I WEEK. Lecture 1

Lesson 1: Random Variables and
Probability Distributions Review
LEARNING GOAL
Random Variables
Probability Distributions
Expected Value, Variance
Discrete Distributions: Binomial
Continuous Distributions: Uniform and Normal
Jointly Distributed Discrete Random Variables
Copyright 2009 Pearson Education, Inc.
Random Variables
Random variable a function that assigns a real number

to each element of a sample space (a numerical
description of the outcome of an experiment). Random
variables are denoted by capital letters, X, Y, ; specific
values by lower case letters, x, y,
Random variables may be discrete, with a finite or

infinitely countable number of values (number of
inaccurate orders or number of imperfections on a car) or
continuous, having any real value possibly within some
limited range (tomorrows temperature)
3(1)-2
Copyright 2010 Pearson

Education, Inc. Publishing as
Prentice Hall
Examples of Random Variables
Experiment: flip a coin 3 times. Heads and Tails
Outcomes: TTT, TTH, THT, THH, HTT, HTH, HHT, HHH

Random variable: X = number of heads.
X can be either 0, 1, 2, or 3.
Experiment: observe end-of-week closing stock

price.
Random variable: Y = closing stock price.

X can be any nonnegative real number.
3(1)-3

Prentice Hall
Probability distribution a characterization of the

possible values a random variable may assume
along with the probability of occurrence.
Probability distributions may be defined for both

discrete and continuous random variables.
3(1)-4

Prentice Hall
Discrete Random Variables
Probability mass function f(x): specifies the

probability of each discrete outcome
Two properties:
0 f(xi) 1
f(xi) = 1
3(1)-5

Prentice Hall
EXAMPLE Two Dice Distribution

Make a probability distribution for the sum of the dice when two dice
are rolled. Express the distribution as a table and as a histogram.
Solution: Because there are six ways for each die to land, there are 6 6
= 36 outcomes of rolling two dice. We enumerate all 36 outcomes in Table
6.5 by listing one die along the rows and the other along the columns. In
each cell, we show the sum of the numbers on the two dice.
Slide 6.2- 6
EXAMPLE Two Dice Distribution

Solution: (cont.)
The possible events are the sums from 2 to 12. These are the events of
interest in this problem.
We find the probability of each event by counting all the outcomes for each
sum and then dividing the number of outcomes by 36.
For example, the five highlighted outcomes in Table 6.5 (previous slide)
have a sum of 8, so the probability of a sum of 8 is 5/36.
Table 6.6 shows the complete probability distribution, and Figure 6.7 (next
slide) shows the distribution as a histogram.
Slide 6.2- 7
0.18
0.16
Probability
0.14
0.12
0.10
0.08
0.06
0.04
0.02
2
6
7
8
Sum of two dice
10
11
12
Figure 6.7 Histogram showing the probability distribution for the sum of two dice.
Slide 6.2- 8
Cumulative Distribution Function, F(x)
Specifies the probability that the random variable X will

be less than or equal to x, denoted as P(X x).
3(1)-9

Prentice Hall
Continuous Random Variables
Probability density function, f(x), a continuous

function that describes the probability of outcomes
for the random variable X.
A histogram of sample data approximates the
shape of the underlying density function.
3(1)-10

Prentice Hall
Properties of Probability Density Functions
f(x) 0 for all x

Total area under f(x) = 1
There are always infinitely many values for X
P(X = x) = 0
We can only define probabilities over intervals: e.g.,
P( a X b), P(X < c), or P(X > d)
3(1)-11

Prentice Hall
Cumulative Distribution Function
F(x) specifies the probability that the random

variable X will be less than or equal to x; that is,
P(X x).
F(x) is equal to the area under f(x) to the left of x
The probability that X is between a and b is the
area under f(x) from a to b:
P( a X b) = F(b) F(a)
3(1)-12

Prentice Hall
Expected Value and Variance of Random

Variables
Expected value of a random variable X is the theoretical

analogy of the mean, or weighted average of possible
values:
E[X] = x i f(x i )
i =1
Variance and standard deviation of a random variable X:
Var[X] = (x j - E[X]) 2 f(x j )

j=1
X =
2
(x
E[X])
f(x j )
j
j=1
3(1)-13

Prentice Hall
Probability
Distributions
Discrete
Probability
Distributions
Continuous
Probability
Distributions
Binomial
Uniform
Hypergeometric
Normal
Poisson
Exponential
Chap 5-14
The Binomial Distribution

