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Summer 2013

Master of Business Administration- MBA Semester 1


MB0040 Statistics for Management - 4 Credits
Q1. Statistics plays a vital role in almost every facet of human life. Describe the functions of
Statistics. Explain the applications of statistics.
Ans : - DEFINITION OF STATISTICS
According to Seligman, Statistics is a science which deals with the method of collecting, classifying,
presenting, comparing and interpreting the numerical data to throw light on enquiry. According to This
definition is both comprehensive and exhaustive. Prof. Boddington, on the other hand, defined
Statistics as The science of estimates and probabilities2. This definition is also not complete.
According to Croxton and Cowden, Statistics is the science of collection, presentation, analysis and
interpretation of numerical data from logical analysis
FUNCTIONS OF STATISTICS
Statistics is used for various purposes. It is used to simplify mass data and to make comparisons easier.
It is also used to bring out trends and tendencies in the data, and the hidden relations between variables.
All these help in easy decision making. Let us look at each function of Statistics in detail.
STATISTICS SIMPLIFIES MASS DATA
The use of statistical concepts helps in simplification of complex data. Using statistical concepts, the
managers can make decisions more easily. The statistical methods help in reducing the complexity of
the data and in the understanding of any huge mass of data.
APPLICATION OF STATISTICS
Statistical methods are applied to specific problems in various fields such as Biology, Medicine,
Agriculture, Commerce, Business, Economics, Industry, Insurance, Sociology and Psychology. In the
field of medicine, statistical tools like t-tests are used to test the efficiency of the new drug or medicine.
In the field of economics, statistical tools such as index numbers, estimation theory and time series
analysis are used in solving economic problems related to wages, price, production and distribution of
income. In the field of agriculture, an important concept of statistics such as analysis of variance
(ANOVA) is used in experiments related to agriculture, to test the significance between two sample
means.
Q2. a). Explain the various measures of Dispersion.
Ans:- a) DISPERSION
Definition: A measure of Dispersion may be defined as a statistics signifying the extent of the
scattering of items around a measure of central tendency.
The property of deviations of values from the average is called Dispersion or Variation. The degree of
variation is found by the measures of variation.
They are as follows:

1. Range (R)
2. Quartile Deviation (Q.D)
3. Mean Deviation (M.D)
4. Standard Deviation (S.D)
Range
Range represents the differences between the values of the extremes. The range of any sample is the
difference between the highest and the lowest values in the series.
Range = Largest value Smallest value = L S

Coefficient of Range =

Largest valueSmallest value


Largest value+ Smallest value

LS
= L+ S

Quartile deviation
Quartiles divide the total frequency in to four equal parts. The lower quartile Q1 refers to the values of
variate corresponding to the cumulative
N
Frequency 4
Q2 corresponds to the value of variate with cumulative frequency equal to.

N
2

Upper quartile Q3

refers to the value of variate corresponding to cumulative


3N
Frequency
4
Hence, Quartile Deviation QD =

1
2

Co-efficient of Quartile Deviation =

(Q3-Q1)
Q3Q
Q 3 +Q1
1

Mean deviation
Mean deviation is defined as the mean of absolute deviations of the values from the central value.
For individual series, Mean deviation from Mean is calculated as:
Standard Deviation
Standard deviation is the root of sum of the squares of deviations divided by their numbers. It is also
called mean square error deviation (or) root mean square deviation.
The standard deviation is root mean square (RMS) average of all the deviations from the mean. It is
denoted by sigma ().
Ans:- b) SOLUTION:
In increasing order: - 384, 391, 407, 522, 591, 672, 733, 777, 1490, 2488
Here n = 10

