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A PowerPoint Presentation Package to Accompany Applied Statistics in Business & Economics, 4th edition David P. Doane and Lori E. Seward Prepared by Lloyd R. Jaisingh McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Continuous Probability Distributions Chapter Contents 7.1 7.2 7.3 7.4 7.5 7.6 7.7 Describing a Continuous Distribution Uniform Continuous Distribution Normal Distribution Standard Normal Distribution Normal Approximations Exponential Distribution Triangular Distribution (Optional) 7-2 Chapter 7 Continuous Probability Distributions Chapter Learning Objectives (LO’s) LO7-1: Define a continuous random variable. LO7-2: Calculate uniform probabilities. LO7-3: Know the form and parameters of the normal distribution. LO7-4: Find the normal probability for given z or x using tables or Excel. LO7-5: Solve for z or x for a given normal probability using tables or Excel. 7-3 Chapter 7 Continuous Probability Distributions Chapter Learning Objectives (LO’s) LO6: Use the normal approximation to a binomial or a Poisson distribution. LO7: Find the exponential probability for a given x. LO8: Solve for x for given exponential probability. LO9: Use the triangular distribution for “what-if” analysis (optional). 7-4 7.1 Describing a Continuous Distribution Chapter 7 LO7-1 LO7-1: Define a continuous random variable. Events as Intervals • • Discrete Variable – each value of X has its own probability P(X). Continuous Variable – events are intervals and probabilities are areas under continuous curves. A single point has no probability. 7-5 7.1 Describing a Continuous Distribution PDF – Probability Density Function Chapter 7 LO7-1 Continuous PDF’s: • Denoted f(x) • Must be nonnegative • Total area under curve = 1 • Mean, variance and shape depend on the PDF parameters • Reveals the shape of the distribution 7-6 7.1 Describing a Continuous Distribution CDF – Cumulative Distribution Function Chapter 7 LO7-1 Continuous CDF’s: • • • Denoted F(x) Shows P(X ≤ x), the cumulative proportion of scores Useful for finding probabilities 7-7 7.1 Describing a Continuous Distribution Probabilities as Areas Chapter 7 LO7-1 Continuous probability functions: • • • Unlike discrete distributions, the probability at any single point = 0. The entire area under any PDF, by definition, is set to 1. Mean is the balance point of the distribution. 7-8 7.1 Describing a Continuous Distribution Expected Value and Variance Chapter 7 LO7-1 The mean and variance of a continuous random variable are analogous to E(X) and Var(X ) for a discrete random variable, Here the integral sign replaces the summation sign. Calculus is required to compute the integrals. 7-9 Chapter 7 7.2 Uniform Continuous Distribution LO7-2 LO7-2: Calculate uniform probabilities. Characteristics of the Uniform Distribution If X is a random variable that is uniformly distributed between a and b, its PDF has constant height. • • Denoted U(a, b) Area = base x height = (b-a) x 1/(b-a) = 1 7-10 7.2 Uniform Continuous Distribution Characteristics of the Uniform Distribution Chapter 7 LO7-2 7-11 7.2 Uniform Continuous Distribution Example: Anesthesia Effectiveness • • • • Chapter 7 LO7-2 An oral surgeon injects a painkiller prior to extracting a tooth. Given the varying characteristics of patients, the dentist views the time for anesthesia effectiveness as a uniform random variable that takes between 15 minutes and 30 minutes. X is U(15, 30) a = 15, b = 30, find the mean and standard deviation. Find the probability that the effectiveness anesthetic takes between 20 and 25 minutes. 7-12 7.2 Uniform Continuous Distribution Example: Anesthesia Effectiveness Chapter 7 LO7-2 P(20 < X < 25) = (25 – 20)/(30 – 15) = 5/15 = 0.3333 = 33.33% 7-13 7.3 Normal Distribution Chapter 7 LO7-3 LO7-3: Know the form and parameters of the normal distribution. Characteristics of the Normal Distribution • • • • • • Normal or Gaussian (or bell shaped) distribution was named for German mathematician Karl Gauss (1777 – 1855). Defined by two parameters, µ and . Denoted N(µ, ). Domain is – < X < + (continuous scale). Almost all (99.7%) of the area under the normal curve is included in the range µ – 3 < X < µ + 3. Symmetric and unimodal about the mean. 7-14 7.3 Normal Distribution Chapter 7 LO7-3 Characteristics of the Normal Distribution 7-15 Chapter 7 LO7-3 7.3 Normal Distribution Characteristics of the Normal Distribution • Normal PDF f(x) reaches a maximum at µ and has points of inflection at µ ± Bell-shaped curve NOTE: All normal distributions have the same shape but differ in the axis scales. 7-16 7.3 Normal Distribution Chapter 7 LO7-3 Characteristics of the Normal Distribution • Normal CDF 7-17 7.4 Standard Normal Distribution Characteristics of the Standard Normal Distribution • Chapter 7 LO7-3 Since for every value of µ and , there is a different normal distribution, we transform a normal random variable to a standard normal distribution with µ = 0 and = 1 using the formula. 