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Introduction to Introduction to Probability Probability Distributions Distributions BBA3274 / DBS1084 QUANTITATIVE METHODS for BUSINESS BBA3274 / DBS1084 QUANTITATIVE METHODS for BUSINESS by Stephen Ong Visiting Fellow, Birmingham City University Business School, UK Visiting Professor, Shenzhen University

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Page 1: Bba 3274 qm week 3 probability distribution

Introduction to Introduction to Probability DistributionsProbability Distributions

Introduction to Introduction to Probability DistributionsProbability Distributions

BBA3274 / DBS1084 QUANTITATIVE METHODS for BUSINESSBBA3274 / DBS1084 QUANTITATIVE METHODS for BUSINESS

byStephen Ong

Visiting Fellow, Birmingham City University Business School, UK

Visiting Professor, Shenzhen University

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Today’s Overview Today’s Overview

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Learning ObjectivesLearning Objectives

1.1. Describe and provide examples of both discrete Describe and provide examples of both discrete and continuous random variables.and continuous random variables.

2.2. Explain the difference between discrete and Explain the difference between discrete and continuous probability distributions.continuous probability distributions.

3.3. Calculate expected values and variances and use Calculate expected values and variances and use the normal table.the normal table.

After this lecture, students will be able to:After this lecture, students will be able to:

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OutlineOutline

2.12.1 Random VariablesRandom Variables

2.22.2 Probability DistributionsProbability Distributions

2.32.3 The Binomial DistributionThe Binomial Distribution

2.42.4 The Normal DistributionThe Normal Distribution

2.52.5 The The FF Distribution Distribution

2.62.6 The Exponential DistributionThe Exponential Distribution

2.72.7 The Poisson DistributionThe Poisson Distribution

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2-5

Random VariablesRandom Variables

Discrete random variablesDiscrete random variables can assume only can assume only a finite or limited set of values. a finite or limited set of values.

Continuous random variablesContinuous random variables can assume can assume any one of an infinite set of values.any one of an infinite set of values.

A A random variablerandom variable assigns a real number assigns a real number to every possible outcome or event in an to every possible outcome or event in an experiment.experiment.

XX = number of refrigerators sold during the day = number of refrigerators sold during the day

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2-6

Random Variables Random Variables –– Numbers Numbers

EXPERIMENT OUTCOME RANDOM VARIABLES

RANGE OF RANDOM

VARIABLES

Stock 50 Christmas trees

Number of Christmas trees sold

X 0, 1, 2,…, 50

Inspect 600 items

Number of acceptable items

Y 0, 1, 2,…, 600

Send out 5,000 sales letters

Number of people responding to the letters

Z 0, 1, 2,…, 5,000

Build an apartment building

Percent of building completed after 4 months

R 0 ≤ R ≤ 100

Test the lifetime of a lightbulb (minutes)

Length of time the bulb lasts up to 80,000 minutes

S 0 ≤ S ≤ 80,000

Table 2.4

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2-7

Random Variables – Not NumbersRandom Variables – Not Numbers

EXPERIMENT OUTCOME RANDOM VARIABLESRANGE OF RANDOM

VARIABLES

Students respond to a questionnaire

Strongly agree (SA)Agree (A)Neutral (N)Disagree (D)Strongly disagree (SD)

5 if SA4 if A..

X = 3 if N..2 if D..1 if SD

1, 2, 3, 4, 5

One machine is inspected

Defective

Not defective

Y = 0 if defective1 if not defective

0, 1

Consumers respond to how they like a product

GoodAveragePoor

3 if good….Z = 2 if average

1 if poor…..

1, 2, 3

Table 2.5

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2-8

Probability Distribution of a Probability Distribution of a Discrete Random VariableDiscrete Random Variable

The students in Pat Shannon’s The students in Pat Shannon’s statistics class have just statistics class have just completed a quiz of five algebra completed a quiz of five algebra problems. The distribution of problems. The distribution of correct scores is given in the correct scores is given in the following table: following table:

For discrete random variablesdiscrete random variables a probability is assigned to each event.

