Normal Distribution

Introductory Case: Demand for Salmon

Akiko Hamaguchi, manager of a small sushi restaurant,
Little Ginza, in Phoenix, Arizona, has to estimate the daily
amount of salmon needed.
Akiko has estimated the daily consumption of salmon to
be normally distributed with a mean of 12 pounds and a
standard deviation of 3.2 pounds.
Buying 20 lbs of salmon every day has resulted in too
much wastage.
Therefore, Akiko will buy salmon that meets the daily
demand of customers on 90% of the days.
Introductory Case: Demand for Salmon
Based on this information, Akiko would like to

Calculate the proportion of days that demand for salmon

at Little Ginza was above her earlier purchase of 20
pounds.
Calculate the proportion of days that demand for
salmon at Little Ginza was below 15 pounds.
Determine the amount of salmon that should be
bought daily so that it meets demand on 90% of the
days.
 Continuous Random Variables
When computing probabilities for a continuous random
variable, keep in mind that P(X = x) = 0.
We cannot assign a nonzero probability to each

infinitely uncountable value and still have the

probabilities sum to one.
Thus, since P(X = a) and P(X = b) both equal zero, the

following holds for continuous random variables:

P a X b P a X b P a X b P a X b

LO 6.1
 Continuous Random Variables
Probability Density Function f(x) of a continuous
random variable X
Describes the relative likelihood that X
assumes a value within a given interval
(e.g., P(a < X < b) ), where
f(x) > 0 for all possible values of X.

The area under f(x) over all values of x

equals one.

LO 6.1
 Continuous Random Variables
Cumulative Density Function F(x) of a
continuous random variable X
For any value x of the random variable X, the
cumulative distribution function F(x) is
computed as
F(x) = P(X < x)

As a result, P(a < X < b) = F(b) F(a)

LO 6.1
 Continuous Random Variables

The Continuous Uniform Distribution

Describes a random variable that has an
equally likely chance of assuming a value within a
specified range.
Probability density function:

1 where a and b are

for a x b, and the lower and upper
f x b a
0
for x a or x b limits, respectively.

LO 6.2
 Continuous Random Variables

The Continuous Uniform Distribution

The expected value and standard deviation of X are:

ab
EX
2

SD X b a
2
12

LO 6.2
 Normal Distribution

The Normal Distribution

Symmetric
Bell-shaped
Closely approximates the probability distribution of a
wide range of random variables, such as the
Heights and weights of newborn babies
Scores on SAT
Cumulative debt of college graduates
Serves as the cornerstone of statistical inference.

LO 6.3
Normal Distribution
Characteristics of the Normal Distribution
Symmetric about its mean
Mean = Median = Mode
Asymptoticthat is, the
tails get closer and
closer to the
horizontal axis, P(X < ) = 0.5 P(X > ) = 0.5

but never touch it.

LO 6.3
Normal Distribution
Characteristics of the Normal Distribution
The normal distribution is completely described by
two parameters: and 2.
is the population mean which describes the
central location of the distribution.
2 is the population variance which describes the
dispersion of the distribution.

LO 6.3
Normal Distribution
Probability Density Function of the Normal
Distribution
For a random variable X with mean and variance 2

x
2
1
f x exp
2 2 2


where 3.14159 and exp x e x
e 2.718 is the base of the natural logarithm

LO 6.3
 Normal Distribution
Example: Suppose the ages of employees in Industries A,
B, and C are normally distributed.
Here are the relevant parameters:

Lets compare industries using the Normal curves.

is the same, is different. is the same, is different.

LO 6.3
Standard Normal Distribution
The Standard Normal (Z) Distribution.
A special case of the normal distribution:
Mean () is equal to zero (E(Z) = 0).

Standard deviation () is equal to one

(SD(Z) = 1).

LO 6.4
Standard Normal Distribution
Standard Normal Table (Z Table).
Gives the cumulative probabilities P(Z < z) for positive
and negative values of z.
Since the random variable Z is symmetric about its
mean of 0,
P(Z < 0) = P(Z > 0) = 0.5.
To obtain the P(Z < z), read down the z column first,
then across the top.