Probability
Distributions
Discrete
Probability
Distributions
Binomial
Hypergeometric
Poisson
Chap 5-15
Bernoulli Distribution
Consider only two outcomes: success or failure

Let P denote the probability of success
Let 1 P be the probability of failure
Define random variable X:
x = 1 if success, x = 0 if failure
Then the Bernoulli probability function is
P(0) (1 P) and P(1) P
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.
Chap 5-16
Bernoulli Distribution
Mean and Variance
The mean is = P
E(X) xP(x) (0)(1 P) (1)P P

X
The variance is 2 = P(1 P)
2 E[(X )2 ] (x )2 P(x)
X
(0 P) (1 P) (1 P) P P(1 P)
2
Chap 5-17
Binomial Probability Distribution
A fixed number of observations, n
Two mutually exclusive and collectively exhaustive categories
e.g., head or tail in each toss of a coin; defective or not defective light
bulb
Generally called success and failure
Probability of success is P , probability of failure is 1 P
Constant probability for each observation
e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse
e.g., Probability of getting a tail is the same each time we toss the coin
Observations are independent
The outcome of one observation does not affect the outcome of the
other
Chap 5-18
Binomial Distribution Formula

n!
X
nX
P(x)
P (1- P)
x ! (n x )!
P(x) = probability of x successes in n trials,
with probability of success P on each trial
x = number of successes in sample,
(x = 0, 1, 2, ..., n)
n = sample size (number of trials
or observations)
P = probability of success
Chap 5-19
Example: Flip a coin four

times, let x = # heads:
n=4
P = 0.5
1 - P = (1 - 0.5) = 0.5
x = 0, 1, 2, 3, 4
Example:
Calculating a Binomial Probability
What is the probability of one success in five
observations if the probability of success is 0.1?
x = 1, n = 5, and P = 0.1
n!
P(x 1)
P X (1 P)n X
x! (n x)!
5!
(0.1)1(1 0.1)5 1
1! (5 1)!
(5)(0.1)(0.9)4
.32805
Chap 5-20
Binomial Distribution
Mean and Variance
Mean
E(x) nP
Variance and Standard Deviation
nP(1- P)
2
nP(1- P)
Where n = sample size
P = probability of success
(1 P) = probability of failure
Chap 5-21
Binomial Characteristics
Examples
nP (5)(0.1) 0.5
Mean
nP(1- P) (5)(0.1)(1 0.1)
0.6708
nP (5)(0.5) 2.5
nP(1- P) (5)(0.5)(1 0.5)
1.118
.6
.4
.2
0
P(x)
x
0
.6
.4
.2
0
n = 5 P = 0.1
P(x)
n = 5 P = 0.5
x
5
Chap 5-22
Linear Functions
of Random Variables
Let a and b be any constants.
a)
E(a) a
and
Var(a) 0
i.e., if a random variable always takes the value a,

it will have mean a and variance 0
b)
E(bX) bX
and
Var(bX) b
2
2
X
i.e., the expected value of bX is bE(x)
Chap 5-23
Linear Functions
of Random Variables
(continued)
Let random variable X have mean x and variance 2x

Let a and b be any constants.
Let Y = a + bX
Then the mean and variance of Y are
Y E(a bX) a bX
Var(a bX) b
2
so that the standard deviation of Y is
Y b X
Chap 5-24
Joint Probability Functions
A joint probability function is used to express the probability

that X takes the specific value x and simultaneously Y
takes the value y, as a function of x and y
P(x, y) P(X x Y y)
The marginal probabilities are
P(x) P(x, y)
y
Ch. 4-25
P(y) P(x, y)
x
Example
3(1)-26