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Probability Distribution of a Probability Distribution of a Discrete Random VariableDiscrete Random Variable

RANDOM VARIABLE RANDOM VARIABLE ((X – ScoreX – Score))

NUMBER NUMBER RESPONDINGRESPONDING

PROBABILITY PROBABILITY P P ((XX))

55 1010 0.1 = 10/1000.1 = 10/100

44 2020 0.2 = 20/1000.2 = 20/100

33 3030 0.3 = 30/1000.3 = 30/100

22 3030 0.3 = 30/1000.3 = 30/100

11 1010 0.1 = 10/1000.1 = 10/100

TotalTotal 100100 1.0 = 100/1001.0 = 100/100

The Probability Distribution follows all three rules:1. Events are mutually exclusive and collectively exhaustive.2. Individual probability values are between 0 and 1.3. Total of all probability values equals 1.

Table 2.6

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2-10

Probability Distribution for Probability Distribution for Dr. Shannon’s ClassDr. Shannon’s Class

P (

X)

0.4 –

0.3 –

0.2 –

0.1 –

0 –| | | | | |1 2 3 4 5

X

Figure 2.5

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2-11

Probability Distribution for Probability Distribution for Dr. Shannon’s ClassDr. Shannon’s ClassP

(X

)

0.4 –

0.3 –

0.2 –

0.1 –

0 –| | | | | |1 2 3 4 5

X

Figure 2.5

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2-12

Expected Value of a Discrete Expected Value of a Discrete Probability DistributionProbability Distribution

n

iii XPXXE

1

)(...)( 2211 nn XPXXPXXPX

The expected value is a measure of the central central tendencytendency of the distribution and is a weighted average of the values of the random variable.

where

iX)( iXP

n

i 1

)(XE

= random variable’s possible values= probability of each of the random variable’s

possible values= summation sign indicating we are adding all n

possible values= expected value or mean of the random variable

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2-13

Expected Value of a Discrete Expected Value of a Discrete Probability DistributionProbability Distribution

n

iii XPXXE

1

9.2

1.6.9.8.5.

)1.0(1)3.0(2)3.0(3)2.0(4)1.0(5

For Dr. Shannon’s class:

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2-14

Variance of a Variance of a Discrete Probability DistributionDiscrete Probability Distribution

For a discrete probability distribution the variance can be computed by

)()]([

n

iii XPXEX

1

22 Varianceσ

where

iX)(XE

)( iXP

= random variable’s possible values= expected value of the random variable= difference between each value of the random

variable and the expected mean= probability of each possible value of the

random variable

)]([ XEX i

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Variance of a Variance of a Discrete Probability DistributionDiscrete Probability Distribution

For Dr. Shannon’s class:

)()]([variance5

1

2

i

ii XPXEX

).().().().(variance 2092410925 22

).().().().( 3092230923 22

).().( 10921 2

291

36102430003024204410

.

.....

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Variance of a Variance of a Discrete Probability DistributionDiscrete Probability Distribution

A related measure of dispersion is the standard deviation.

2σVarianceσ where

σ= square root= standard deviation

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Variance of a Variance of a Discrete Probability DistributionDiscrete Probability Distribution

A related measure of dispersion is the standard deviation.

2σVarianceσ where

σ= square root= standard deviation

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1 - 18

Using ExcelUsing Excel

Program 2.1A

Formulas in an Excel Spreadsheet for the Dr. Shannon Example

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1 - 192-19

Using ExcelUsing Excel

Program 2.1B

Excel Output for the Dr. Shannon Example

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Probability Distribution of a Probability Distribution of a Continuous Random VariableContinuous Random Variable

Since random variables can take on an infinite number of values, the fundamental rules for continuous random variables must be modified.

The sum of the probability values must still equal 1.

The probability of each individual value of the random variable occurring must equal 0 or the sum would be infinitely large.

The probability distribution is defined by a continuous mathematical function called the probability density function or just the probability function.

This is represented by f (X).

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Probability Distribution of a Probability Distribution of a Continuous Random VariableContinuous Random Variable

Pro

bab

ility

| | | | | | |

5.06 5.10 5.14 5.18 5.22 5.26 5.30

Weight (grams)

Figure 2.6

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The Binomial The Binomial DistributionDistribution

Many business experiments can be Many business experiments can be characterized by the Bernoulli process.characterized by the Bernoulli process.

The Bernoulli process is described by the The Bernoulli process is described by the binomial probability distribution.binomial probability distribution.

1.1. Each trial has only two possible outcomes.Each trial has only two possible outcomes.

2.2. The probability of each outcome stays the The probability of each outcome stays the same from one trial to the next.same from one trial to the next.

