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Faculty of Business Administration

MBA Program
MBA 5207: Business Statistics & Decision Analysis (Section - A)
Summer 2013-14
Assignment - 2
Due Date 04.08.2014

Marks - 10




Write down the properties of Binomial Probability Distribution and

Poisson Probability Distribution.
Describe Systematic Random Sampling with as example.


Describe the advantages of Stratified Random Sampling and Cluster



Describe the stages of testing a hypothesis.


A sample of 36 observations is selected from a normal population.

The sample mean is 49 and the population standard deviation is 5.
Conduct the following test of hypothesis using the 0.05 significance
Ho : = 50
H1 : 50

The basic logic of hypothesis testing is to prove or disprove the research question. By only
allowing an error of 5% or 1% and making correct decisions based on statistical principles, the
researcher can conclude that the result must be real if chance alone could produce the same
result only 5% of the time or less. These five steps consists of all the decisions a researcher
needs to make in order to answer any research question using an inferntial statistical test.


The first step is to state the research problem in terms of a question that identifies the
population(s) of interest to the researcher, the parameter(s) of the variable under investigation,
and the hypothesized value of the parameter(s). This step makes the researcher not only define
what is to be tested but what variable will be used in sample data collection. The type of
variable (or combination of variables as in relationship type research questions) whether
categorical, discrete or continuous further defines the statistical test which can be performed
on the collected data set.
For example:
Is the mean first salary of a newly graduated student equal to $30,000?
The population of interest is all students who have just graduated. The parameter of interest is

the mean and the variable salary is continuous. The hypothesized value of the parameter, the
mean, is $30,000. Since the parameter is a population mean of a continuous variable variable,
this suggests a one sample test of a mean.


The second step is to state the research question in terms of a null hypothesis (H0) and a
alternative hypothesis (HA). The null hypothesis is the population parameter, = $30,000
(H0: = $30,000). The alternative hypothesis is the population parameter does not equal
$30,000 ( HA: NE $30,000). This HA suggests a two-tailed test as NE $30,000 can be less
than $30,000 or more than $30,000. Sometimes the alternative hypothesis is stated in terms of
a direction such as less than or greater than a value such at $30,000. A directional HA calls for
a one-tailed test, in the direction stated in the HA.
The next part of step 2 is to select a significance level (Type I error) typically alpha is used at
the .05 or the .01 level. A good researcher will also not neglect Type II error. In this step we
are not only setting up our research question in terms of statistical hypotheses, but we must
evaluate whether all the assumptions appropriate for the statistical test have been met.
H0: = $30,000
HA: NE $30,000 alpha=.05
Test assumptions are 1) the population is normally distributed or sample size is approximately
>=30 and 2) the sample we have used to collect the data was drawn randomly from the
population. If these test assumptions have not been meet, then data collection should be
reevaluated or continued under caution.


The third step is to calculate a statistic analogous to the parameter specified by the null
hypothesis. If the null hypothesis is defined by the parameter , then the statistics computed
on our data set would be the mean (xbar) and the standard deviation (s). A histogram of our
sample data set gives us our best approximation of what we expect our population distribution
to look like.
Since the best estimate of is xbar, our sample mean, the test statistic is based on a
distribution of sample means, the sampling distribution of the mean, xbar, with n, sample size,
equal to the number of data values used to compute xbar. We have hypothesized from the
research question the mean of this distribution and want to see if our sample mean is close to
this value. To determine where our sample mean fits on this sampling distribution, we convert
our sample mean, xbar, to a z-score. Thus the test statistic would be :
z = xbar- (hypothesized)
standard error of xbar
The standard error of xbar (point estimate) is s, the sample standard deviation, divided by
square root of n, the sample size since the population standard deviation is unknown.
Suppose we randomly sampled 100 high school seniors and determined their salary of their
first job. The sample mean salary, xbar, was $29,000 with a standard deviation of $6,000.
Since sample size is >30, we don't have to worry about whether the population is normally
distributed (Central Limit Theorem). The test statistic would be:

z = $29,000 - $30,000 = -$1,000 = -1.667



The fourth step is to calculate the probability value (often called the p-value) which is the
probability of the test statistic for both tails since this this two-tailed test. The probability
value computed in this step is compared with the significance level selected in step 2. If the
probability is less than or equal to the significance level, then the null hypothesis is rejected.
If the probability is greater than the significance level then the null hypothesis is not rejected.
When the null hypothesis is rejected, the outcome is said to be "statistically significant"; when
the null hypothesis is not rejected then the outcome is said be "not statistically significant." If
the outcome is statistically significant, then the null hypothesis is rejected in favor of the
alternative hypothesis.

