

( ∩ )= ( ) × ( ) = (0.80)(0.40) = 0.32

Example 2.2: (Case of Intersection Rule for more than two events)

PROBLEM: The projected probability of increase in online holiday sales from 2004 to 2005 is
95% in the United States, 90% in Australia, and 85% in Japan. Assume these
probabilities are independent. What is the probability that holiday sales will increase
in all three countries from 2004 to 2005?

SOLUTION: Let A be the event of increase in online holiday sales in the United States
B be the event of increase in online holiday sales in Australia
C be the event of increase in online holiday sales in Japan

Statistics for Business | Chapter 02: Probability

( ) = 0.95, ( ) = 0.90, ( ) = 0.85

The probability that holiday sales will increase in all three countries from 2004 to
2005:

( ∩ ∩ )= ( ) × ( ) × ( ) = (0.95)(0.90)(0.85) ≈ 0.7268

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Example 2.3: (Case of Union Rule for two events)

PROBLEM: According to an article in Fortune, institutional investors recently changed the

proportions of their portfolios toward public sector funds. The article implies that 8%
of investors studied invest in public sector funds and 6% in corporate funds. Assume
that 2% invest in both kinds. If an investor is chosen at random, what is the
probability that this investor has either public or corporate funds?

SOLUTION: Let A be the event that the investors studied invest in public sector funds
B be the event that the investors studied invest in corporate funds

( ) = 0.08, ( ) = 0.06, ( ∩ ) = 0.02

The probability that this investor has either public or corporate funds:

( ∪ ) = ( )+ ( )− ( ∩ ) = 0.08 + 0.06 − 0.02 = 0.12

Example 2.4: (Case of Union Rule for more than two events)

PROBLEM: According to USA Today, 65% of Americans are overweight or obese. If five
Americans are chosen at random, what is the probability that at least one of them is
overweight or obese?

SOLUTION: Let A be the event that Americans are overweight or obese

( ) = 0.65, ( ̅ ) = 1 − ( ) = 1 − 0.65 = 0.35

Statistics for Business | Chapter 02: Probability

The probability that at least one of them is overweight or obese:

( )= ( ∪ ∪ ∪ ∪ )
= 1− ( ̅ ) ( ̅ ) ( ̅ ) ( ̅ ) ( ̅ )
= 1 − (0.35)(0.35)(0.35)(0.35)(0.35) = 1 − (0.35) = 0.9947

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4. Dependence and Independence of Events

 Conditional Probability (Dependence of Events)

( ∩ )
( | )= or ( ∩ )= ( | ) ( )
( )
( ∩ )
( | )= or ( ∩ )= ( | ) ( )
( )

 Independence of Events

( | )= ( )

( | )= ( )

Example 4.1: (Case of Conditional Probability)

PROBLEM: A club has 120 members, of whom 35 play chess, 58 play bridge, and 27 play both
chess and bridge. If a member of the club is randomly chosen, what is the conditional
probability that she
(a) plays chess given that she plays bridge;
(b) plays bridge given that she plays chess?

Statistics for Business | Chapter 02: Probability

SOLUTION: Let A be the event of playing chess
B be the event of playing bridge

( ) = 35/120
( ) = 58/120
( ∩ ) = 27/120

(a) The conditional probability that she plays chess given that she plays bridge:

( ∩ ) 27/120 27
( | )= = = ≈ 0.4655
( ) 58/120 58

(b) The conditional probability that she plays bridge given that she plays chess:

( ∩ ) 27/120 27
( | )= = = ≈ 0.7714
( ) 35/120 35

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5. The Relationship between the Two Events A and B

 Mutually Exclusive Events

Two events are called mutually exclusive when the sets corresponding to
two events are disjoint.

For mutually exclusive events A and B:

P(A ∩ B) = 0

 Independent Events

Two events are called independent when the probability of the intersection
of two events is equal to

P(A ∩ B) = P(A)P(B)

Example 5.1: (Case of Mutually Exclusive Events)

PROBLEM: A machine produces components for use in cellular phones. At any given time, the
machine may be in one, and only one, of three states: operational, out of control, or
down. What is the relationship between the two events “machine is out of control”
and “machine is down”?

