Chapter 6 Discrete Probability Distributions

1 1CHAPTER 6 DISCRETE PROBABILITY DISTRIBUTIONS Objectives: 1. The student will be able to distinguish between a discrete and continuous random variable.

2. The student will be able to apply and interpret expected value for discrete variables.

3. The student will be able to use the expected value concept with decision trees.

4. The student will be able to apply expected value to the concepts of risk.

5. The student will be able to use and interpret the binomial probability distribution.

6. The student will be able to use and interpret the poisson probability distribution.

Random variable - a variable whose numerical value is determined by the outcome of a random trial Pg 188

Discrete random variable is able to take on a countable number of values in an interval. Pg 184

Continuous random variable is assumed able to take any value in an interval. Pg 184

A probability distribution reports all possible outcomes as well as the corresponding probability. page 184.

Expected value of a discrete random variable is a weighted mean  equal to the sum of the products of each value x of the variable and associated probability P(X = x), or Pg 185

2AVERAGE SALES/DAY REL. FREQ. 50 .1 150 .2 _ 2 250 .4 X = 200 350 .3 E(X) = 240 σ = 94.33

COMPUTE EXPECTED VALUE AND A SIMPLE AVERAGE

LOTTERY 2,000,000 entries $1 PER TICKET $1,000,000 FIRST PRIZE COMPUTE THE EXPECTED VALUE OF THE LOTTERY TICKET. COMPUTE THE AVERAGE PROFIT(LOSS) OF THE LOTTERY TICKET.

DRAW A DECISION TREE FOR THE POSSIBLE OUTCOMES.

RISK TAKER - AN INDIVIDUAL IS WILLING TO PAY TO TAKE A RISK.

[Cyber rebate offers a Fisher Price play phone for $206 with a rebate of $206. Assume the cost for this product to Cyber Rebate of this product is $10. Cyber Rebate also notes that 10% of its customers do not apply for the rebate. Can Cyber Rebate make a profit with this rebate program?] WSJ 3/5/01 Marketplace

11/25/05 “Beyond Bland: Gift Cards Now Play Music, Record Messages” WSJ B1 10/13/09 Retailers Turn to Gift-Card Promotions to Lure Reluctant Buyers, Boost Spending WSJ B1 11/17/09 Fed Targets Gift-Card Fees WSJ A2

Tennis balls on the Web. 50 free downloads How should you decide if is a good idea to give something away. If the benefits exceed the costs What is the cost? Assume e-music pays royalties of .05 per song What are the benefits? Subscribe for 9.95 a month but I can cancel anytime in the first 2 weeks and keep 50 songs.

Piracy and formula 6-1 11/19/09 Armed U.S. Ship Repels Attack by Somali Pirates WSJ A12 Piracy and Business decision making 10,000 ships pass near Somilia 40 are taken each year. What is the probability of being hijacked? 3

FIRE INSURANCE Mr. Askil faces a decision to buy or not buy fire insurance for his home. The cost of the insurance is $150/year, but there is only a 1/1000 chance of a fire destroying their home each year. Draw a decision tree for the outcomes Mr. Askil faces.

RISK AVERSION - An individual must be compensated to take a risk or is willing to pay something to avoid a risk.

Mr. Askil has a business opportunity to purchase 10 acres of land at $50,000/acre. The land will only produce a profit if Mr. Askil can get approval from the local government to re-zone the land for residential use. Mr. Askil can buy an option for $10,000/acre to buy in the next month. Mr. Askil believes there is a 50% chance he can convince the local government to rezone the land. If the land is re-zoned, it can be developed for a profit of $30,000/acre. Mr. Askil may decide to seek approval from the local government before making any purchase, but he estimates there will only be a 30% chance the land will still be available.

[Compute the expected value of each decision.]

[Explain which branch of the decision tree you would choose.]

[Compute the standard deviation of each branch.]

DRAW THE OUTCOME TREE FOR THIS PROBLEM. Make a decision.

DRAW OUTCOME TREE FOR A MANUFACTURER REBATE.

RISK NEUTRAL - An individual is indifferent between two assets, regardless of risk, as long as the expected values are the same.

DISCUSS MARCH MADNESS.

DISCUSS REBATES

TORO START P(S) = .9 100,000 SOLD THIS SUMMER 1,200,000 Attempts $50 COST/MACHINE 1. What is the average number of times a Toro will not start on two pulls this summer? 2. What is the average cost per lawn mower to Toro of this plan? 4

Binomial and poisson probability distributions are used to determine the probability of events that can occur in more than one way. In the previous chapters we computed probability of events occurring in a specific manner.