3.3. The trials are statistically independent.The trials are statistically independent.

4.4. The number of trials is a positive integer.The number of trials is a positive integer.

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The Binomial The Binomial DistributionDistribution

The binomial distribution is used to find the The binomial distribution is used to find the probability of a specific number of successes probability of a specific number of successes in in nn trials. trials.

We need to know:

n = number of trialsp = the probability of success on any

single trial

We letr = number of successesq = 1 – p = the probability of a failure

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The Binomial The Binomial DistributionDistribution

The binomial formula is:The binomial formula is:

rnrqprnr

nnr

)!(!!

trials in successes of yProbabilit

The symbol The symbol !! means factorial, and means factorial, and nn!! = = nn((nn – 1)( – 1)(nn – 2)…(1) – 2)…(1)

For exampleFor example44!! = (4)(3)(2)(1) = 24 = (4)(3)(2)(1) = 24

By definitionBy definition11!! = 1 and 0 = 1 and 0!! = 1 = 1

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The Binomial The Binomial DistributionDistribution

NUMBER OFHEADS (r) Probability = (0.5)r(0.5)5 – r

5!r!(5 – r)!

0 0.03125 = (0.5)0(0.5)5 – 0

1 0.15625 = (0.5)1(0.5)5 – 1

2 0.31250 = (0.5)2(0.5)5 – 2

3 0.31250 = (0.5)3(0.5)5 – 3

4 0.15625 = (0.5)4(0.5)5 – 4

5 0.03125 = (0.5)5(0.5)5 – 5

5!0!(5 – 0)!

5!1!(5 – 1)!

5!2!(5 – 2)!

5!3!(5 – 3)!

5!4!(5 – 4)!

5!5!(5 – 5)!Table 2.7

Binomial Distribution for n = 5 and p = 0.50.

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Solving Problems with Solving Problems with the Binomial Formulathe Binomial Formula

We want to find the probability of 4 heads in 5 tosses.

n = 5, r = 4, p = 0.5, and q = 1 – 0.5 = 0.5

Thus454 5.05.0

)!45(!4

!5) trials5in successes 4(

P

15625050062501123412345

.).)(.()!)()()(())()()((

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Solving Problems with the Solving Problems with the Binomial FormulaBinomial Formula

Pro

bab

ilit

y P

(r)

| | | | | | |1 2 3 4 5 6

Values of r (number of successes)

0.4 –

0.3 –

0.2 –

0.1 –

0 –Figure 2.7

Binomial Probability Distribution for n = 5 and p = 0.50.

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Solving Problems with Solving Problems with Binomial TablesBinomial Tables

MSA Electronics is experimenting with the manufacture of a new transistor.

Every hour a random sample of 5 transistors is taken.

The probability of one transistor being defective is 0.15.

What is the probability of finding 3, 4, or 5 defective?n = 5, p = 0.15, and r = 3, 4, or 5So

We could use the formula to solve We could use the formula to solve this problem, but using the table is this problem, but using the table is

easier.easier.

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Solving Problems with Solving Problems with Binomial TablesBinomial Tables

P

nn rr 0.050.05 0.100.10 0.150.15

5 0 0.7738 0.5905 0.4437

1 0.2036 0.3281 0.3915

2 0.0214 0.0729 0.1382

3 0.0011 0.0081 0.0244

4 0.0000 0.0005 0.0022

5 0.0000 0.0000 0.0001Table 2.8 (partial)

We find the three probabilities in the table for n = 5, p = 0.15, and r = 3, 4, and 5 and add them together.

Page 30: Bba 3274 qm week 3 probability distribution

Table 2.8 (partial)

We find the three probabilities in the table for n = 5, p = 0.15, and r = 3, 4, and 5 and add them together

Solving Problems with Solving Problems with Binomial TablesBinomial Tables

P

n r 0.05 0.10 0.15

5 0 0.7738 0.5905 0.4437

1 0.2036 0.3281 0.3915

2 0.0214 0.0729 0.1382

3 0.0011 0.0081 0.02440.0244

4 0.0000 0.0005 0.00220.0022

5 0.0000 0.0000 0.00010.0001

)()()()( 543defects more or 3 PPPP

02670000100022002440 ....

