Quantitative Methods by SM

Random Variable and Probability Distribution

Sujay K Mukhoti

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Quantitative Methods by SM

Agenda
1. Motivation
2. Random variable: discrete and continuous
3. Probability distribution of discrete random variable
4. Cumulative Distribution Function
5. Expectation
6. Variance
7. Pizza Cottage:

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Quantitative Methods by SM

Pizza Cottage

Buy CE and pay Rs. 15/- for a GB OR Buy CE and LC and

get a GB free

How much extra we are going to get from the offer:

Number of coupon15 and coupon0 utilizations
Production cost of GB per unit: 12
Customer dissatisfaction penalty: we give it free if not
delivered hot: Number of free GB
Selling Price per unit GB: 35
Selling Price per unit GB charged after discount: 15 or 0
Revenue from GB: 3 or -12

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Quantitative Methods by SM

Random Variable

A random variable is a rule that assigns one numerical value

to each outcome of a random experiment.

All possible values are known in advance but which one will
occur next cant be assured

Mathematically, a random variable is a real valued function X: so that

every real value corresponds to an event.

Common Notations: X, Y , Z,

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Quantitative Methods by SM

Discrete Random Variable

A discrete random variable can assume at most
countable number of values.
Example: Number of A Grades in QT (E&F)
Number of CAT attempts
Number of errors in a printed book
Number of clicks on a Google ad
Number of purchase of iPad in a day

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Quantitative Methods by SM

Continuous Random Variable

A continuous random variable can assume uncountably
infinite values.
Example: Amount of rain in 2015
Daily return from Reliance share
Change in blood-sugar level after using
insulin

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Quantitative Methods by SM

Problems
Discrete or Continuous?
1. Population in a particular state of India.
2. Total weight of consignments handled by a courier
company in a day.
3. Time to complete an exam.
4. Number of participants in an exit poll.

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Quantitative Methods by SM

Problem
Discrete or Continuous?
1. Total number of goals scored in a hockey game.
2. Life of a particular medicine.
3. Height of the Ocean's tide at a given location.
4. Amount of rain on a particular day.
5. Number of train derailments in a year.

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Quantitative Methods by SM

Probability Distribution
Def: Probability distribution of a random variable X is a formula,
table, or graph that gives all possible sets of values of X and
corresponding probabilities
Example: Suppose an entrepreneur is looking to get funding from 3
venture capital firms on one project. X= number of VC firms who
would agree to invest.
Sample
Point

YYY

YYN

YNY

NYY

NNY

NYN

YNN

NNN

P(X=x)

X= number of YES . Prob distrn?

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Quantitative Methods by SM

Properties of Discrete Probability Distribution

Total probability =1 :
P(X=0)+P(X=1)+P(X=2)+P(X=3)=?
Cumulative distribution function (CDF):

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Quantitative Methods by SM

Problem
The daily exchange rate of one dollar in euros during the 1st 3
months of 2007 obeys the following distribution.
X

0.73

0.74

0.75

0.76

0.77

0.78

P(x)

0.05

0.1

0.15

0.15

0.05

Total

What is the probability that the exchange rate on a given day

during this period is 0.76?
What is the probability that the exchange rate on a given day
during this period will be at least 0.75?
What is the probability that the exchange rate will be between
0.74 and 0.76?

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Quantitative Methods by SM

Expectation (or Mean)

Def: If we make very large number of draws from the
distribution of a random variable and calculate the average of
the data then the average is the expected value (or mean) of the
random variable.

E ( X ) i 1 xi .P ( xi ).
n

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Quantitative Methods by SM

Problem
Monthly sales of a certain product follow a prob. Distribution
as below:
Number of
sales (x)

P(x)

5000

0.2

6000

0.3

7000

0.2

8000

0.2

9000

0.1

What is expected number of sales?

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Quantitative Methods by SM

Problem

Management of an airline knows that 0.5% of the airlines

passengers lose their luggage on domestic flights.
Management also knows that the average value claimed
for a lost piece is $600. The company is considering
increasing fare by an appropriate amount to cover up their
losses due to lost luggage. How much they should increase?

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Quantitative Methods by SM

Problem

A random variable X can assume five values:

0,1,2,3,4. A portion of the probability
distribution of X is shown below:
x

P(x)

0.1

0.3

0.1

If E(X) = 1.9 then find the missing values.

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Quantitative Methods by SM

Properties of Expectation
Rules of Expectation:

In the sales example: Each item is sold for a profit of $2.

Production cost has two components: fixed cost of $8000 and
variable cost of $0.5 per unit. What is expected profit?

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Quantitative Methods by SM

Variance & Standard Deviation

Var(X)=

SD(X) =

Variance in the sales example?

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Quantitative Methods by SM

Problem
Variance of profit in the last example?

Suppose X takes values {0,1,2} with E(X)= 1.5 and

V(X)=0.5. Find pmf of X.

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Quantitative Methods by SM

Problem
You can insure a $50,000 diamond for its total value
by a premium of D dollars. If the probability of theft
in a given year is estimated to be 0.01, what
premium should the insurance company charge if it
wants the expected gain equal to $1000?

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Quantitative Methods by SM

Problem
Airport Rent-a-Car is a locally operated business in competition several
major firms. ARC is planning a new deal for prospective customers who
want to rent a car for only one day and will return it to the airport. For
$35, the company will rent a small economy car to a customer, whose
only other expense is to fill the car with petrol at days end. ARC is
planning to buy a number of small cars from the manufacturer at a
reduced cost of $6300. Question is how many to buy. Company executives
have decided on the following daily demand distribution:
# Cars

13

14

15

16

17

18

Prob.

0.08

0.15

0.22

0.25

0.21

0.09

The company intends to offer the plan 6 days a week and anticipates
variable cost per car per day as $2.5. After one year they plan to sell the
cars to recapture 50% of the original cost. How many cars would be an
optimal choice?
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Quantitative Methods by SM

Expectation of special functions

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Quantitative Methods by SM

Chebyshevs Theorem
Let X have expectation and variance . Then
The labelled net content (i.e., ) on a bottle of a cough syrup
is 200ml, and suppose it is known that the standard
deviation is 5ml. Find the probability that the actual
content is either more than 210ml or less than 190ml.

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Quantitative Methods by SM

Pizza Cottage

Buy CE and pay Rs. 15/- for a GB OR Buy CE and LC and

get a GB free

How much extra we are going to get from the offer:

Number of coupon15 and coupon0 utilizations
Production cost of GB per unit: 12
Customer dissatisfaction penalty: we give it free if not
delivered hot: Number of free GB
Selling Price per unit GB: 35
Selling Price per unit GB charged after discount: 15 or 0
Revenue from GB: 3 or -12

Profit function:
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Quantitative Methods by SM

Next topic: Binomial and Poisson distribution

8/7/16