Binomial distribution represents the probabilities of various numerical outcomes over several identical, independent trials, where there are two possible outcomes for each trial. Pg 194 ASSUMPTIONS 1. MUTUALLY EXCLUSIVE, ONLY TWO OUTCOMES ARE POSSIBLE 2. PROBABILITY OF SUCCESS AND FAILURE REMAIN CONSTANT 3. TRIALS ARE INDEPENDENT

TOSS A COIN THREE TIMES

OUTCOMES PROBABILITY BINOMIAL FORMULA 0 .125 1 .375 2 .375 3 .125

3x = number of successes, n = number of trials, n-x = number of failures

10/10/06 “More Fliers Forced To Give Up Seats” WSJ D1 9/17/09 Bumped Passengers Learn a Cruel Flying Lesson WSJ D1 1/07/09 An Airline Report Card: Fewer Delays, Hassles Last Year, but Bumpy Times May Be Ahead WSJ D1

[Askil is a small commuter airline with a capacity of 14 passengers per plane. Askil also determines that 95% of people, who have reservations, take the flight. On Reserve A. What percent of the time will this airplane fly with at least one empty seat? 5 pts

B. The airline decides to over book this flight by one person(take 15 reservations). What is the probability that 15 people show up for the flight. 5 pts 5 C. The FAA(Federal Aviation Association) requires compensation if you are bumped. Assume this compensation cost the airline $100 for each individual that is bumped(can not get on the plane because more people have tickets than seats on the aircraft). If this airline consistently over books by one person, determine the average cost of over booking this flight. Label and interpret your answer. 10 pts] Fall 01

Excel - top menu - formula paste function fx - binomial

MEAN AND STANDARD DEVIATION E(X) = n∏ π = Probability of event A (1-p) = Probability of the complement of event A.

4Function key > Probability Distribution>Binomial In the dialog box select Probability, set the number of trials to 6, the probability of success to .5 and the input column to c1 trials (n=3) and the probability of success is .5 (p=.5)

Poisson distribution represents the random arrival of events per unit of time, distance or area.  = the mean number of Poisson distributed events over the sampling medium that is being examined. x = the number of occurrences over the sampling medium

ASSUMPTIONS 1. All the assumptions relating to the binomial plus 2. A precise maximum does not exist in the sample space.

Compare the average number of occurrences to the actual number of occurrences to determine the probability.

Determine the poisson approximation to the binomial distribution for tossing a coin 25 times and getting 12 heads.

Excel - fx - poisson

Chapter 7 CONTINUOUS PROBABILITY DISTRIBUTIONS Objectives: 1. The student will be able to use and interpret the normal distribution. 6 2. The student will be able to compute and interpret a value for a continuous variable if given a probability of occurrence.

3. The student will be able to know when it is appropriate to approximate the binomial distribution with the normal distribution.

4. The student will be able to determine when it is appropriate to use the binomial, poisson, and normal distributions.

A PROBABILITY DISTRIBUTION IS CONTINUOUS WHEN THE RANDOM VARIABLE MAY ASSUME ANY VALUE WITHIN SOME SPECIFIED RANGE.

THE NORMAL DISTRIBUTION - Pg 227 PROPERTIES OF THE NORMAL CURVE 1. Only the mean (μ) and standard deviation (σ) need to be known to compute probabilities for the normal distribution. 2. The graph of a normal distribution is bell shaped and symmetrical around the mean. 3. Since the normal curve is measured on a continuous scale the probability of obtaining a precise value is approximately 0. 4. The probability that a random variable will have a value between any two points is equal to the area under the normal curve between those two points. 5. The area under the normal curve between the mean and any other point can be determined by knowing how many standard deviations this data value is from the mean.

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Excel - fx - standardize - for Z-values

fx - normdist - Returns the probability of less than a specified value for a given mean and standard deviation. For less than probability cumulative probability put 1 in the cumulative window. X Mean 7 S Dev Cum

fx - normsdist converts z-values to less than probabilities. Z fx - normsinv - Gives a Z-value for a given probability.

fx - norminv - Gives a data value. Only a designated percent of the data will be less than or equal to this value given a mean and standard deviation.

[Your product requires ball bearings that have an average diameter 1 cm. You are looking for a supplier of ball bearings. The quality control department determines that a ±.008 cm variation around the mean is acceptable.

The mean diameter of the ball bearings is 1 cm. What percent of parts will be acceptable if the standard deviation is .008?

The quality control department wants to establish a failure rate of .0026 or .26%. What standard deviation should the quality control department demand from its suppliers?

This is a 3-sigma quality control level.]

[4.5-sigma .49996599x2 = .999993198 1 - .999993198=.000003198] Incentive Pay (How would you design a pay incentive plan for cashiers?)