7-18 7.4 Standard Normal Distribution Characteristics of the Standard Normal • Standard normal PDF f(x) reaches a maximum at z = 0 and has points of inflection at +1. • Shape is unaffected by the transformation. It is still a bell-shaped curve. Chapter 7 LO7-3 Figure 7.11 7-19 7.4 Standard Normal Distribution Characteristics of the Standard Normal • Standard normal CDF • • • • Chapter 7 LO7-3 A common scale from -3 to +3 is used. Entire area under the curve is unity. The probability of an event P(z1 < Z < z2) is a definite integral of f(z). However, standard normal tables or Excel functions can be used to find the desired probabilities. 7-20 7.4 Standard Normal Distribution Normal Areas from Appendix C-1 • • Chapter 7 LO7-3 Appendix C-1 allows you to find the area under the curve from 0 to z. For example, find P(0 < Z < 1.96): 7-21 7.4 Standard Normal Distribution Normal Areas from Appendix C-1 • • Now find P(-1.96 < Z < 1.96). Due to symmetry, P(-1.96 < Z) is the same as P(Z < 1.96). • So, P(-1.96 < Z < 1.96) = .4750 + .4750 = .9500 or 95% of the area under the curve. Chapter 7 LO7-3 7-22 7.4 Standard Normal Distribution Basis for the Empirical Rule • • • Chapter 7 LO7-3 Approximately 68% of the area under the curve is between + 1 Approximately 95% of the area under the curve is between + 2 Approximately 99.7% of the area under the curve is between + 3 7-23 7.4 Standard Normal Distribution LO7-4: Find the normal probability for given z or x using tables or Excel. Chapter 7 LO7-4 Normal Areas from Appendix C-2 • Appendix C-2 allows you to find the area under the curve from the left of z (similar to Excel). • For example, P(Z < 1.96) P(Z < -1.96) P(-1.96 < Z < 1.96) 7-24 7.4 Standard Normal Distribution Normal Areas from Appendices C-1 or C-2 • • Chapter 7 LO7-4 Appendices C-1 and C-2 yield identical results. Use whichever table is easiest. Finding z for a Given Area • • • Appendices C-1 and C-2 can be used to find the z-value corresponding to a given probability. For example, what z-value defines the top 1% of a normal distribution? This implies that 49% of the area lies between 0 and z which gives z = 2.33 by looking for an area of 0.4900 in Appendix C-1. 7-25 7.4 Standard Normal Distribution Finding Areas by using Standardized Variables • Chapter 7 LO7-4 Suppose John took an economics exam and scored 86 points. The class mean was 75 with a standard deviation of 7. What percentile is John in? That is, what is P(X < 86) where X represents the exam scores? • So John’s score is 1.57 standard deviations about the mean. • P(X < 86) = P(Z < 1.57) = .9418 (from Appendix C-2) • So, John is approximately in the 94th percentile. 7-26 • 7.4 Standard Normal Distribution Finding Areas by using Standardized Variables Chapter 7 LO7-4 NOTE: You can use Excel, Minitab, TI83/84 etc. to compute these probabilities directly. 7-27 7.4 Standard Normal Distribution LO7-5: Solve for z or x for a normal probability using tables or Excel. • Chapter 7 LO7-5 Inverse Normal • How can we find the various normal percentiles (5th, 10th, 25th, 75th, 90th, 95th, etc.) known as the inverse normal? That is, how can we find X for a given area? We simply turn the standardizing transformation around: Solving for x in z = (x − μ)/ gives x = μ + zσ 7-28 • 7.4 Standard Normal Distribution Chapter 7 LO7-5 Inverse Normal • For example, suppose that John’s economics professor has decided that any student who scores below the 10th percentile must retake the exam. • The exam scores are normal with μ = 75 and σ = 7. • What is the score that would require a student to retake the exam? • We need to find the value of x that satisfies P(X < x) = .10. • The z-score for with the 10th percentile is z = −1.28. 7-29 • 7.4 Standard Normal Distribution Chapter 7 LO7-5 Inverse Normal • The steps to solve the problem are: • Use Appendix C or Excel to find z = −1.28 to satisfy P(Z < −1.28) = .10. • Substitute the given information into z = (x − μ)/σ to get −1.28 = (x − 75)/7 • Solve for x to get x = 75 − (1.28)(7) = 66.03 (or 66 after rounding) • Students who score below 66 points on the economics exam will be required to retake the exam. 7-30 • 7.4 Standard Normal Distribution Inverse Normal Chapter 7 LO7-5 7-31 7.5 Normal Approximations LO7-6: Use the normal approximation to a binomial or a Poisson. Chapter 7 LO7-6 Normal Approximation to the Binomial • • • Binomial probabilities are difficult to calculate when n is large. Use a normal approximation to the binomial distribution. As n becomes large, the binomial bars become smaller and continuity is approached. 