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 Describing a Continuous Distribution

7.2 Uniform Continuous Distribution
7.3 Normal Distribution
7.4 Standard Normal Distribution
7.5 Normal Approximations
7.6 Exponential Distribution
7.7 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
 Chapter 7
LO7-1 7.1 Describing a Continuous Distribution

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
 Chapter 7
LO7-1 7.1 Describing a Continuous Distribution

PDF – Probability Density Function

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
 Chapter 7
LO7-1 7.1 Describing a Continuous Distribution

CDF – Cumulative Distribution Function

Continuous CDF’s:
 Denoted F(x)
 Shows P(X ≤ x), the
cumulative proportion
of scores
 Useful for finding
probabilities

7-7
 Chapter 7
LO7-1 7.1 Describing a Continuous Distribution

Probabilities as Areas
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
 Chapter 7
LO7-1 7.1 Describing a Continuous Distribution

Expected Value and Variance

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
LO7-2 7.2 Uniform Continuous Distribution

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
 Chapter 7
LO7-2 7.2 Uniform Continuous Distribution

Characteristics of the Uniform Distribution

7-11
 Chapter 7
LO7-2 7.2 Uniform Continuous Distribution

Example: Anesthesia Effectiveness

• 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
 Chapter 7
LO7-2 7.2 Uniform Continuous Distribution

Example: Anesthesia Effectiveness

P(20 < X < 25) = (25 – 20)/(30 – 15) = 5/15 = 0.3333 = 33.33%

7-13
 Chapter 7
LO7-3 7.3 Normal Distribution

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
 Chapter 7
LO7-3 7.3 Normal Distribution

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
 Chapter 7
LO7-3 7.3 Normal Distribution

Characteristics of the Normal Distribution

• Normal CDF

7-17
 Chapter 7
LO7-3 7.4 Standard Normal Distribution

Characteristics of the Standard Normal Distribution

• 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
 Chapter 7
LO7-3 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.

Figure 7.11

7-19
 Chapter 7
LO7-3 7.4 Standard Normal Distribution

Characteristics of the Standard Normal

• Standard normal CDF • 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
 Chapter 7
LO7-3 7.4 Standard Normal Distribution

Normal Areas from Appendix C-1

• 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
 Chapter 7
LO7-3 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.

7-22
 Chapter 7
LO7-3 7.4 Standard Normal Distribution

Basis for the Empirical Rule

• 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
 Chapter 7
LO7-4 7.4 Standard Normal Distribution

LO7-4: Find the normal probability for given z or x using tables or Excel.
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
 Chapter 7
LO7-4 7.4 Standard Normal Distribution

Normal Areas from Appendices C-1 or C-2

• 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
 Chapter 7
LO7-4 7.4 Standard Normal Distribution

Finding Areas by using Standardized Variables

• 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
 Chapter 7
LO7-4 7.4 Standard Normal Distribution

• Finding Areas by using Standardized Variables

NOTE: You can use Excel, Minitab, TI83/84 etc. to compute these
probabilities directly.

7-27
 Chapter 7
LO7-5 7.4 Standard Normal Distribution

LO7-5: Solve for z or x for a normal probability using tables or Excel.

• 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
 Chapter 7
LO7-5 7.4 Standard Normal Distribution

• 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
 Chapter 7
LO7-5 7.4 Standard Normal Distribution

• 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
 Chapter 7
LO7-5 7.4 Standard Normal Distribution

• Inverse Normal

7-31
 Chapter 7
LO7-6 7.5 Normal Approximations

LO7-6: Use the normal approximation to a binomial or a Poisson.

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
 Chapter 7
LO7-6 7.5 Normal Approximations

Normal Approximation to the Binomial

• 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
 Chapter 7
LO7-6 7.5 Normal Approximations

Example Coin Flips

• 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
 Chapter 7
LO7-6 7.5 Normal Approximations

Example Coin Flips

• 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
 Chapter 7
LO7-6 7.5 Normal Approximations

Example Coin Flips

P(X > 17) = P(X ≥ 18)  P(X ≥ 17.5)

= P(Z > 0.53) = 0.2981

7-36
 Chapter 7
LO7-6 7.5 Normal Approximations

Normal Approximation to the Poisson

• 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
 Chapter 7
LO7-6 7.5 Normal Approximations

Example Utility Bills

• 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
 Chapter 7
LO7-7 7.6 Exponential Distribution
Characteristics of the Exponential Distribution

Probability of waiting less than or Probability of waiting more than x

equal to x

7-40
 Chapter 7
LO7-7 7.6 Exponential Distribution
Example Customer Waiting Time

• 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
 Chapter 7
LO7-7 7.6 Exponential Distribution

Example Customer Waiting Time

P(X > 0.50) P(X ≤ 0.50)

7-42
 Chapter 7
LO7-8 7.6 Exponential Distribution
LO7-8: Solve for x for given exponential probability.

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
 Chapter 7
LO7-8 7.6 Exponential Distribution
Inverse Exponential

7-44
 Chapter 7
LO7-8 7.6 Exponential Distribution

Mean Time Between Events

7-45
 Chapter 7
LO7-9 7.7 Triangular Distribution
LO7-9: Use the triangular distribution for “what-if” analysis (optional).
Characteristics of the Triangular Distribution

7-46
 Chapter 7
LO7-9 7.7 Triangular Distribution
Characteristics of the Triangular Distribution

• 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
 Chapter 7
LO7-9 7.7 Triangular Distribution
Characteristics of the Triangular Distribution

• 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