Prentice Hall
Example
3(1)-27

Prentice Hall
Slide 1.1- 28
Slide 1.1- 29
Slide 1.1- 30
Independence
The jointly distributed random variables X and Y are said to

be independent if and only if their joint probability function is
the product of their marginal probability functions:
P(x, y) P(x)P(y)
for all possible pairs of values x and y
A set of k random variables are independent if and only if
P(x1, x 2 ,, x k ) P(x1 )P(x 2 )P(x k )
Chap 5-31
Covariance
Let X and Y be discrete random variables with means X

and Y
The expected value of (X - X)(Y - Y) is called the

covariance between X and Y
For discrete random variables
Cov(X, Y) E[(X X )(Y Y )] (x x )(y y )P(x, y)

x
An equivalent expression is
Cov(X, Y) E(XY) xy xyP(x, y) xy

x
Chap 5-32
Covariance and Independence
The covariance measures the strength of the linear

relationship between two variables
If two random variables are statistically

independent, the covariance between them is 0
The converse is not necessarily true
Chap 5-33
Correlation
The correlation between X and Y is:
Cov(X, Y)
Corr(X, Y)
X Y
= 0 no linear relationship between X and Y

> 0 positive linear relationship between X and Y
when X is high (low) then Y is likely to be high (low)

= +1 perfect positive linear dependency
< 0 negative linear relationship between X and Y
when X is high (low) then Y is likely to be low (high)

= -1 perfect negative linear dependency
Chap 5-34
Slide 1.1- 35
Slide 1.1- 36
Slide 1.1- 37
Slide 1.1- 38
The Uniform Distribution
The uniform distribution is a probability distribution

that has equal probabilities for all possible outcomes
of the random variable
f(x)
Total area under the

uniform probability
density function is 1.0
xmax x
xmin
Chap 6-39
Statistics for Business and

Economics, 6e 2007 Pearson
Education, Inc.
The Uniform Distribution

(continued)
The Continuous Uniform Distribution:
f(x) =
1
if a x b
ba
0
otherwise
where
f(x) = value of the density function at any x value
a = minimum value of x
b = maximum value of x
Chap 6-40

Education, Inc.
Properties of the
Uniform Distribution
The mean of a uniform distribution is
The variance is
ab
2
(b
a)
2
12
Chap 6-41

Education, Inc.
Uniform Distribution Example

Example: Uniform probability distribution
over the range 2 x 6:
1
f(x) = 6 - 2 = .25 for 2 x 6
f(x)
.25
ab 26
4
2
2
(b - a)2 (6 - 2)2

1.333
12
12
2
Chap 6-42

Education, Inc.
Slide 1.1- 43
Slide 1.1- 44
The Normal Distribution

Probability
Distributions
Continuous
Probability
Distributions
Uniform
Normal
Exponential
Chap 6-45

Education, Inc.

(continued)
Bell Shaped
Symmetrical
Mean, Median and Mode
are Equal
f(x)
Location is determined by the

mean,
Spread is determined by the
standard deviation,
The random variable has an
infinite theoretical range:
+ to
Mean
= Median
= Mode
Chap 6-46

(continued)
The normal distribution closely approximates the

probability distributions of a wide range of random
variables
Distributions of sample means approach a normal

distribution given a large sample size
Computations of probabilities are direct and elegant
The normal probability distribution has led to good

business decisions for a number of applications
Chap 6-47

Education, Inc.
Many Normal Distributions
By varying the parameters and , we obtain

different normal distributions
Chap 6-48

Education, Inc.
The Normal Distribution Shape

f(x)
Changing shifts the

distribution left or right.
Changing increases
or decreases the
spread.
Given the mean and variance we define the normal

distribution using the notation
X ~ N(, 2 )
Chap 6-49

Education, Inc.
The Normal Probability

Density Function
The formula for the normal probability density

function is
1
(x )2 /2 2
f(x)
e
2
Where
e = the mathematical constant approximated by 2.71828

= the mathematical constant approximated by 3.14159
= the population mean
= the population standard deviation
x = any value of the continuous variable, < x <
Chap 6-50

Education, Inc.
Cumulative Normal Distribution
For a normal random variable X with mean and

variance 2 , i.e., X~N(, 2), the cumulative distribution
function is
F(x 0 ) P(X x 0 )
f(x)
P(X x 0 )
0
Chap 6-51
x0
x
Education, Inc.
Finding Normal Probabilities

The probability for a range of values is
measured by the area under the curve
P(a X b) F(b) F(a)
Chap 6-52
x
Education, Inc.