7-32 7.5 Normal Approximations Normal Approximation to the Binomial • • Chapter 7 LO7-6 Rule of thumb: when n ≥ 10 and n(1- ) ≥ 10, then it is appropriate to use the normal approximation to the binomial distribution. In this case, the mean and standard deviation for the binomial distribution will be equal to the normal µ and , respectively. Example Coin Flips • If we were to flip a coin n = 32 times and = .50, are the requirements for a normal approximation to the binomial distribution met? 7-33 Example Coin Flips • • • • • • Chapter 7 7.5 Normal Approximations LO7-6 n = 32 x .50 = 16 n(1- ) = 32 x (1 - .50) = 16 So, a normal approximation can be used. When translating a discrete scale into a continuous scale, care must be taken about individual points. For example, find the probability of more than 17 heads in 32 flips of a fair coin. This can be written as P(X 18). However, “more than 17” actually falls between 17 and 18 on a discrete scale. 7-34 7.5 Normal Approximations Example Coin Flips • • • Chapter 7 LO7-6 Since the cutoff point for “more than 17” is halfway between 17 and 18, we add 0.5 to the lower limit and find P(X > 17.5). This addition to X is called the Continuity Correction. At this point, the problem can be completed as any normal distribution problem. 7-35 7.5 Normal Approximations Example Coin Flips Chapter 7 LO7-6 P(X > 17) = P(X ≥ 18) P(X ≥ 17.5) = P(Z > 0.53) = 0.2981 7-36 7.5 Normal Approximations Normal Approximation to the Poisson • • Chapter 7 LO7-6 The normal approximation to the Poisson distribution works best when is large (e.g., when exceeds the values in Appendix B). Set the normal µ and equal to the mean and standard deviation for the Poisson distribution. Example Utility Bills • • • On Wednesday between 10A.M. and noon customer billing inquiries arrive at a mean rate of 42 inquiries per hour at Consumers Energy. What is the probability of receiving more than 50 calls in an hour? = 42 which is too big to use the Poisson table. Use the normal approximation with = 42 and = 6.48074 7-37 7.5 Normal Approximations Example Utility Bills • • Chapter 7 LO7-6 To find P(X > 50) calls, use the continuity-corrected cutoff point halfway between 50 and 51 (i.e., X = 50.5). At this point, the problem can be completed as any normal distribution problem. 7-38 Chapter 7 LO7-7 7.6 Exponential Distribution LO7-7: Find the exponential probability for a given x. Characteristics of the Exponential Distribution • • If events per unit of time follow a Poisson distribution, the time until the next event follows the Exponential distribution. The time until the next event is a continuous variable. NOTE: Here we will find probabilities > x or ≤ x. 7-39 7.6 Exponential Distribution Characteristics of the Exponential Distribution Probability of waiting less than or equal to x Chapter 7 LO7-7 Probability of waiting more than x 7-40 7.6 Exponential Distribution Example Customer Waiting Time • • • • Chapter 7 LO7-7 Between 2P.M. and 4P.M. on Wednesday, patient insurance inquiries arrive at Blue Choice insurance at a mean rate of 2.2 calls per minute. What is the probability of waiting more than 30 seconds (i.e., 0.50 minutes) for the next call? Set = 2.2 events/min and x = 0.50 min P(X > 0.50) = e–x = e–(2.2)(0.5) = .3329 or 33.29% chance of waiting more than 30 seconds for the next call. 7-41 7.6 Exponential Distribution Chapter 7 LO7-7 Example Customer Waiting Time P(X > 0.50) P(X ≤ 0.50) 7-42 7.6 Exponential Distribution LO7-8: Solve for x for given exponential probability. Chapter 7 LO7-8 Inverse Exponential • • If the mean arrival rate is 2.2 calls per minute, we want the 90th percentile for waiting time (the top 10% of waiting time). Find the x-value that defines the upper 10%. 7-43 7.6 Exponential Distribution Inverse Exponential Chapter 7 LO7-8 7-44 7.6 Exponential Distribution Chapter 7 LO7-8 Mean Time Between Events 7-45 7.7 Triangular Distribution LO7-9: Use the triangular distribution for “what-if” analysis (optional). Chapter 7 LO7-9 Characteristics of the Triangular Distribution 7-46 7.7 Triangular Distribution Characteristics of the Triangular Distribution Chapter 7 LO7-9 • The triangular distribution is a way of thinking about variation that corresponds rather well to what-if analysis in business. • It is not surprising that business analysts are attracted to the triangular model. • Its finite range and simple form are more understandable than a normal distribution. 7-47 7.7 Triangular Distribution Characteristics of the Triangular Distribution Chapter 7 LO7-9 • It is more versatile than a normal, because it can be skewed in either direction. • Yet it has some of the nice properties of a normal, such as a distinct mode. • The triangular model is especially handy for what-if analysis when the business case depends on predicting a stochastic variable (e.g., the price of a raw material, an interest rate, a sales volume). • If the analyst can anticipate the range (a to c) and most likely value (b), it will be possible to calculate probabilities of various outcomes. • Many times, such distributions will be skewed, so a normal wouldn’t be much help. 7-48