2009 Spring TUNG, Yik-Man

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ISOM111 Business Statistics
Tutorial Set 3


Concept of Probability ()

Frequentist definition: Let E be an event in a random experiment or process, its
probability ) (E P , is defined as the relative frequency of E in the long run.
Mathematically,
n
f
E P
E
n
= lim ) ( , wheren is the no. of times the experiment or process
repeated.

Classical definition: Assume equally likely for each possible outcome. LetE be an event in a
random experiment or process, its probability ) (E P , is defined as the proportion of outcomes
favorable toE with respect to all possible outcomes of the experiment or process. That
is
Total
E
n
n
E P = ) ( .

Axioms of Probability Theory ():
For any event E in a random experiment or process, O _ _ E , whereOdenotes the
sample space or the population;
) ( 1 ) ( 0 ) ( O = s s = P E P P , for any event O _ _ E ;
Addition Rule (): 1 ) (
1
=

= i
i
E P , where each
i
E is an outcome in an experiment
or process.

Properties of Probability: For any event O _ _ E B A , , ,
) ( ) ( ) ( ) ( B A P B P A P B A P + = ;
) ( 1 ) ( E P E P
C
= .

Conditional Probability (): The probability of an event B, given another event A
was occurred, is
) (
) (
) | (
A P
B A P
A B P

= if 0 ) ( = A P (Why?).
Multiplication Rule (): ) ( ) | ( ) ( ) ( ) | ( A P A B P B A P B P B A P = = .

Relationship between Events ()

Mutually Exclusive ( ): Let O _ _ B A, , if = B A or 0 ) ( = B A P ,
then B A, are mutually exclusive to each other and they cannot occur at the same time.

Independent (): Let O _ _ B A, , if ) ( ) | ( B P A B P = , thenB is independent toA.
If B is independent toA, thenAis independent toB in return. Hence B A, are independent
to each other.
If B A, are independent to each other, then ) ( ) ( ) ( B P A P B A P = ;
B A, are independent to each other= B A, are mutually exclusive to each other.

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Bayes Formula

Let O _ _
k
A A A , , ,
2 1
be k pair-wise mutually exclusive events, i.e. =
j i
A A for
all j i = . Also O =
=

k
i
i
A
1
, then for any nontrivial event O _ B (Why?), we have:

=
k
j
j j
i i
i
A B P A P
A B P A P
B A P
1
) | ( ) (
) | ( ) (
) | (

Example

1. (Spring08Exam1Q2) Of the travelers arriving at an airport, 65% fly on major airlines, 30%
fly on budget airlines, and the remainder fly on privately owned planes. Of those traveling
on major airlines, 45% are traveling for business reasons, whereas 75% of those arriving on
budget airlines and 90% of those arriving on privately owned planes are travelling for
business reasons. Suppose one person arriving at this airport is randomly selected.
a). What is the probability that the selected person is travelling for business reasons?
b). What is the probability that the selected person is travelling for business reasons is on a
budget airline?
c). If the selected person is travelling for business reasons, what is the probability that
he/she is arriving on a privately owned plane?
d). If the selected person is travelling not for business reasons, what is the probability that
he/she is arriving on a major airline?
e). What is the probability that the selected person is either travelling on a privately owned
plane, for business reasons, or both?

Sol: Draw a Tree Diagram to illustrate:













a). 5625 . 0 9 . 0 05 . 0 75 . 0 3 . 0 45 . 0 65 . 0 ) sin ( = + + = ess Bu P .

b). 225 . 0 75 . 0 3 . 0 ) | sin ( ) ( ) sin ( = = = Budget ess Bu P Budget P Budget ess Bu P .

c). 08 . 0
5625 . 0
9 . 0 05 . 0
) sin (
) Pr sin (
) sin | (Pr =

=
ess Bu P
ivate ess Bu P
ess Bu ivate P .

Major
0.65
Budget
0.3
Private
0.05
Business
0.45
Not
Business
0.55
Not
Business
0.1
Business
0.9
Not
Business
0.25
Business
0.75
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d). 8171 . 0
5625 . 0 1
) 45 . 0 1 ( 65 . 0
) sin (
) sin (
) sin | ( ~

=
C
C
C
ess Bu P
ess Bu Major P
ess Bu Major P .

e). ) Pr sin ( ) (Pr ) sin ( ) Pr sin ( ivate ess Bu P ivate P ess Bu P ivate ess Bu P + =
5675 . 0 9 . 0 05 . 0 05 . 0 5625 . 0 = + = .