(continued)
F(b) P(X b)
a
F(a) P(X a)
P(a X b) F(b) F(a)

Chap 6-53

Education, Inc.
The Standardized Normal
Any normal distribution (with any mean and variance

combination) can be transformed into the standardized
normal distribution (Z), with mean 0 and variance 1
f(Z)
Z ~ N(0 ,1)
Need to transform X units into Z units by0subtracting theZ

mean of
X and dividing by its standard deviation
X
Z
Chap 6-54

Education, Inc.

b
a
P(a X b) P
Z

b
a
F
F
f(x)
a
a
Chap 6-55

Education, Inc.
Probability as
Area Under the Curve
The total area under the curve is 1.0, and the curve is
symmetric, so half is above the mean, half is below
f(X) P( X ) 0.5
0.5
P( X ) 0.5
0.5
P( X ) 1.0
Chap 6-56

Education, Inc.
Chap 6-57

Education, Inc.
Chap 6-58

Education, Inc.
General Procedure for Finding

Probabilities
To find P(a < X < b) when X is
distributed normally:
Draw the normal curve for the problem in

terms of X
Translate X-values to Z-values
Use the Cumulative Normal Table
Chap 6-59

Suppose X is normal with mean 8.0 and
standard deviation 5.0
Find P(X < 8.6)
8.0
8.6
Chap 6-60

Education, Inc.

(continued)
Suppose X is normal with mean 8.0 and standard

deviation 5.0. Find P(X < 8.6)
X 8.6 8.0
Z
0.12
5.0
=8
= 10
8 8.6
=0
=1
0 0.12
P(X < 8.6)
P(Z < 0.12)

Chap 6-61

Education, Inc.
Solution: Finding P(Z < 0.12)

Standardized
Table (Portion)Normal Probability
F(z)
.10
.5398
.11
.5438
.12
.5478
.13
.5517
P(X < 8.6)

= P(Z < 0.12)
F(0.12) = 0.5478
0.00
0.12
Chap 6-62
Upper Tail Probabilities

Suppose X is normal with mean 8.0 and
standard deviation 5.0.
Now Find P(X > 8.6)
8.0
8.6
Chap 6-63

Education, Inc.
Upper Tail Probabilities

(continued)
Now Find P(X > 8.6)
P(X > 8.6) = P(Z > 0.12) = 1.0 - P(Z 0.12)

= 1.0 - 0.5478 = 0.4522
0.5478
1.000
1.0 - 0.5478
= 0.4522
0
0.12
0.12
Chap 6-64

Education, Inc.
Finding the X value for a Known

Probability
Steps to find the X value for a known

probability:
1. Find the Z value for the known probability
2. Convert to X units using the formula:
X Z
Chap 6-65

Education, Inc.
Finding the X value for a Known

Probability
(continued)
Example:
Suppose X is normal with mean 8.0 and standard
deviation 5.0.
Now find the X value so that only 20% of all values
are below this X
.2000
?
?
Chap 6-66
8.0
0
X
Z

Education, Inc.
Find the Z value for

20% in the Lower Tail
1. Find the Z value for the known probability
Standardized
Table (Portion)Normal Probability
F(z)
.82
.7939
.83
.7967
.84
.7995
.85
20% area in the lower tail

is consistent with a Z
value of -0.84
.80
.20
?
8.0
-0.84 0
.8023
Chap 6-67
X
Z
Education, Inc.
Finding the X value

2. Convert to X units using the formula:
X Z
8.0 ( 0.84)5.0
3.80
So 20% of the values from a distribution
with mean 8.0 and standard deviation
5.0 are less than 3.80
Chap 6-68

Education, Inc.
Normal Distribution Approximation

for Binomial Distribution
Recall the binomial distribution:

n independent trials
probability of success on any given trial = P
Random variable X:
X =1 if the ith trial is success
i
X =0 if the ith trial is failure
i
E(X) nP
Var(X) nP(1- P)
2
Chap 6-69

Education, Inc.

