Continuous Probability Distributions

 A continuous random variable can assume any value

in an interval on the real line or in a collection of
intervals.
 It is not possible to talk about the probability of the
random variable assuming a particular value.
 Instead, we talk about the probability of the random
variable assuming a value within a given interval.
 Continuous Probability Distributions
Uniform Probability Distribution
Normal Probability Distribution

Exponential Probability Distribution

f (x) Exponential
Uniform
f (x)
Normal
f (x)

x
x
x
 Continuous Probability Distributions

 The probability of the random variable assuming a

value within some given interval from x1 to x2 is
defined to be the area under the graph of the
probability density function between x1 and x2.

Uniform f (x) Exponential

f (x)
Normal
f (x)

x
x x1 xx12 x2
x1 x 2
x
x1 x 2
 Uniform Probability Distribution
 A random variable is uniformly distributed
whenever the probability is proportional to the
interval’s length.
 The uniform probability density function is:

f (x) = 1/(b – a) for a < x < b

=0 elsewhere

where: a = smallest value the variable can assume

b = largest value the variable can assume
Uniform Probability Distribution
 Expected Value of x

E(x) = (a + b)/2

 Variance of x

Var(x) = (b - a)2/12
 Uniform Probability Distribution
 Example: Slater's Buffet
Slater customers are charged for the amount of
salad they take. Sampling suggests that the amount
of salad taken is uniformly distributed between 5
ounces and 15 ounces.
Uniform Probability Distribution

 Uniform Probability Density Function

f(x) = 1/10 for 5 < x < 15

=0 elsewhere

where:
x = salad plate filling weight
Uniform Probability Distribution

 Expected Value of x

E(x) = (a + b)/2
= (5 + 15)/2
= 10

 Variance of x

Var(x) = (b - a)2/12
= (15 – 5)2/12
= 8.33
 Uniform Probability Distribution
• Uniform Probability Distribution
for Salad Plate Filling Weight
f(x)

1/10

x
0 5 10 15
Salad Weight (oz.)
Uniform Probability Distribution

What is the probability that a customer

will take between 12 and 15 ounces of salad?

f(x)

P(12 < x < 15) = 1/10(3) = .3

1/10

x
0 5 10 12 15
Salad Weight (oz.)
Area as a Measure of Probability

 The area under the graph of f(x) and probability are

identical.
 This is valid for all continuous random variables.
 The probability that x takes on a value between some
lower value x1 and some higher value x2 can be found
by computing the area under the graph of f(x) over
the interval from x1 to x2.
 Normal Probability Distribution
• The normal probability distribution is the most
important distribution for describing a
continuous random variable.
 It is widely used in statistical inference.
 It has been used in a wide variety of applications
including:
• Heights of people • Test scores
• Rainfall amounts • Scientific measurements

 Abraham de Moivre, a French mathematician,

published The Doctrine of Chances in 1733.
 He derived the normal distribution.
 Normal Probability Distribution
• Normal Probability Density Function
1  ( x   )2 /2 2
f (x)  e
 2

where:
 = mean
 = standard deviation
 = 3.14159
e = 2.71828
Normal Probability Distribution

 Characteristics

The distribution is symmetric; its skewness

measure is zero.

x
Normal Probability Distribution

 Characteristics

The entire family of normal probability

distributions is defined by its mean  and its
standard deviation  .

Standard Deviation 

x
Mean 
Normal Probability Distribution

 Characteristics

The highest point on the normal curve is at the

mean, which is also the median and mode.

x
Normal Probability Distribution

 Characteristics

The mean can be any numerical value: negative,

zero, or positive.

x
-10 0 25
Normal Probability Distribution

 Characteristics

The standard deviation determines the width of the

curve: larger values result in wider, flatter curves.

 = 15

 = 25

x
Normal Probability Distribution

 Characteristics

Probabilities for the normal random variable are

given by areas under the curve. The total area
under the curve is 1 (.5 to the left of the mean and
.5 to the right).

.5 .5
x
Normal Probability Distribution

 Characteristics (basis for the empirical rule)

68.26% of values of a normal random variable

are within +/- 1 standard deviation of its mean.

95.44% of values of a normal random variable

are within +/- 2 standard deviations of its mean.

99.72% of values of a normal random variable

are within +/- 3 standard deviations of its mean.
Normal Probability Distribution

 Characteristics (basis for the empirical rule)

99.72%
95.44%
68.26%


x
 – 3  – 1  + 1  + 3
 – 2  + 2
 Standard Normal Probability
 Characteristics
Distribution
A random variable having a normal distribution
with a mean of 0 and a standard deviation of 1 is
said to have a standard normal probability
distribution.
Standard Normal Probability Distribution

 Characteristics

The letter z is used to designate the standard

normal random variable.