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2-31

Solving Problems with Solving Problems with Binomial TablesBinomial Tables

It is easy to find the expected value (or mean) and variance of a binomial distribution.

Expected value (mean) = Expected value (mean) = npnp

Variance = Variance = npnp(1 – (1 – pp))

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2-32

Using ExcelUsing ExcelFunction in an Excel 2010 Spreadsheet for Binomial Probabilities

Program 2.2A

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2-33

Using ExcelUsing Excel

Excel Output for the Binomial Example

Program 2.2B

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The Normal DistributionThe Normal Distribution

The The normal distributionnormal distribution is the one of the most is the one of the most popular and useful continuous probability popular and useful continuous probability distributions. distributions.

The formula for the probability density function The formula for the probability density function is rather complex:is rather complex:

2

2

2

21

)(

)(

x

eXf

The normal distribution is specified completely when we know the mean, µ, and the standard deviation, .

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The Normal The Normal DistributionDistribution

The normal distribution is symmetrical, with The normal distribution is symmetrical, with the midpoint representing the mean.the midpoint representing the mean.

Shifting the mean does not change the Shifting the mean does not change the shape of the distribution.shape of the distribution.

Values on the Values on the XX axis are measured in the axis are measured in the number of standard deviations away from number of standard deviations away from the mean.the mean.

As the standard deviation becomes larger, As the standard deviation becomes larger, the curve flattens.the curve flattens.

As the standard deviation becomes smaller, As the standard deviation becomes smaller, the curve becomes steeper.the curve becomes steeper.

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The Normal The Normal DistributionDistribution

| | |

40 µ = 50 60

| | |

µ = 40 50 60

Smaller µ, same

| | |

40 50 µ = 60

Larger µ, same

Figure 2.8

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2-37

µ

The Normal The Normal DistributionDistribution

Figure 2.9

Same µ, smaller

Same µ, larger

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2-38

Using the Standard Normal TableUsing the Standard Normal Table

Step 1Step 1Convert the normal distribution into a standard standard normal distribution.normal distribution.

A standard normal distribution has a mean of 0 and a standard deviation of 1

The new standard random variable is Z

X

Z

whereX = value of the random variable we want to measureµ = mean of the distribution = standard deviation of the distributionZ = number of standard deviations from X to the mean, µ

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Using the Standard Normal TableUsing the Standard Normal Table

For example, µ = 100, = 15, and we want to find the probability that X is less than 130.

15100130

XZ

dev std 21530

| | | | | | |55 70 85 100 115 130 145

| | | | | | |–3 –2 –1 0 1 2 3

X = IQ

X

Z

µ = 100 = 15P(X < 130)

Figure 2.10

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Using the Standard Normal TableUsing the Standard Normal Table

Step 2Step 2Look up the probability from a table of normal curve areas.

Use Appendix A or Table 2.9 (portion below). The column on the left has Z values. The row at the top has second decimal

places for the Z values.

AREA UNDER THE NORMAL CURVE

Z 0.00 0.01 0.02 0.03

1.8 0.96407 0.96485 0.96562 0.96638

1.9 0.97128 0.97193 0.97257 0.97320

2.0 0.97725 0.97784 0.97831 0.97882

2.1 0.98214 0.98257 0.98300 0.98341

2.2 0.98610 0.98645 0.98679 0.98713

Table 2.9 (partial)

P(X < 130)= P(Z < 2.00)= 0.97725

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Haynes Construction Company Haynes Construction Company

Haynes builds three- and four-unit apartment buildings (called triplexes and quadraplexes, respectively).

Total construction time follows a normal distribution.

For triplexes, µ = 100 days and = 20 days. Contract calls for completion in 125 days,

and late completion will incur a severe penalty fee.

What is the probability of completing in 125 days?

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Haynes Construction Company Haynes Construction Company

From Appendix A, for Z = 1.25 the area is 0.89435.

The probability is about 0.89 that Haynes will not violate the contract.

20100125

XZ

2512025

.

µ = 100 days X = 125 days = 20 daysFigure 2.11

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2-43

Haynes Construction Company Haynes Construction Company

Suppose that completion of a triplex in 75 days or less will earn a bonus of $5,000.

What is the probability that Haynes will get the bonus?

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2-44

Haynes Construction Company Haynes Construction Company

But Appendix A has only positive Z values, and the probability we are looking for is in the negative tail.