(continued)
The shape of the binomial distribution is approximately

normal if n is large
The normal is a good approximation to the binomial when

nP(1 P) > 5
Standardize to Z from a binomial distribution:
X E(X)
X np
Z
Var(X)
nP(1 P)
Chap 6-70

(continued)
Let X be the number of successes from n independent trials,

each with probability of success P.
If nP(1 - P) > 5,
P(a X b) P
a nP
b nP
Z
nP(1 P)
nP(1 P)
Chap 6-71
Binomial Approximation Example
40% of all voters support ballot proposition A. What is

the probability that between 76 and 80 voters indicate
support in a sample of n = 200 ?
E(X) = = nP = 200(0.40) = 80
Var(X) = 2 = nP(1 P) = 200(0.40)(1 0.40) = 48
( note: nP(1 P) = 48 > 5 )
76 80
80 80
P(76 X 80) P
Z
200(0.4)(1 0.4)
200(0.4)(1 0.4)
P( 0.58 Z 0)
F(0) F( 0.58)
0.5000 0.2810 0.2190
Chap 6-72
Excel Support
NORMDIST(x, mean, standard_deviation, cumulative)

NORMSDIST(z): same as Table A.1
STANDARDIZE(x, mean, standard_deviation) computes z-values
3(1)-73

Prentice Hall
Normal Probability Calculations
Customer demand (X) averages 750 units/month with a

standard deviation of 100 units/month.
Find P(X<900), P(X>700), P(700<X<900) and the level
of demand that will be exceeded only 10% of the time.
3(1)-74

Prentice Hall
Computing Normal Probabilities
3(1)-75

Prentice Hall
Use Computed Values or Standard

Normal Tables
P(X < x) = P(Z < z),
where
x
z=
Use Table A.1 for the

cumulative distribution
of the standard normal
3(1)-76

Prentice Hall
P(X<900)
900 750
z=
1.5
100
P(X < 900) = P(Z < 1.5)
From Table A.1, P(Z < 1.5) = 0.9332.
3(1)-77

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Lesson 1: Random Variables and

Probability Distributions Review

Copyright 2009 Pearson Education, Inc.

Random variable a function that assigns a real number

Random variables may be discrete, with a finite or

Copyright 2010 Pearson

Examples of Random Variables

Experiment: flip a coin 3 times. Heads and Tails

Outcomes: TTT, TTH, THT, THH, HTT, HTH, HHT, HHH

Experiment: observe end-of-week closing stock

Random variable: Y = closing stock price.

Copyright 2010 Pearson

Probability distribution a characterization of the

Probability distributions may be defined for both

Copyright 2010 Pearson

Discrete Random Variables

Probability mass function f(x): specifies the

Copyright 2010 Pearson

EXAMPLE Two Dice Distribution

Copyright 2009 Pearson Education, Inc.

EXAMPLE Two Dice Distribution

Copyright 2009 Pearson Education, Inc.

Copyright 2009 Pearson Education, Inc.

Cumulative Distribution Function, F(x)

Specifies the probability that the random variable X will

Copyright 2010 Pearson

Continuous Random Variables

Probability density function, f(x), a continuous

Copyright 2010 Pearson

Properties of Probability Density Functions

f(x) 0 for all x

Copyright 2010 Pearson

Cumulative Distribution Function

F(x) specifies the probability that the random

Copyright 2010 Pearson

Expected Value and Variance of Random

Expected value of a random variable X is the theoretical

Variance and standard deviation of a random variable X:

Var[X] = (x j - E[X]) 2 f(x j )

Copyright 2010 Pearson

The Binomial Distribution

Consider only two outcomes: success or failure

P(0) (1 P) and P(1) P

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

E(X) xP(x) (0)(1 P) (1)P P

The variance is 2 = P(1 P)

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

Binomial Probability Distribution

A fixed number of observations, n

Two mutually exclusive and collectively exhaustive categories

Constant probability for each observation

e.g., 15 tosses of a coin; ten light bulbs taken from a warehouse

Observations are independent

Binomial Distribution Formula

Example: Flip a coin four

Variance and Standard Deviation

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

Let a and b be any constants.

i.e., if a random variable always takes the value a,

i.e., the expected value of bX is bE(x)

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

Let random variable X have mean x and variance 2x

so that the standard deviation of Y is