NORMAL APPROXIMATION TO THE BINOMIAL DISTRIBUTION

6Rule of thumb np(1-p)  5 Pg 238

1. Determine the probability of 3 defectives in a box of 5. 2. Determine the probability of 5 or more heads in 20 tosses. 3. Determine the probability of 3 defects in a yard of cloth. 4. Determine the probability of 4 phone calls in two hours. 5. Determine the probability of an individual's income, picked at random, being equal to $36,000. 6. Determine the probability of an individual's income, picked at random, being greater than $36,000. 7. Determine the probability of 400 heads in 1000 tosses. 8 Continuity correction is an adjustment that we make by adding or subtracting ½ to a discrete value when we use a continuous distribution to approximate a discrete distribution. Pg 238

Normal approximation of a binomial proportion of successes.

7Sometimes, an appropriate procedure is to work not with the number X of successes in n trials but, instead with the proportion or fraction of successes.

[What is the probability that a data value is more than 1.96 standard deviations from its mean?]

[Assume 1=0, what is the probability that a population slope is more than 1.96 standard deviations from 0?]

Chapter 8 Sampling Distributions Objectives: 1. The student will be able to understand the importance of random sampling in the process of inference.

2. The student will be able to distinguish between a population and a sample. Pg 264-265

3. The student will be able to choose the appropriate sampling method (i.e. systematic, stratified, cluster or simple random samples). Pg 265-270.

SAMPLING TECHNIQUES 1. sample versus census why use a sample? 5/8/10 In Counting Illegal Immigrants, Certain Assumptions Apply WSJ A2

2. Sample should be representative of the population - random

If samples are random we can use the normal distribution. There are N!/[n!(N - n)!] samples of size n in a finite population of size, N, and random sampling means choosing one in such a way that all are equally likely to be choose.

POPULATION SAMPLE IS THIS RANDOM 9 1. ALL MEN MEN IN THIS CLASS 2. COLLEGE STUDENTS UW-PLATTEVILLE 3. VOTERS PHONE SURVEY BEFORE THE ELECTION 4. UNEMPLOYED PEOPLE WHO RECEIVE U.E. COMP. 5. T.V. VIEWERS 5500 VIEWERS RANDOMLY SELECTED

9/6/07 “New Way to Count Listeners Shakes Up Radio” WSJ B1 survey 1/10/08 Thomas E. Obama WSJ A14

Sampling  Computations  Results  Inference

Why Sample? 1. Impractical (destructive testing) 2.Time and Money Pg 264-265 NON-RANDOM SAMPLING 1. JUDGEMENT SAMPLING 2. QUOTA OR CONVENIENCE SAMPLING

RANDOM SAMPLING I. Complete list of the population is available - random numbers with minitab. Calc-random data. 84/8/09 Which Is Epidemic-Sexting or Worrying About It? WSJ A9 sampling 2/27/10 Lights, Camera, Calculator! The New Celebrity Math WSJ A2 Sampling

II. Population list is not available Non-human subjects 1. Systematic sampling population does not follow a pattern - Data set homogeneous-Usually non-human -Assembly line Human Subjects 2. Stratified sample from some subgroup - Data set is not homogenous, such as human subjects - effects of drugs on people, advertising dollars based on return on equity 3. Cluster sample- Sampling a geographic area - divide sample into small units called primary units - entire subgroups- Pg 270 10/18/06 “655,00 War Dead? WSJ A20 Cluster sampling

Good samples are ones that are representative of the population.

In general if the sample is random it should be representative of the population.

QUESTIONNAIRE CONSTRUCTION 10 1. NON-RESPONSE BIAS

PROPER STEPS FOR CONSTRUCTING QUESTIONNAIRES 1. DEFINE YOUR OBJECTIVES 2. FORMULATE THE QUESTIONS 3. DETERMINE THE TABULATION METHOD MAKE SURE YOU CAN QUANTIFY THE DATA 4. PREPARE THE INSTRUMENT 5. PRETEST THE INSTRUMENT

AER papers and Proceedings May 2001 ‘Do People Mean What they Say? Implications for Subjective Survey Data’ Pg 67

Cognitive problems 1. Ordering of questions How happy are you with life in general? How often do you go out on a date

2. Wording Issues Do you think the United States should forbid public speeches against democracy? Over 50% said yes

Do you think that the Unites States should allow public speeches against democracy? 75% answered no

3. Scale effect People are asked to indicated the amount of time they spend watching TV. Half of the people were given the following scale on the left the other half were given the scale on the right: Less than ½ ½ to 1 hr 1 hr to 1.5 1.5 to 2.0 2.0 to 2.5 2.5 or less 2.5 to 3.0 2.5 to 3.0 3.0 to 3.5 3.0 to 3.5 3.5 to 4.0 3.5 to 4.0 4.0 to 4.5 4.0 to 4.5 4.5 or more 4.5 or more 11 In the first survey 16%of the people survey indicated they watched more than 2.5 hours of TV per day, while 32% of the people in the second survey indicated they watched more than 2.5 hours.