LO 6.4
Standard Normal Distribution
Standard Normal Table (Z Table).

Table for positive z values. Table for negative z values.

LO 6.4
 Standard Normal Distribution
Finding the Probability for a Given z Value.
Transform normally distributed random variables into
standard normal random variables and use the z table to
compute the relevant probabilities.
The z table provides cumulative probabilities
P(Z < z) for a given z.
Portion of right-hand page of z table.
If z = 1.52, then look up

LO 6.4
 Standard Normal Distribution
Finding the Probability for a Given z Value.
Remember that the z table provides cumulative
probabilities P(Z < z) for a given z.
Since z is negative, we can look up this probability
from the left-hand page of the z table.

Portion of left-hand page of Z Table.

If z = -1.96, then look up

LO 6.4
 Standard Normal Distribution
Example: Finding Probabilities for a Standard
Normal Random Variable Z.
Find P(-1.52 < Z < 1.96) =
P(Z < 1.96) P(Z < -1.52 ) =
P(Z < 1.96) = 0.9750

P(Z < 1.52 ) = 0.0643 0.9750 0.0643 = 0.9107

LO 6.4
 Standard Normal Distribution
Example: Alternately, use Excel to look up
probabilities for standard normal variables.
Find P(-1.52 < Z < 1.96) = P(Z < 1.96) P(Z < -1.52 )
Round NORM.S.INVs output to
4 decimal places in your HW
BEFORE
doing other
calculations!

Note the 1s are for

cumulative! A 0 would
be nonsensical for a
continuous distribution.

LO 6.4
 Standard Normal Distribution
Example: Finding a z value for a given probability.
For a standard normal variable Z, find the z values
that satisfy P(Z < z) = 0.6808.
Go to the standard normal table and find 0.6808 in
the body of the table.
Find the corresponding
z value from the
row/column of z.
z = 0.47.

LO 6.4
 Standard Normal Distribution
Example: Alternately, use Excel to find a z value
for a given probability.
For a standard normal variable Z, find the z values
that satisfy P(Z < z) = 0.6808.

Round NORM.S.INVs output to

2 decimal places in your HW
BEFORE doing other
calculations!

LO 6.4
 Standard Normal Distribution
Revisiting the Empirical Rule.

P 3 Z 3

P 2 Z 2

P 1 Z 1

LO 6.4
 Standard Normal Distribution
Example: The Empirical Rule
An investment strategy has an expected return of 4%
and a standard deviation of 6%. Assume that
investment returns are normally distributed.
What is the probability of earning a return greater
than 10%?
A return of 10% is one standard deviation above
the mean, or 10 = + 1 = 4 + 6.
Since about 68% of observations fall within
one standard deviation of the mean, 32%
(100% 68%) are outside the range.

LO 6.4
 Standard Normal Distribution
Example: The Empirical Rule
An investment strategy has an expected return of 4%
and a standard deviation of 6%. Assume that
investment returns are normally distributed.
What is the probability of earning a return greater
than 10%?
Using symmetry, we
16%
conclude that 16% 16%

(half of 32%) of the 68%

observations are
greater than 10%.
-2
( ) ( + )

LO 6.4
 Solving Problems with
the Normal Distribution

The Normal Transformation

Any normally distributed random variable X with
mean and standard deviation can be transformed
into the standard normal random variable Z as:

X x
Z with corresponding values z

As constructed: E(Z) = 0 and SD(Z) = 1.

LO 6.5
Solving Problems with
the Normal Distribution
A z value specifies by how many standard
deviations the corresponding x value falls above
(z > 0) or below (z < 0) the mean.
A positive z indicates by how many standard
deviations the corresponding x lies above .
A zero z indicates that the corresponding x
equals .
A negative z indicates by how many standard
deviations the corresponding x lies below .

LO 6.5
Solving Problems with
the Normal Distribution
Use the Inverse Transformation to compute
probabilities for given x values.
A standard normal variable Z can be transformed to
the normally distributed random variable X with
mean and standard deviation as

X Z with corresponding values x z

LO 6.5
Solving Problems with
the Normal Distribution
Example: Scores on a management aptitude exam are
normally distributed with a mean of 72 () and a
standard deviation of 8 ().
What is the probability that a randomly selected

manager will score above 60?

