Continuous Probability Distribution: Business Statistics Prepared By: Ikram-E-Khuda

Continuous Probability Distribution
Business Statistics
Prepared by: Ikram-E-Khuda
Learning Outcomes
• Continuous random variable (CRV)
• Examples of random variables
• Probabilities for continuous random variables

– Probability Mass Function and Probability Density Function: PMF vs. PDF
• Expectations and Variances of Continuous Random Variables
• Numerical Example
Continuous Random Variable (CRV)
• A continuous random variable is the outcome of a
continuous random experiment
• Theoretically they have infinite values
• They are quantitative and represented by real

(decimal valued) numbers
• Their level of measurement is either interval or ratio.

Examples of Random
Variables
Examples of Random
Variables
Probabilities in CRVs
•
• Let
•
E.g.X: X={1,2,3,4}
be a DRV
– The events in X are countable and finite

– We can find probabilities of every single event present in X.
– These probabilities of events in X are also called Probability Mass Function (PMF)
of X
• Let X be a CRV
• E.g.
• Now in actuality there are infinite events present in X.
• Is it possible to find probability of any single event in X ? E.g. P(X=2.67=?)
– The probability of any individual event will be approximately equal to 0.
– Why?
– Not because it is not present in X but rather because we are trying to find
probability of an event that is very small fraction of the total.
• Hence PMF concept cannot be used in CRV.
• But it is important to note that instead of finding probability of just one event if a range
of events’ probability is found then this could be determined.
• This gives the idea and concept of Probability Density Function or PDF.
Probability Density Function (PDF)
• Therefore we do not use the idea of finding individual
probability of events in CRV.
• Rather we are more interested in fining the area within

which the desired event can be found.
• Mathematically areas are always determined on functions
• The function of random variable X that can be used to find

these areas are called Probability Density Function or PDF
• PDFs are function of X that has the following
properties
– They show the profile and trend of how the function
varies with changing values of X
– Area of any portion of the PDF will give the probability

density of the range of value of X
– Total area of a PDF follows the law of sum of probabilities

for all mutually exclusive events from the execution of a
random experiment.
•• We
find the areas using a mathematical operator called
“integration”. This is identified as follows:
• Let is a function of and is the PDF of X. Then integral of

provides the PDF of X and is given as;
Integrations always give us the area under the curve and also
shows the summation as in discrete case given by
Integrations when used as above gives the probability

density or area of X for a certain interval
Statistical Parameters
•Expectation

• Continuous Discrete
𝑛
𝑛
∑ 𝑓 𝑖 𝑥𝑖
𝐸 ( 𝑋 ) =𝜇= ∑ 𝑃 𝑥 𝑥 𝑖 = 𝑖=1
𝑖=1
𝑖
𝑁
Variance or error2 𝑛 𝑛
2 𝑓𝑖
• Continuous Discrete 2
𝜎 =∑ 𝑃 𝑥 ( 𝑥 𝑖 − 𝜇 ) =∑ ( 𝑥 − 𝜇 )
2
𝑖=1
𝑖
𝑖=1 𝑁 𝑖
Standard Deviation or error

𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑𝑜𝑢𝑡𝑐𝑜𝑚𝑒=𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐𝑎𝑙𝑚𝑜𝑑𝑒𝑙±𝑒𝑟𝑟𝑜𝑟𝑜𝑓 𝑡h𝑒𝑚𝑜𝑑𝑒𝑙

or
𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑𝑜𝑢𝑡𝑐𝑜𝑚𝑒=𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑𝑣𝑎𝑙𝑢𝑒±𝑒𝑟𝑟𝑜𝑟𝑜𝑓 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑𝑣𝑎𝑙𝑢𝑒

Example 1
• Consider
a continuous random variable defined
by the PDF given as:
Determine the following:

a) Prove that is actually a PDF
b)
c)
d) Predicted outcome of
Solution
•a) In to prove that given function is
actually a PDF , it must satisfy the
following condition
This is done as follows:

Solution
•
Solution
•c)
Solution
• Predicted outcome of
d)
𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑 𝑜𝑢𝑡𝑐𝑜𝑚𝑒=𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐𝑎𝑙 𝑚𝑜𝑑𝑒𝑙 ± 𝑒𝑟𝑟𝑜𝑟 𝑜𝑓 𝑡 h 𝑒 𝑚𝑜𝑑𝑒𝑙
or
𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑𝑜𝑢𝑡𝑐𝑜𝑚𝑒=𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑𝑣𝑎𝑙𝑢𝑒±𝑒𝑟𝑟𝑜𝑟𝑜𝑓 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑𝑣𝑎𝑙𝑢𝑒

∞ 4
𝑥+1 37
𝐸 ( 𝑋 ) =𝜇= ∫ 𝑥 𝑓 ( 𝑥 ) 𝑑𝑥=∫ 𝑥
𝑥=−∞ 2
( )
8
𝑑𝑥= =3.083
12
∞ 4

𝑥+1
2 2
𝜎 = ∫ (𝑥 − 𝜇) 𝑓 ( 𝑥 ) 𝑑𝑥=∫ (𝑥 − 𝜇)
𝑥=− ∞ 2 8
2
( )
𝑑𝑥=0 . 3263
𝜎 =√ 0 .3263=0 .5712

Normal Distributions
Normally Distributed CRV
Learning Outcomes
• Concept of normally distributed CRV
• Concept of Z
• Finding probabilities using Z
• Finding Z and X using probabilities
Normal PDF
Normal PDF
𝑓 (𝑥)
𝑋

Let
Let
Normal PDF
𝑓 (𝑥)
1. What does mean?
2. How many standard deviations is ?
3. How many standard deviations is ?
4. How many standard deviations correspond to
?
𝜇=100
𝑋
= 20
Standard Normal PDF
𝑓 (𝑧)
𝑍

Let
Let
Normal PDF
If I am 125 units away from mean
then in terms of standard deviations what does
it mean?

Solution
100 units on X makes 0 standard deviation
20 units on X from 100 (i.e. 120-100)

makes 1 standard deviation ( on either side of mean)
125 unit on X will make=>

Normal Distribution
Z- Scores
Example Normal Distribution
Example Normal Distribution (Cont’d)
Solution
Solution
Solution
Solution
Solution

Continuous Probability Distribution: Business Statistics Prepared By: Ikram-E-Khuda

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Continuous Probability Distribution

• Examples of random variables

• Probabilities for continuous random variables

• Expectations and Variances of Continuous Random Variables

• Theoretically they have infinite values

• They are quantitative and represented by real

• Their level of measurement is either interval or ratio.

– The events in X are countable and finite

• Rather we are more interested in fining the area within

• Mathematically areas are always determined on functions

• The function of random variable X that can be used to find

– Area of any portion of the PDF will give the probability

– Total area of a PDF follows the law of sum of probabilities

• Let is a function of and is the PDF of X. Then integral of

Integrations when used as above gives the probability

Standard Deviation or error

Determine the following:

This is done as follows:

20 units on X from 100 (i.e. 120-100)

125 unit on X will make=>

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