What is exponential distribution?

The exponential distribution is a continuous probability distribution that models the time between events occurring in a Poisson process.

PDF and CDF

The exponential distribution is defined by its probability density function (PDF) and cumulative distribution function (CDF).

The PDF of the exponential distribution is given by:

Where λ (lambda) is the rate parameter which determines the shape of the distribution.

The CDF of the exponential distribution is given by:

Characteristics

The exponential distribution has the following characteristics:

• It is a continuous distribution defined only for non-negative values.

• The distribution is memoryless, meaning that the probability of an event occurring in the future is independent of how much time has already passed.

• The mean and standard deviation of the distribution are equal and can be used to measure the average time between events.

Example

A company receives customer service calls at a rate of 8 calls per hour, following an exponential distribution. What is the probability that the company receives at most five calls in a given hour?

Solution

The rate parameter $\lambda$ for the exponential distribution is the average number of events per unit of time.

We can use the CDF of the exponential distribution to find the probability of receiving at most five calls in one hour.

The probability of receiving at most five calls in one hour is approximately 0.99 or 99%.

Applications

• Reliability analysis: The exponential distribution models the time to failure of systems or components in reliability analysis. It aids in estimating the probability of failure within a given time interval.

• Queueing systems: Queueing theory extensively employs the exponential distribution to model interarrival times of customers or events in systems such as call centers, transportation networks, and computer networks.

• Financial modeling: The exponential distribution finds applications in financial modeling, specifically for modeling the time between trades or the duration of time until the occurrence of specific financial events.

Conclusion

Exponential distribution's memoryless property, simple mathematical formulation, and versatile applications make it a valuable asset in different fields. Understanding the exponential distribution and its applications allows analysts and researchers to make informed decisions and predictions in a wide range of contexts.