Social Desirability Respondents want to avoid looking bad.

Non-Attitudes, Wrong Attitudes and Soft Attitudes Respondents reluctance to admit lack of an attitude. People are asked about things they do not know Unclear about their attitudes (rope experiment) Experiment when people are paid a little or a lot.

The probability distribution of a statistic is known as the statistic's sampling distribution of the sample means. Pg 267

Assignment: One fourth of the groups in the class ask the following question to students in your other classes: Do you favor or oppose allowing students and parents to choose a private school to attend at tax payer expense?

One fourth of the groups in the class ask the following question to students in your other classes: Do you favor or oppose that tax dollars should be used to assist parents who send their children to private, parochial or religious schools, or should tax dollars be spent to improve public schools?

One fourth of the groups in the class ask the following question to students in your other classes: Do you favor or oppose allowing students and parents to choose a private school to attend, assuming this policy will result in tax increases?

One fourth of the groups in the class ask the following question to students in your other classes: Do you favor or oppose allowing students and parents to choose a private school to attend, assuming this policy will result in no increase in taxes?

Groups with the same question should count the total number sampled and present the percentage of people in favor or opposed.

[Wis State Journal 11/10/08 A3 A advisory referendum was placed on the ballot of 11/4/08 “Shall the next state Legislature enact health-care reform by December 31, 2009, that guarantees every Wisconsin resident affordable health-care coverage as good as what is provided to state legislators?”

12/1/10 Race Is On to 'Fingerprint' Phones, PCs WSJ A1 12 Would the phrasing of this question have any impact on the final results of the referendum?]

REFERENCES: 3/ /85 “...to highest bidders” WSJ 3/24/89 “Hottest Commodity In Wall Street Pits? Georgetown Hoyas” WSJ FALL 1990 "ON THE ECONOMICS OF STATE LOTTERIES" by Charles T. Clotfelter and Philip J. Cook J.E.P. Spring 1990 “Quality...World Class Definition” Applied Microwave magazine 7/19/90 “T.V. Neilson Ratings Long Unquestioned, Face Tough Challenges” WSJ 3/18/91 “Marketers Zero In On Their Customers” WSJ 11/14/91 “Studies Galore Support Products and Positions, But Are They Reliable? WSJ 7/28/93 “Statisticians Occupy Front Lines In Battle Over Passive Smoking” WSJ 5/30/95 “Lottery takes biggest bite from wallets of poor” Wis. State Journal 1/21/96 “In all probability, polls will never reach perfection” WSJ 4/11/96 “Fright by the Numbers: Alarming Disease Data Are Frequently Flawed” WSJ 5/2/96 “Preparing for 2000, Census Bureau Tests Carrots vs. Sticks”WSJ 8/27/96 “Polling Quirks Give HMOs Healthy Ratings” WSJ 9/17/96 “What Americans Really think of School Choice” WSJ 11/22/96 “Networks Blast Nielson, Blame Faulty Ratings for Drop in Viewership” WSJ 8/30/97 “Tempest in a Census” WSJ 10/16/97 “No Easy money: Powerball lottery game will be harder to win” Wis. State Journal 2/10/98 “Rebates Secret Appeal to Manufacturers: Few Consumers Actually Redeem Them” WSJ 2/10/98 Expected value 2/11/98 “Surprise! A Home Builder (Finally) Surveys Buyers” WSJ 5/6/98 “In Battle for TV Ads, Cable Is Now the Enemy” WSJ 6/26/98 “Sense and the Census” WSJ 8/3/98 “Networks to Launch a Rival to Nielson Service WSJ 2/8/99 “Can You Trust the Polls? Well, Sometimes.” WSJ 4/13/99 “Is a Web Political Poll reliable? Yes? No? Maybe? WSJ 2/25/00 “Nielson ratings Spark a Battle Over Just Who Speaks Spanish” WSJ May 2001 “Do People Mean What They Say? Implications for subjective Survey Data? AER Papers and Proceedings 10/18/06 “655,00 War Dead? WSJ A20 Cluster sampling 4/17/10 It Is 90% Certain That Unemployment Rose. Or Fell. WSJ A2 5/8/10 In Counting Illegal Immigrants, Certain Assumptions Apply WSJ A2