Chapter 6 – Normal Distribution 6-1

6 Chapter 6 Learning Objectives (LOs)

LO 6.1 Describe a continuous random variable.
Continuous Probability LO 6.2 Calculate and interpret probabilities for a random
Distributions 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
Business Statistics: variable that follows the normal distribution.
Communicating with Numbers, 2e LO 6.6 Calculate and interpret probabilities for a random
variable that follows the exponential distribution.
By Sanjiv Jaggia and Alison Kelly LO 6.7 Calculate and interpret probabilities for a random
variable that follows the lognormal distribution.

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6.1 Continuous Random Variables and 6.2 The Standard Normal Distribution
the Uniform Probability Distribution LO 6.3 Explain the characteristics of the normal distribution.
LO 6.1 Describe a continuous random variable.
The Normal Distribution
• Remember that random variables may be •
 Symmetric
classified as
 Bell-shaped
 Discrete
 Closely approximates the probability distribution of a
• The random variable assumes a countable wide range of random variables, such as the
number of distinct values.
• Heights and weights of newborn babies
 Continuous • Scores on SAT
• The random variable is characterized by • Cumulative debt of college graduates
(infinitely) uncountable values within any
 Serves as the cornerstone of statistical inference.
interval.
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6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Characteristics of the Normal Distribution • Characteristics of the Normal Distribution
 Symmetric about its mean  The normal distribution is completely described
• Mean = Median = Mode by two parameters:  and σ2.
 Asymptotic—that is, the •  is the population mean which describes the
tails get closer and central location of the distribution.
closer to the • σ is the population variance which describes
horizontal axis, P(X < ) = 0.5 P(X > ) = 0.5
the dispersion of the distribution.
but never touch it.

 x

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Chapter 6 – Normal Distribution 6-2

6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Example: Suppose the ages of employees in Industries A,  LO 6.4 Use the standard normal table (z table).
B, and C are normally distributed.  • The Standard Normal (Z) Distribution.
 Here are the relevant parameters:
 A special case of the normal distribution:
• Mean () is equal to zero (E(Z) = 0).

• Standard deviation (σ) is equal to one 
 Let’s compare industries using the Normal curves. (SD(Z) = 1).

σ is the same,  is different.  is the same, σ is different.

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6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Standard Normal Table (Z Table). • Standard Normal Table (Z Table).
 Gives the cumulative probabilities P(Z < z) for positive 
and negative values of z.
Table for positive z values. Table for negative z values.
 Since the random variable Z is symmetric about its 
mean of 0, 
P(Z < 0) = P(Z > 0) = 0.5. 
 To obtain the P(Z < z), read down the z column first, 
then across the top.

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6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Finding the Probability for a Given z Value. • Finding the Probability for a Given z Value.
 Transform normally distributed random variables into
 Remember that the z table provides cumulative
standard normal random variables and use the z
probabilities P(Z < z) for a given z.
table to compute the relevant probabilities.
 The z table provides cumulative probabilities  Since z is negative, we can look up this
P(Z < z) for a given z. probability from the left-hand page of the z table.
Portion of right-hand page of z table.
If z = 1.52, then look up Portion of left-hand page of Z Table.
If z = -1.96, then look up

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Chapter 6 – Normal Distribution 6-3

6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Example: Finding Probabilities for a • Example: Alternately, use Excel to look up
Standard Normal Random Variable Z. probabilities for standard normal variables.
 Find P(-1.52 < Z < 1.96) =  Find P(-1.52 < Z < 1.96) = P(Z < 1.96) − P(Z < -1.52 )
Round NORM.S.INV’s
P(Z < 1.96) − P(Z < -1.52 ) = output to 4 decimal places in
P(Z < 1.96) = 0.9750 your HW BEFORE
doing other
calculations!
P(Z < −1.52 ) = 0.0643 0.9750 − 0.0643 = 0.9107
Note the “1”s are for
cumulative! A “0” would
be nonsensical for a
continuous distribution.

