Queens College, Economics 249, Geordan Hull, 1

BAYES THEOREM
Provides a means for making probability calculations after revising probabilities when obtaining
new information in an important phase of probability analysis.

Prior
Probabilitie
s

New
Informatio
n

Application
of Bayes
Theorem

Posterior
Probabilitie
s

When given P(A) and P(AB), one can calculate P(B/A) by manipulating the information in the
Multiplication Rule. However, one could not calculate P(A/B). Similarly, when given P(B) and
P(AB), one can calculate P(A/B) by manipulating the information in the Multiplication Rule.
However, one could not calculate P(B/A). There is where one can now apply Bayes Theorem.
BAYES THEOREM (TWO-EVENT CASE)
P(A1/B) =

P(A1)P(B/A1)
P(A1)P(B/A1) + P(A2)P(B/A2)

P(A2/B) =

P(A2)P(B/A2)
P(A1)P(B/A1) + P(A2)P(B/A2)
BAYES THEOREM (MULTI-EVENT CASE)

P(Ai/B) =

P(Ai)P(B/Ai)
P(A1)P(B/A1) + P(A2)P(B/A2) + + P(An)P(B/An)
EXAMPLE

Given: G = Having good seats, B = Having bad seats, A 1 = Seeing Wicked, A2 = Seeing Mama
Mia!, the probability of having good seats given that you are seeing Wicked [P(G/A1)] = 0.98, the
probability of having good seats given that you are seeing Mama Mia! [P(G/A2)] = 0.95, P(A1) =
0.65, and P(A2) = 0.35 Please find the probability of a) Seeing Wicked given you have bad
seats, and b) Seeing Mama Mia! given you have bad seats.
P(B/A1) = 1 - P(G/A1) = 1 - 0.98 = 0.02; P(B/A2) = 1 - P(G/A2) = 1 - 0.95 = 0.05
a) P(A1/B) = [(0.65)(0.02)]/[(0.65)(0.02) + (0.35)(0.05)] = 0.0130/(0.0130 + 0.0175) =
0.0130/0.0305 = 0.4262
b) P(A2/B) = [(0.35)(0.05)]/[(0.65)(0.02) + (0.35)(0.05)] = 0.0175/(0.0130 + 0.0175) =
0.0175/0.0305 = 0.5738