2. (Spring08Exam1Q3) In a recent survey conducted by Ernst and Whinney, 52 insurance
companies which have initiated, or are initiating mergers, are further classified according to
type of company (mutual or stock) and whether or not they have merged with another
company in recent years. The data, taken from the Journal of Accounting, are as follows:

Merged with another company
during the preceding period
Mutual Companies Stock Companies
Of one year 8 9
Between two to three years 4 0
Between four to five years 3 6
None during the above periods 14 8

One insurance company is selected at random from the 52 surveyed.
a). What is the probability that the selected company is a mutual company and has merged
with another company during the last one year? (Show your work)
b). What is the probability that the selected company either is a mutual company, or has
merged with another company during any one of the last three years, or both? (Show
your work)
c). What is the probability that the selected company has not merged with another company
during any one of the last five years, given that it is a stock company? (Show your
work)

Sol: a). 1538 . 0
52
8
) 1 ( ~ = s year Mutual P .

b). ) 3 ( ) 3 ( ) ( ) 3 ( years Mutual P years P Mutual P years Mutual P s s + = s
7308 . 0
52
38
52
4 8
52
0 4 9 8
52
14 3 4 8
~ =
+

+ + +
+
+ + +
= .

c). 3478 . 0
23
8
52 ) 8 6 0 9 (
52 8
) (
) 5 (
) | 5 ( ~ =
+ + +
=
s
= s
Stock P
Stock years P
Stock years P
C
C
.

3. (Fall08Exam1Q1) In Gotham City, 30% of the families have a MasterCard, 20% have an
American Express card, and 25% have a Visa card. Eight percent of the families have both
a MasterCard and an American Express card. Twelve percent have both a Visa card and a
MasterCard. Six percent have both an American Express card and a Visa card. Two percent
have all three cards. (Show your work)
a). What proportion of families in Gotham City have none of the three cards?
b). If one family is randomly selected from Gotham City, what is the probability that the
selected family has more than one of the three cards?
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c). Among those families of Gotham City having more than one of the three cards, what
proportion have all three cards?

Sol: a). By the Inclusion and Exclusion principle, we have:

49 . 0
02 . 0 06 . 0 12 . 0 08 . 0 25 . 0 2 . 0 3 . 0 1
) ( ) ( ) ( ) ( ) ( ) ( ) ( 1
) ( 1
=
+ + + =
+ + + =

V A M P V A P V M P A M P V P A P M P
V A M P


b).

22 . 0
02 . 0 2 06 . 0 12 . 0 08 . 0
) ( 2 ) ( ) ( ) (
=
+ + =
+ + V A M P V A P V M P A M P


c). By b, we have 09 . 0
22 . 0
02 . 0
~ .

4. (Fall08Exam1Q2) The Mark Six Lottery in Hong Kong is a 6 out of 49 lotto game
conducted three times a week. To play a game, a player pays $5 for a ticket and marks 6
numbers from 1 through 49 printed on the ticket. Out of a drum with 49 numbered balls
from 1 through 49, 6 numbered balls will be randomly drawn as the set of winning
numbers, followed by a seventh numbered ball drawn as the extra number. A jackpot
prize will be given to tickets bearing all 6 marked numbers matching the 6 winning
numbers. A second prize will be given to tickets with all 6 marked numbers matching any 5
of the 6 winning numbers and the extra number. (There are all together 7 different ways
of winning a prize.)
Now consider the forth prize, that is, of the 6 numbers marked on a ticket, 4 of them are
winning numbers, 1 matches the extra number, and 1 does not match any winning number
nor the extra number. Calculate the probability of a player winning the forth prize. (Show
your work)

Sol: 000045052 . 0
49
6
42
1
1
1
6
4
~

C
C C C


5. (Fall08Exam1Q3) According to Food and Environmental Hygiene Department of the Hong
Kong SAR, 27% of all soup products in local supermarkets do not carry nutritional labeling.
In addition, 83% of breakfast meats and 59% of hot dog products in local supermarkets
also do not carry nutritional labeling. If these three food products are considered together
as a whole, 60% would be soup products, 35% would be breakfast meats, and 5% would be
hot dogs.
a). Consider only these three food products in local supermarkets, what proportion of these
food products do not carry nutritional labeling?
b). If a food product in a local supermarket is randomly selected from these three groups,
and it is found to have nutritional labeling, what are the probabilities that it is (i) a soup
product, (ii) a breakfast meat, and (iii) a hot dog product?