2010075

XZ

2512025

.

Figure 2.12

µ = 100 daysX = 75 days

P(X < 75 days)Area ofInterest

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2-45

Haynes Construction Company Haynes Construction Company

Because the curve is symmetrical, we can look at the probability in the positive tail for the same distance away from the mean.

2010075

XZ

2512025

.

µ = 100 days X = 125 days

P(X > 125 days)Area ofInterest

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2-46

Haynes Construction Company Haynes Construction Company

µ = 100 days X = 125 days

We know the probability completing in 125 days is 0.89435.

So the probability completing in more than 125 days is 1 – 0.89435 = 0.10565.

Page 47: Bba 3274 qm week 3 probability distribution

Haynes Construction Company Haynes Construction Company

µ = 100 daysX = 75 days

The probability of completing in less than 75 days is 0.10565.

Going back to the left tail of the distribution:

The probability completing in more than 125 days is 1 – 0.89435 = 0.10565.

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Haynes Construction Company Haynes Construction Company

What is the probability of completing a triplex within 110 and 125 days?

We know the probability of completing in 125 days, P(X < 125) = 0.89435.

We have to complete the probability of completing in 110 days and find the area between those two events.

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Haynes Construction Company Haynes Construction Company

From Appendix A, for Z = 0.5 the area is 0.69146.P(110 < X < 125) = 0.89435 – 0.69146 = 0.20289.

20100110

XZ

502010

.

Figure 2.13

µ = 100 days

125 days

= 20 days

110 days

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2-50

Using ExcelUsing Excel

Program 2.3A

Function in an Excel 2010 Spreadsheet for the Normal Distribution Example

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2-51

Using ExcelUsing Excel

Program 2.3B

Excel Output for the Normal Distribution Example

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The Empirical RuleThe Empirical Rule

For a normally distributed random variable with mean µ and standard deviation , then

1. About 68% of values will be within ±1 of the mean.

2. About 95.4% of values will be within ±2 of the mean.

3. About 99.7% of values will be within ±3 of the mean.

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2-53

The Empirical RuleThe Empirical Rule

Figure 2.14

68%16% 16%

–1 +1a µ b

95.4%2.3% 2.3%

–2 +2a µ b

99.7%0.15% 0.15%

–3 +3a µ b

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The The FF Distribution Distribution

It is a continuous probability distribution. The F statistic is the ratio of two sample variances. F distributions have two sets of degrees of freedom. Degrees of freedom are based on sample size and used to calculate

the numerator and denominator of the ratio.

The probabilities of large values of F are very small.

df1 = degrees of freedom for the numerator

df2 = degrees of freedom for the denominator

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F

The The FF Distribution Distribution

Figure 2.15

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2-56

The The FF Distribution Distribution

df1 = 5

df2 = 6 = 0.05

Consider the example:

From Appendix D, we get

F, df1, df2 = F0.05, 5, 6 = 4.39

This means

P(F > 4.39) = 0.05

The probability is only 0.05 F will exceed 4.39.

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Copyright ©2012 Pearson Education, Inc. publishing as

Prentice Hall2-57

The The FF Distribution Distribution

Figure 2.16

F = 4.39

0.05

F value for 0.05 probability with 5 and 6 degrees of freedom

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2-58

Using ExcelUsing Excel

Program 2.4A

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2-59

Using ExcelUsing Excel

Program 2.4B

Excel Output for the F Distribution

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The Exponential The Exponential DistributionDistribution

The The exponential distributionexponential distribution (also called the (also called the negative exponential distributionnegative exponential distribution) is a ) is a continuous distribution often used in queuing continuous distribution often used in queuing models to describe the time required to service models to describe the time required to service a customer. Its probability function is given by:a customer. Its probability function is given by:

xeXf )(whereX = random variable (service times)µ = average number of units the service facility can

handle in a specific period of timee = 2.718 (the base of natural logarithms)

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Probability for Exponential DistributionProbability for Exponential Distribution

The probability that an The probability that an exponentially exponentially distributed timedistributed time ( (XX) required to serve a ) required to serve a customer is less than or equal to time customer is less than or equal to time t t is is given by:given by:

tetXP 1)(where

X = random variable (service times)µ = average number of units the service facility can

handle in a specific period of time (eg. per hour)t = a specific period of time (eg. hours)e = 2.718 (the base of natural logarithms)

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2-62

The Exponential The Exponential DistributionDistribution

time service Average1

value Expected

2

1Variance

f(X)

X

Figure 2.17

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2-63

Arnold’s Muffler ShopArnold’s Muffler Shop

Arnold’s Muffler Shop installs new Arnold’s Muffler Shop installs new mufflers on automobiles and small trucks.mufflers on automobiles and small trucks.