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6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Example: Finding a z value for a given • Example: Alternately, use Excel to find a z
probability. value for a given probability.
 For a standard normal variable Z, find the z  For a standard normal variable Z, find the z
values that satisfy P(Z < z) = 0.6808. 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
Round NORM.S.INV’s output
row/column of z. to 2 decimal places in your
 z = 0.47. HW BEFORE doing other
calculations!

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6.2 The Standard Normal Distribution 6.2 The Standard Normal Distribution
• Revisiting the Empirical Rule. • 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%?
• 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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Chapter 6 – Normal Distribution 6-4

6.2 The Standard Normal Distribution 6.3 Solving Problems with

the Normal Distribution
• Example: The Empirical Rule
LO 6.5 Calculate and interpret probabilities for a random variable 
 An investment strategy has an expected return of that follows the normal distribution.
4% and a standard deviation of 6%. Assume that
investment returns are normally distributed. • The Normal Transformation
 What is the probability of earning a return greater  Any normally distributed random variable X with
than 10%? mean  and standard deviation σ can be
• Using symmetry, we transformed into the standard normal random
conclude that 16% 16% 16% variable Z as:
(half of 32%) of the 68%
observations are with corresponding values
greater than 10%.
‐2 As constructed: E(Z) = 0 and SD(Z) = 1.
(μ − σ) (μ + σ)

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6.3 Solving Problems with 6.3 Solving Problems with

the Normal Distribution the Normal Distribution
• A z value specifies by how many standard • Use the Inverse Transformation to compute
deviations the corresponding x value falls probabilities for given x values.
above (z > 0) or below (z < 0) the mean.  A standard normal variable Z can be transformed
 A positive z indicates by how many standard to the normally distributed random variable X
deviations the corresponding x lies above . with mean  and standard deviation σ as
 A zero z indicates that the corresponding x
equals  with corresponding values
 A negative z indicates by how many standard
deviations the corresponding x lies below 

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6.3 Solving Problems with 6.3 Solving Problems with

the Normal Distribution the Normal Distribution - Excel
• Example: Scores on a management aptitude exam • Example: Scores on a management aptitude exam
are normally distributed with a mean of 72 () and are normally distributed with a mean of 72 () and
a standard deviation of 8 (σ). a standard deviation of 8 (σ).
 What is the probability that a randomly selected  What is the probability that a randomly selected
manager will score above 60? manager will score above 60?
• First transform the random variable X to Z using the • Alternately, Excel will return the probability directly if
transformation formula: you use NORM.DIST() and give it the mean and
standard deviation.
• Using the standard normal table, find
• P(Z > -1.5) = 1 − P(Z < -1.5) = 1 − 0.0668 = 0.9332

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Chapter 6 – Normal Distribution 6-5

Introductory Case: Demand for Salmon Introductory Case: Demand for Salmon
• Akiko Hamaguchi, manager of a small sushi • Based on this information, Akiko would like to:
restaurant, Little Ginza, in Phoenix, Arizona, has to • Calculate the proportion of days that demand for
estimate the daily amount of salmon needed. salmon at Little Ginza was above her earlier
• Akiko has estimated the daily consumption of purchase of 20 pounds.
salmon to be normally distributed with a mean of
 Calculate the proportion of days that demand for
12 pounds and a standard deviation of 3.2 pounds.
• Buying 20 lbs of salmon every day has resulted in salmon at Little Ginza was below 15 pounds.
too much wastage.  Determine the amount of salmon that should be

• Therefore, Akiko will buy salmon that meets the bought daily so that it meets demand on 90% of
daily demand of customers on 90% of the days. the days.

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6.3 Solving Problems with 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?
b. What proportion of days was demand below 15 pounds?
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.
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:

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App A Table 1. Standard Normal Curve

App A Table 1. Standard Normal Curve

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Chapter 6 – Normal Distribution 6-6

End of Chapter 6

Business Statistics, 2nd Ed. SOM@USM