1

z
0
Standard Normal Probability Distribution

 Converting to the Standard Normal Distribution

x
z


We can think of z as a measure of the number of

standard deviations x is from .
1. When x is less than mean the value of z is negative
2. When x is more than mean the value of z is positive
3. When x=mean the value of z=0.
Two types of questions

1. Specifies a value, or values for Z and asks

to use the table to determine the
corresponding areas or probabilities.
2. Provides a area, or probability and asks us
to use the table to determine the
corresponding Z value..
Computing probabilities for a Normal Distribution
To find probability of Procedure
Being
Less than Z Look up z in the table

More than Z Subtract above answer

from 1

Between Z1 and Z 2 Look up z1 and z2in the

table and subtract smaller
probability from larger

Not between z1 and Z2 subtract above answer

from 1
Chapter 6. 12. page 281.
a. P(0 ≤ z ≤ .83) = .7967 - .5000 = .2967
b. P(-1.57 ≤ z ≤ 0) = .5000 - .0582 = .4418
c. P(z > .44) = 1 - .6700 = .3300
d. P(z ≥ -.23) = 1 - .4090 = .5910
e. P(z < 1.20) = .8849
f. P(z ≤ -.71) = .2389
Ex.2 Given that z is a standard normal random
variable, find z for each situation
a. The area to the left of z is .9750
b. The area between 0 and z is .4750
c. The area to the left of z is .7291
d. The area to the right of z is .1314
e. The area to the left of z is .6700
f. The area to the right of z is .3300
14. a. The z value corresponding to a cumulative probability of .9750 is z = 1.96.

b. The z value here also corresponds to a cumulative probability of .9750: z = 1.96.

c. The z value corresponding to a cumulative probability of .7291 is z = .61.

d. Area to the left of z is 1 - .1314 = .8686. So z = 1.12.

e. The z value corresponding to a cumulative probability of .6700 is z = .44.

f. The area to the left of z is .6700. So z = .44.

Ex.3.
For borrower with good credit scores, the mean debt for
revolving and installment account is 15015. Assume
the s.d is 3540 and the debt amount are normally
distributed.
a. What is the probability that the debt for a borrower
with good credit is more than 18000.
b. What s the probability that the debt for a borrower
with good credit is less than 10000.
c. What is the probability that the debt for a borrower
with good credit is between 12000 and 18000.
d. What is the probability that the debt for a borrower
with good credit is no more than 14000.
Let x = debt amount

 = 15,015,  = 3540

18,000  15,015
a. z  .84
3540

P(x > 18,000) = 1- P(z ≤ .84) = 1 - .7995 = .2005

10,000  15,015
b. z   1.42
3540

P(x < 10,000) = P(z < -1.42) = .0778

c. At 18,000, z = .84 from part (a)

12,000  15,015
At 12,000, z   .85
3540

P(12,000 < x < 18,000) = P(-.85 < z < .84) = .7995 - .1977 = .6018

14,000  15,015
d. z  .29
3540

P(x  14,000) = P(z  -.29) = .3859

Ex.4 The average return for large-cap domestic stock
funds over the three years 2009-2011 was 14.4%.
Assume the three year returns were normally across
funds with a standard deviation of 4.4%.
a. What is the probability an individual large-cap
domestic stock fund had a three-year return of at
least 20%?
b. What is the probability an individual large-cap
domestic stock fund had a three-year return of 10% or
less?
c. How big does the return have to be put a domestic
stock fund in the top 10% for the three-year period?.
 Standard Normal Probability
Distribution
XYZ sells auto parts and supplies including
a popular 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 a
replenishment order.
Standard Normal Probability Distribution

It has been determined that demand during

replenishment lead-time 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 stockout during replenishment lead-time. In
other words, what is the probability that demand
during lead-time will exceed 20 gallons?

P(x > 20) = ?

Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 1: Convert x to the standard normal distribution.

z = (x - )/
= (20 - 15)/6
= .83

Step 2: Find the area under the standard normal

curve to the left of z = .83.

see next slide

Standard Normal Probability Distribution

 Cumulative Probability Table for

the Standard Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
. . . . . . . . . . .

P(z < .83)

Standard Normal Probability Distribution

 Solving for the Stockout Probability

Area = 1 - .7967
Area = .7967
= .2033

z
0 .83
Standard Normal Probability Distribution

 Solving for the Stockout Probability

Step 3: Compute the area under the standard normal

curve to the right of z = .83.

P(z > .83) = 1 – P(z < .83)

= 1- .7967
= .2033

Probability
of a stockout P(x > 20)
Standard Normal Probability Distribution

• Standard Normal Probability Distribution

If the manager of XYZ wants the probability
of a stock out during replenishment lead-time to be
no more than .05, what should the reorder point be?
---------------------------------------------------------------
(Hint: Given a probability, we can use the standard
normal table in an inverse fashion to find the
corresponding z value.)
Standard Normal Probability Distribution

 Solving for the Reorder Point

Area = .9500

Area = .0500

z
0 z.05
Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 1: Find the z-value that cuts off an area of .05

in the right tail of the standard normal
distribution.
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
. . . . . . . . . . .
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 We
.9693
look.9699
up .9706
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 the complement
.9756 .9761 .9767
of the tail area
. . . . . . . . (1 -..05 = .95)
. .
Standard Normal Probability Distribution

 Solving for the Reorder Point

Step 2: Convert z.05 to the corresponding value of x.

x =  + z.05
= 15 + 1.645(6)
= 24.87 or 25

A reorder point of 25 gallons will place the probability

of a stockout during leadtime at (slightly less than) .05.
Normal Probability Distribution
 Solving for the Reorder Point

Probability of no
Probability of a
stockout during
stockout during
replenishment
replenishment
lead-time = .95
lead-time = .05

x
15 24.87
Standard Normal Probability Distribution

 Solving for the Reorder Point

By raising the reorder point from 20 gallons to
25 gallons on hand, the probability of a stockout
decreases from about .20 to .05.
This is a significant decrease in the chance that
XYZ will be out of stock and unable to meet a
customer’s desire to make a purchase.