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    Conditional Probability: EC2:Quantitative Methods For Business Decisions

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    Wahaaj Ahmad
    This document discusses conditional probability and related concepts. It provides an example to calculate the probability that a customer is able to finance a purchase and wants to buy. It defines conditional probability as the probability of event B given A (P(B|A)) equals the joint probability of events A and B (P(A ∩ B)) divided by the probability of event A (P(A)). The document also discusses the multiplication law of probability, independent events, the law of total probability, and provides examples to demonstrate these concepts.

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    Conditional Probability: EC2:Quantitative Methods For Business Decisions

    Uploaded by

    Wahaaj Ahmad
    29 views7 pages
    This document discusses conditional probability and related concepts. It provides an example to calculate the probability that a customer is able to finance a purchase and wants to buy. It defines conditional probability as the probability of event B given A (P(B|A)) equals the joint probability of events A and B (P(A ∩ B)) divided by the probability of event A (P(A)). The document also discusses the multiplication law of probability, independent events, the law of total probability, and provides examples to demonstrate these concepts.

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    This document discusses conditional probability and related concepts. It provides an example to calculate the probability that a customer is able to finance a purchase and wants to buy. It defines conditional probability as the probability of event B given A (P(B|A)) equals the joint probability of events A and B (P(A ∩ B)) divided by the probability of event A (P(A)). The document also discusses the multiplication law of probability, independent events, the law of total probability, and provides examples to demonstrate these concepts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    29 views7 pages

    Conditional Probability: EC2:Quantitative Methods For Business Decisions

    Uploaded by

    Wahaaj Ahmad
    This document discusses conditional probability and related concepts. It provides an example to calculate the probability that a customer is able to finance a purchase and wants to buy. It defines conditional probability as the probability of event B given A (P(B|A)) equals the joint probability of events A and B (P(A ∩ B)) divided by the probability of event A (P(A)). The document also discusses the multiplication law of probability, independent events, the law of total probability, and provides examples to demonstrate these concepts.

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    EC2:Quantitative Methods for Business Decisions

    CONDITIONAL PROBABILITY
    Example:
    Of 200 people interviewed regarding intention to buy your product and whether are not they are financially able to do so, the
    following results were obtained:
    To Buy (B) Not to Buy (B)
    Able to Finance (A)
    40
    20
    60
    Unable to Finance (A)
    80
    60
    140
    120
    80
    200
    Which may be expressed as
    To Buy (B) Not to Buy (B)
    Able to Finance (A)
    .2
    .1
    .3
    Unable to Finance (A)
    .4
    .3
    .7
    .6
    .4
    What is the probability that
    1. a customer is financially able and has a desire to buy?
    (P (A B))
    2. a customer has a desire to buy? (P (B))
    3. a customer will buy given that she has the financial ability
    to pay? (conditional probability P (B|A) )

    Conditional Probability
    DEFN: The conditional probability of B given A is
    P (B|A) =

    P (A B)
    P (A)

    Terminology:
    Joint Probability:
    Marginal Probability:

    P (A B)
    P (A), P(B)

    Conditional Probability: P (A|B) or P (B|A)


    A rearrangement of the above definition yields the following:
    Multiplication Law of Probability:
    Two events
    P (A)P (B|A)
    P (A B) =
    P (B)P (A|B)
    More than two events:
    P (E1 E2 E3 Ek ) =
    P (E1 )P (E2 |E1 )P (E3 |E1 E2 ) P (Ek |E1 E2 Ek )

    Examples:
    1. Consider four firms A, B, C, D bidding for a certain contract. A survey of past bidding success of these firms show
    the following probabilities of winning:
    P (A) = 0.35, P (B) = 0.15, P (C) = 0.3, P (D) = 0.2
    Before the decision is made to award the contract, firm B
    withdraws the bid. Find the new probabilities of winning
    the bid for A, C and D.
    2. Pull three cards from a deck without replacement. What is
    the probability that all are black?
    3. A firm submits tenders for two different contracts. The
    probability that the first and second tenders will be successful is 50% and 30% respectively. Calculate the probability
    that:
    (a) both will be successful;
    (b) neither will be successful;
    (c) only the first will be successful;
    (d) at least one will be successful.

    Independent Events
    DEFN: Independent Events
    A and B are said to be independent if
    P (A|B) = P (A)

    Multiplication Law
    Two Independent Events
    P (A B) = P (A)P (B)

    More than Two Independent Events

    P (E1 E2 E3 Ek ) = P (E1 )P (E2 ) P (Ek )

    Law of Total Probability


    Examples:
    1. In a certain company
    50% of documents are written in WORD;
    30% in WORDSTAR;
    20% in WORDPERFECT.
    From past experience it is know that:
    40% of the WORD documents exceed 10 pages
    20% of the WORDSTAR exceed 10 pages
    20% of the WORDPERFECT documents exceed 10 pages
    (a) What is the overall proportion of documents containing
    more than 10 pages?
    2. An insurance company runs three different offices, A, B and
    C. 30% of the companys employees work in Office A, 20%
    work in Office B and 50% work in Office C. 10% of the staff
    in Office A are managers, 20% of the staff in Office B are
    managers and 5% from Office C are managers.
    Offices
    A B C
    Proportion Employees .3 .2 .5
    Proportion Managers .1 .2 .5
    (a) What is the total proportion of managers in the company?

    Law of Total Probability


    If a sample space can be partitioned into k mutually exclusive and exhaustive events:
    A1 , A2 , A3 , Ak
    i.e.
    S = A1 A2 A3 Ak
    Then for any event E:
    P (E) = P (A1 )P (E|A1 )+P (A2 )P (E|A2 ) P (Ak )P (E|AK )
    Proof:
    E = ES
    = E (A1 A2 Ak )
    = (E A1 ) (E A2 ) (E Ak )
    Since these are mutually exclusive
    P (E) = P (E A1 ) + P (E A2 ) + P (E Ak )
    = P (A1 )P (E|A1 ) + P (A2 )P (E|A2 ) + P (Ak )P (E|Ak )

    Example 1
    1. In a certain company
    50% of documents are written in WORD;
    30% in WORDSTAR;
    20% in WORDPERFECT.
    From past experience it is know that:
    40% of the WORD documents exceed 10 pages
    20% of the WORDSTAR exceed 10 pages
    20% of the WORDPERFECT documents exceed 10 pages
    (a) What is the overall proportion of documents containing
    more than 10 pages?
    .5 .4 + .3 .2 + .2 .2 = .3

    Tree Diagram
    d

    .4

    - d

    .2

    s d
    Q

    .2

    3
    
    
    .5
    
    
    
    
    

    
    

    .3

    
    Q
    Q
    Q
    Q

    Q.2
    Q
    Q
    Q
    Q

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