The mechanic can install 3 new mufflers The mechanic can install 3 new mufflers per hour.per hour.

Service time is exponentially distributed.Service time is exponentially distributed.

What is the probability that the time to install a new muffler would be ½ hour or less?

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Arnold’s Muffler ShopArnold’s Muffler Shop

Here:X = Exponentially distributed service timeµ = average number of units the served per time period =

3 per hourt = ½ hour = 0.5hour

P(X≤0.5) = 1 – e-3(0.5) = 1 – e -1.5 = 1 - 0.2231 = 0.7769

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Arnold’s Muffler ShopArnold’s Muffler Shop

P(X≤0.5) = 1 – e-3(0.5) = 1 – e -1.5 = 1 - 0.2231 = 0.7769

Note also that if:

Then it must be the case that:

P(X>0.5) = 1 - 0.7769 = 0.2231

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2-66

Arnold’s Muffler ShopArnold’s Muffler Shop

Probability That the Mechanic Will Install a Muffler in 0.5 Hour

Figure 2.18

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2-67

Using ExcelUsing Excel

Function in an Excel Spreadsheet for the Exponential Distribution

Program 2.5A

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2-68

Using ExcelUsing Excel

Program 2.5B

Excel Output for the Exponential Distribution

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The Poisson DistributionThe Poisson Distribution

The The PoissonPoisson distributiondistribution is a is a discretediscrete distribution distribution that is often used in queuing models to describe that is often used in queuing models to describe arrival rates over time. Its probability function is arrival rates over time. Its probability function is given by:given by:

!)(

Xe

XPx

where

P(X) =probability of exactly X arrivals or occurrences =average number of arrivals per unit of time (the mean arrival rate)e =2.718, the base of natural logarithmsX =specific value (0, 1, 2, 3, …) of the random variable

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The Poisson DistributionThe Poisson Distribution

The mean and variance of the distribution The mean and variance of the distribution are both are both ..

Expected value = Expected value = Variance = Variance =

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2-71

Poisson DistributionPoisson Distribution

We can use Appendix C to find Poisson probabilities.Suppose that λ = 2. Some probability calculations are:

2706.02

)1353.0(4

!2

2)2(

2706.01

)1353.0(2

!1

2)1(

1353.01

)1353.0(1

!0

2)0(

!)(

22

21

20

eP

eP

eP

X

eXP

x

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Poisson DistributionPoisson Distribution

Figure 2.19

Sample Poisson Distributions with λ = 2 and λ = 4

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Using ExcelUsing Excel

Program 2.6A

Functions in an Excel 2010 Spreadsheet for the Poisson Distribution

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Using ExcelUsing Excel

Program 2.6B

Excel Output for the Poisson Distribution

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Exponential and Poisson Exponential and Poisson TogetherTogether

If the number of occurrences per time If the number of occurrences per time period follows a Poisson distribution, then period follows a Poisson distribution, then the time between occurrences follows an the time between occurrences follows an exponential distribution:exponential distribution: Suppose the number of phone calls at a Suppose the number of phone calls at a

service center followed a Poisson distribution service center followed a Poisson distribution with a mean of 10 calls per hour.with a mean of 10 calls per hour.

Then the time between each phone call would Then the time between each phone call would be exponentially distributed with a mean time be exponentially distributed with a mean time between calls of 6 minutes (1/10 hour).between calls of 6 minutes (1/10 hour).

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TutorialTutorial

Lab Practical : Spreadsheet Lab Practical : Spreadsheet

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Further ReadingFurther Reading

Render, B., Stair Jr.,R.M. & Hanna, M.E. (2013) Quantitative Analysis for Management, Pearson, 11th Edition

Waters, Donald (2007) Quantitative Methods for Business, Prentice Hall, 4th Edition.

Anderson D, Sweeney D, & Williams T. (2006) Quantitative Methods For Business Thompson Higher Education, 10th Ed.

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QUESTIONS?QUESTIONS?