Sol: a). 482 . 0 59 . 0 05 . 0 83 . 0 35 . 0 27 . 0 6 . 0 ) ( = + + =
C
Labeling P .
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b). 846 . 0
482 . 0 1
) 27 . 0 1 ( 6 . 0
) (
) (
) | ( ~

=
Labeling P
Labeling Soup P
Labeling Soup P
115 . 0
482 . 0 1
) 83 . 0 1 ( 35 . 0
) (
) (
) | ( ~

=
Labeling P
Labeling Meat P
Labeling Meat P
04 . 0
482 . 0 1
) 59 . 0 1 ( 05 . 0
) (
) (
) | ( ~

=
Labeling P
Labeling HotDog P
Labeling HotDog P

6. (Fall08Exam1Q4) The Mandatory Provident Fund (MPF) system is a retirement protection
scheme introduced in Hong Kong in December 2000. Recently a survey commissioned by
Hong Kong Institute of Social Studies has reported that 51% of all MPF members do not
believe the system will be secure in 20 years. Of those members who are aged 45 or older,
70% believe the system will be secure in 20 years. Of all MPF members, 57% are under
age 45. Assume the above reported figures are correct. (Show your work)
a). Of all MPF members, what proportion are younger than age 45 and believe that the
system will be secure in 20 years?
b). Of all MPF members, what proportion are either younger that age 45, or believe that the
system will not be secure in 20 years, or both?
c). Of those MPF members who believe that the system will be secure in 20 years, what
proportion are younger than age 45?

Sol:
Probabilities Secure Not Secure Marginal
45 ) 57 . 0 1 ( 7 . 0 ) 57 . 0 1 ( ) 7 . 0 1 ( 57 . 0 1
<45 0.189 0.57-0.189 0.57
Marginal 51 . 0 1 0.51 1.00

a). 189 . 0 ) 45 ( 51 . 0 1 ) 57 . 0 1 ( 7 . 0 ) 45 ( = < = + < Secure P Secure P

b). ) 45 ( ) ( ) 45 ( ) 45 (
C C C
Secure P Secure P P Secure P < + < = <
699 . 0 ) 189 . 0 57 . 0 ( 51 . 0 57 . 0 = + =

c). 3857 . 0
49 . 0
189 . 0
) (
) 45 (
) | 45 ( ~ =
<
= <
Secure P
Secure P
Secure P

7. (Spring08Exam1Q4) (Cont. from Example2) One insurance company is selected at random
from the 52 surveyed. Two events, X and Y, are defined as follows:
Event X: the selected company is a stock company.
Event Y: the selected company has not merged with another company in any one of the last
five years.
a). Are the two events X and Y mutually exclusive of each other?
b). Are the two events X and Y independent to each other?

Sol: a). Since 0
52
8
) 5 ( ) ( = = s =
C
years Stock P Y X P , so X and Y are NOT mutually
exclusive of each other.

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b). Since ) ( ) 5 (
52
22
23
8
) | 5 ( ) | ( Y P years P Stock years P X Y P
C C
= s = = = s = , so X and Y
are NOT independent to each other.

8. (Optional) Let O _ _ B A, , given that A and B are independent to each other, show that:
a).
C
B A, or B A
C
, are independent to each other.
b).
C C
B A , are independent to each other.

Sol: a). WLOG, we prove the case B A
C
, are independent to each other.

) (
) ( ) ( ) (
) (
) (
) | (
B P
B A P B P A P
B P
B A P
B A P
C C C
C
+
=

= (Inclusion-Exclusion principle)

) (
) ( ) (
) (
)] ( ) ( [ ) (
B P
B A P B P
B P
A P B A P B P
C C

=

=
) ( ) ( ) (
C C
A P B A P B A P =

) (
) (
)] ( 1 [ ) (
) (
) ( ) ( ) (
C
A P
B P
A P B P
B P
B P A P B P
=

=

=
(By Independence, ) ( ) ( ) ( B P A P B A P = )
Therefore B A
C
, are independent to each other and the same applies to
C
B A, .

b). WLOG, we apply the De Morgans Law
C C C
B A B A ) ( = and consider:

) (
) ( 1
) (
) ) ((
) (
) (
) | (
C C
C
C
C C
C C
B P
B A P
B P
B A P
B P
B A P
B A P

=

=

) (
) ( 1
) (
) ( 1
) ( 1
1
) ( 1
)] ( ) ( ) ( [ ) ( 1
) (
) ( ) ( ) ( ) ( 1
) (
) ( ) ( ) ( 1
C
C
C
A P
A P
A P
B P
B P
B P
B P A P A P B P
B P
B P A P B P A P
B P
B A P B P A P
=
=

=
+
=
+
=

Therefore
C C
B A , are independent to each other.
Remark: You may also prove ) ( ) | (
C C C
B P A B P = for the result.