First transform the random variable X to Z using the
transformation formula: x 60 72
z 1.5
8
Using the standard normal table, find
P(Z > -1.5) = 1 P(Z < -1.5) = 1 0.0668 = 0.9332

LO 6.5
Solving Problems with
the Normal Distribution - Excel
Example: Scores on a management aptitude exam are
normally distributed with a mean of 72 () and a
standard deviation of 8 ().
What is the probability that a randomly selected

manager will score above 60?

Alternately, Excel will return the probability directly if you
use NORM.DIST() and give it the mean and standard
deviation.
P(x > 60) = 1- P(x 60) =

LO 6.5
Solving Problems with
the Normal Distribution
Case Solution: Akiko is concerned about buying the right amount
of salmon for Little Ginza. The daily consumption is normally
distributed with a mean of 12 pounds and a standard deviation of
3.2 pounds.
a. What proportion of days was demand above 20 pounds?
20 -12
P(x > 20) = P Z > = P(Z > 2.5) = 1- P(Z 2.5) = 1- 0.9938 = 0.0062
3.2

b. What proportion of days was demand below 15 pounds?

15 -12
P(x < 15) = P Z < = P(Z < 0.94) = 0.8264
3.2

LO 6.5
Solving Problems with
the Normal Distribution
Case Solution: Akiko is concerned about buying the right amount
of salmon for Little Ginza. The daily consumption is normally
distributed with a mean of 12 pounds and a standard deviation of
3.2 pounds.
c. How much salmon should she buy so she meets customer demand
on 90% of the days?
In order to answer this, solve for the z-score of a 90% probability
and then plug that z into the equation: x = m + zs
P(Z z) = 90 z = 1.28 or just use NORM.INV() in Excel:
x = 12 +1.28 3.2 = 16.10

LO 6.5
 The return on investment is normally distributed with a mean
of 10% and a standard deviation of 5%. What is the
probability oflosing money?

X 0 10
P ( X 0) P
5
P( Z 2)
.5 P(0 Z 2)
.5 .4772
.0228
Example

A store sells auto parts and supplies including multi-grade motor

oil. When the stock of this oil drops to 20 gallons, a
replenishment order is placed. The store manager is concerned
that sales are being lost due to stock outs while waiting for an
order. It has been determined that lead time demand is normally
distributed with a mean of 15 gallons and a standard deviation of
6 gallons. The manager would like to know the probability of a
stock out. If the manager of the store wants the probability of a
stock out to be no more than .05, what should the reorder point
be?
 Problem

The life expectancy of watches of a brand is normally distributed with a mean of

four years and a standard deviation of eight months.
a. What is the probability that a randomly selected watch will be in working
condition for more than five years?
b. The company has a three-year warranty period on their watches. What
percentage of their watches will be in operating condition after the warranty
period?
c. What is the minimum and the maximum life expectancy of the middle 95% of
the watches?
d. Ninety-five percent of the watches will have a life expectancy of at least how
many months?

7/24/2017
 Exponential Distribution

A random variable X follows the exponential distribution if its

probability density function is:

f x e x
and
for x 0 1
E X SD X
where is the rate parameter
The cumulative
e 2.718 distribution
function is:
P X x 1 e x

LO 6.6
Exponential Distribution
The exponential distribution is based entirely on
one parameter, > 0, as illustrated below.

LO 6.6
Exponential Distribution (Example)

LO 6.6
Exponential Distribution
Example: Let the time between e-mail messages during work
hours be exponentially distributed with a mean of 25 minutes. Use
Excels EXPON.DIST() function.
a. Calculate the rate parameter . l = 1/ 25 = 0.04
b. What is the probability that you do not get an email for more than
one hour?
Since the mean is given in minutes, convert 1 hour to 60 minutes. Excel wont
calculate P(X > 60) directly, so convert to 1 P(X 60).

c. What is the probability that you get an e-mail within 10 minutes?

LO 6.6