P(z> 1.667) =.048 + P(z< -1.667)=.048, the p-value is .

Since this value is greater than alpha=.05 selected when we set up out hypotheses, we accept
the null hypothesis, H0: = $30,000.
If we wish to use a rejection region of alpha=.05 (.025 in each tail) to determine if we accept
or reject the null hypothesis, the cut-off z-score would be -1.96 and 1.96. If our test statistic is
>=1.96 or <= -1.96, then we would reject the null hypothesis at alpha=.05. We can say that our
test statistic (transformed into a z-score) is in the rejection region. In this example, our test
statistic, z=-1.667 for our test statistic does not fall in the rejection region (sometimes called
the acceptance region), so we must accept the null hypothesis.

The fifth and final step is to describe the results and state correct statistical conclusions in an
understandable way. The conclusions consists of two statments-one describing the results of
the null hypothesis and the other describing the results of the alternative hypothesis. The first
statement should state as to whether we accepted or rejected the null hypothesis and for what
value of alpha or p-value for our test statistic. The second statement should answer the
research question proposed in step 1 stating the sample statistic collected which estimated the
parameter we hypothesized.
Accept the null hypothesis at alpha=.05 or p-value of .096. Based on a sample mean of
$25,000, the mean salary of a newly graduated student does not equal $30,000.

The Five Steps in Hypothesis Testing

There are five steps in hypothesis testing:
1. Making assumptions
2. Stating the research and null hypotheses and selecting (setting) alpha
3. Selecting the sampling distribution and specifying the test statistic
4. Computing the test statistic
5. Making a decision and interpreting the results

If you learn these five basic steps, it will help you greatly in hypothesis testing. It gives you a
procedure to follow, regardless of the particular problem you are working with.
Now let's go through the five steps for our gas prices example. We have already done each of
these steps, but now we are doing them more explicitly in terms of the stages.

Making Assumptions
In hypothesis testing we make assumptions about the level of measurement of the variable,
the sampling method, the shape of the population distribution, and the sample size. In our
example, we made these assumptions:
1. We used a random sample.
2. Our variable, price, is at the interval-ratio level of measurement.
3. N > 50, so we need not assume a normal population.

Stating the Research and Null Hypotheses and Selecting Alpha

The substantive hypothesis or research hypothesis (H1) states the relationship in which we are
really interested. We always state research hypotheses in terms of population parameters
because we want to use sample statistics to estimate population parameters. Our research
hypothesis was:
H1: Y > $2.86
The null hypothesis (H0) always contradicts the research hypothesis, usually stating that there
is no difference between the population mean and some specified value. Our null hypothesis
H0: Y = $2.86
We set alpha at .05, meaning that we would reject the null hypothesis if the probability of the
obtained Z was less than or equal to .05 (P<.05).

Selecting the Sampling Distribution and Specifying the Test Statistic

In this example, we used the normal distribution and the Z statistic as the test statistic. This
will not always be the case, but you would still follow these steps even if you are using a
different distribution and test statistic.

Computing the Test Statistic

We used Formula 9.1 on page 261 to compute the test statistic.

Making a Decision and Interpreting the Results

Because our research hypothesis indicates that the mean (the population parameter) is less
than a specified value, we expect the obtained Z value to be on the right tail of the
distribution. This is the case. Our obtained Z value of 14.70 is greater than the .05 alpha level
that we set. Therefore, we can reject the null hypothesis of no difference between the mean
price of gasoline in California and nationally. This supports our research hypothesis, so we
conclude that California gas prices are, on average, significantly higher than the mean prices
paid by all Americans. The result is statistically significant at the .05 level or we can say that
the level of significance is less than .0001.