Problem 34 - Basic Statistics for Business and Economics with Student

Question

Under what conditions will the binomial and the Poisson distributions give roughly the same results?

Step-by-Step Solution

Answer

The binomial and Poisson distributions give similar results when \( n \) is large, \( p \) is small, and \( np < 10 \).

Step 1: Understand the Binomial Distribution

The binomial distribution models the number of successes in a fixed number of independent Bernoulli trials, each with the same probability of success. It is defined by two parameters: the number of trials \( n \) and the probability of success \( p \).

Step 2: Understand the Poisson Distribution

The Poisson distribution models the number of events occurring in a fixed interval of time or space, with a known constant mean rate \( \lambda \) and that occur independently of each other.

Step 3: Describe the Relationship between Binomial and Poisson Distributions

The Poisson distribution can be seen as an approximation of the binomial distribution under certain conditions. When the number of trials \( n \) is large and the probability of success \( p \) is small, the binomial distribution with parameters \( n \) and \( p \) can be approximated by a Poisson distribution with parameter \( \lambda = np \).

Step 4: Define Conditions for Approximation

The approximation holds well when \( n \) is high, \( p \) is small, and the mean \( \lambda = np \) is small. As a rule of thumb, this approximation works best when \( n > 20 \) and \( p < 0.05 \), or equivalently, when \( np < 10 \).

Key Concepts

Binomial Distribution

The binomial distribution is a key concept in statistics that describes the number of successes in a fixed number of independent and identically distributed Bernoulli trials. Each trial has two possible outcomes: success or failure. The notation for a binomial distribution is often given as Binomial(, p), where:

• \( n \) represents the number of trials.
• \( p \) is the probability of success in each trial.

Imagine you're flipping a fair coin 10 times. Each coin flip is a trial, and if you wanted to count how many times you get "heads," the number of heads represents a binomial variable. In this case, the probability \( p \) is 0.5 for each trial, and \( n \) is 10.

The binomial distribution is extensively used in various fields, such as biology, economics, and insurance, whenever the outcomes of experiments are binary or binomial in nature.

Poisson Distribution

The Poisson distribution is a different type of statistical distribution that models the number of events occurring within a fixed interval of time or space. This distribution is determined by the mean rate \( \lambda \), which indicates how frequently the event occurs within that interval.

• \( \lambda \) is the average number of occurrences in the given interval.

For example, imagine you're counting the number of buses arriving at a station per hour. If, on average, 2 buses arrive every hour, \( \lambda \) would be 2. The Poisson distribution gives the probability of a specific number of arrivals during a defined period.

The main characteristic of the Poisson distribution is that these events happen independently. That is, the occurrence of one event doesn't affect the occurrence of another.

This makes the Poisson distribution very useful for practical applications such as predicting the number of calls received by a call center in an hour or the number of typing errors found in a book.

Approximation Conditions

When it comes to statistical distributions, the relationship between the binomial and Poisson distributions can become significant under certain conditions. A Poisson distribution can serve as an approximation to a binomial distribution when the following conditions are met:

• The number of trials \( n \) is large.
• The probability of success \( p \) is small.
• The mean \( \lambda = np \) remains a small number.

This approximation is considered reliable when \( n > 20 \), \( p < 0.05 \), and specifically when the product \( np < 10 \). This rule works because as \( p \) becomes smaller and \( n \) larger, the skew and variance of the binomial distribution become similar to that of the Poisson distribution.

Understanding these conditions is crucial as it allows statisticians to simplify their models under specific scenarios, facilitating easier calculations especially in fields like telecommunications, traffic engineering, and epidemiology.