SOLUTION: The relationship between the two events “machine is out of control” and “machine is

Statistics for Business | Chapter 02: Probability

down” is mutually exclusive because at any given time, the machine may be in one,
and only one, of three states.

Example 5.2: (Case of Independent Events)

PROBLEM: The probability of getting an A in Physics is 25% and the probability of getting an A in
Math is 40%. The probability of getting an A in both classes is 0.1. Are the 2 events
independent? Explain.

SOLUTION: Let A be the event of getting an A in Physics

B be the event of getting an A in Math

( ) = 0.25, ( ) = 0.4, ( ∩ ) = 0.1

Since ( ) × ( ) = ( ∩ ) = 0.1, two event of getting an A in Physics and in

Math are independent.

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6. Combinational Concepts

Combinational Concepts
!
Permutations =
( − )!
!
Combinations = =
( − )!

Example 6.1: (Case of Permutations and Combinations)

PROBLEM: There are 20 people who work in an office together. Four of these people are
selected to go to the same conference together. How many such selections are
possible?

SOLUTION: This problem involves a combination of 20 people taken 4 at a time. It is not a

permutation because the order in which the people are selected does not matter. To
get the answer, you must find = , .

PROBLEM: There are 20 people who work in an office together. Four of these people are
selected to attend four different conferences. The first person selected will go to a
conference in New York, the second will go to Chicago, the third to San Francisco,
and the fourth to Miami. How many such selections are possible?

SOLUTION: This problem involves a permutation of 20 people taken 4 at a time. It is not a

combination because the order in which the people are selected matters. To obtain
the answer, you need = , .

Statistics for Business | Chapter 02: Probability

PROBLEM : Serial numbers for a product are to be made using three letters (using any letter of
the alphabet) followed by two single-digit numbers. For example, JGR29 is one such
serial number. How many such serial numbers are possible if neither letters nor
numbers can be repeated?

SOLUTION: The solution involves the intersection rule and permutations. First three letters must
be chosen from 26, and since order is important, this is . Then two digits must
be chosen from 10, and this is . By the intersection rule, the number of possible
serial numbers is ( )( )= , , .

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7. Law of Total Probability and Bayes’ Theorem

(Understanding this concept may be easier for you if you use the chart to
analyze the concept and its problems instead of the formulas in your textbook)

Example 7.1: (Case of Bayes’ Theorem)

PROBLEM: You ask your neighbor to water a sickly plant while you are on vacation. Without
water it will die with probability 0.8; with water it will die with probability 0.15. You
are 90 percent certain that your neighbor will remember to water the plant.
(a) What is the probability that the plant will be alive when you certain?
(b) If it is dead, what is the probability your neighbor forgot to water it?

SOLUTION:

Statistics for Business | Chapter 02: Probability

a. The probability that the plant will be alive when you certain is equal to

( ) = 0.9 × 0.85 + 0.1 × 0.2 = 0.785

b. If it is dead, the probability your neighbor forgot to water it is equal to

0.1 × 0.8
( ℎ | )= = 0.372
0.9 × 0.15 + 0.1 × 0.8

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Example 7.2: (Case of Bayes’ Theorem)

PROBLEM: Suppose that when answering a question on a multiple-choice test, a student either
knows the answer or guesses at it. If he guesses at the answer, then he will be
correct with probability 1/5. The probability that a student knows the answer is 0.6.
(a) What is the probability that the student answer correctly a certain question?
(b) What is the probability that the student knew the answer given that he
answered it correctly?

SOLUTION:

(a) The probability that the student answer correctly a certain question:

( ) = 0.6 × 1.0 + 0.4 × 0.2 = 17/25

(b) The probability that the student knew the answer given that he answered it
correctly:

Statistics for Business | Chapter 02: Probability

( ℎ | )
0.6 × 1.0
= = 15/17 ≈ 0.8824
0.6 × 1.0 + 0.4 × 0.2