Q1 = (

10+ 1
4

) th value = (

= 391 + (407-391) x

Median or Q2 = 2(

= 591 +

672592
2

Q3 = 3 (

10+ 1
4

Q3 = 777 + (

3
4

3
4

) th value
3 x 16
4

= 391 +

10+ 1
4

) th value = (
80
2

= 591+

) th value =

1490777
4

2+

= 391 + 12 = 403
5+

1
2

)th value

= 631

33
4

) = 777 +

the value = (

8+

1
4

) th value

713
4

Q3 = 777 + 178.25 = 955.25


Therefore, Median = 631 and Quartiles are: - 403, 631, 955.25 Ans.
Q3. a). What is correlation? Distinguish between positive and negative correlation.
Ans:- b) SOLUTION:X
1
2
3
4
5
6
7
8
9
X =
45

Y
9
8
10
12
11
13
14
16
15
Y =1
08

X2
1
4
9
16
25
36
49
64
81
X 2 =28
5

Therefore, Coefficient of correlation,


r=

XY
X 2 . Y 2

Y2
81
64
100
144
121
169
196
256
225
Y 2 =135
6

XY
9
18
30
48
55
78
98
144
135
XY =
615

r=

615
285 1356

r=

615
386460

r=

615
621 . 659

r = 0.989288 which is highly Positive Correlation.


Q4. Index number acts as a barometer for measuring the value of money. What are the
characteristics of an index number? State its utility.
Ans:- DEFINITION OF AN INDEX NUMBER
An index number is a number which is used to measure the level of a certain phenomenon as compared
to the level of the same phenomenon at some standard period. In other words, an index number is a
number which is used as a device for comparison between the price, quantity or value of a group of
articles in different situations for example, at a certain place or a period of time and that of another
place or period of time.
UTILITY
The primary purpose of index numbers is to measure relative temporal or cross-sectional changes in a
variable or a group of related variables which are not capable of being directly measured. The greatest
purpose of index numbers has been to measure and compare the changes in prices and purchasing
power of money which have received great attention from economists for many years. Today, index
number is not only used for measuring price changes alone. Factors like wages, employment,
production, trade, demand, supply, business condition, industrial activity, financial problems etc. are
also studied through this statistical device. Just as a barometer measures the pressure of atmosphere or
gases, the index numbers measure the pressure of economic behaviour. Thus, index numbers are called
economic barometers.
CHARACTERISTICS
1. EXPRESSED IN NUMBERS
Index numbers represent the relative changes such as increase in production; reduction in prices etc. in
the numbers.
2. EXPRESSED IN PERCENTAGE
Index numbers are expressed in terms of percentages so as to show the extent or relative change where
the value of base is assumed to be 100 but the sign of percentage (%) is not used.
3. RELATIVE MEASURE
Index numbers measure changes which are not capable of direct measurement.
4. SPECIFIED AVERAGES

Index number represents a special case of average, in general known as weighted average. It is a special
type of average, because in a simple average, the data is homogenous having the same unit of
measurement, whereas the average variables have different units of measurement.
5. BASIS OF COMPARISON
Index numbers by their very nature are comparative. They compare changes over time or between
places or similar categories.
Q5. Business forecasting acquires an important place in every field of the economy. Explain the
objectives and theories of Business forecasting.
Ans:- BUSINESS FORECASTING
Business forecasting refers to the analysis of past and present economic conditions with the object of
drawing inferences about probable future business conditions. The process of making definite estimates
of future course of events is referred to as forecasting and the figure or statements obtained from the
process is known as forecast; future course of events is rarely known. In order to be assured of the
coming course of events, an organised system of forecasting helps. The following are two aspects of
scientific business forecasting:
1. ANALYSIS OF PAST ECONOMIC CONDITIONS
For this purpose, the components of time series are to be studied. The secular trend shows how the
series has been moving in the past and what its future course is likely to be over a long period of time.
The cyclic fluctuations would reveal whether the business activity is subjected to a boom or depression.
The seasonal fluctuations would indicate the seasonal changes in the business activity.
2. ANALYSIS OF PRESENT ECONOMIC CONDITIONS
The object of analysing present economic conditions is to study those factors which affect the
sequential changes expected on the basis of the past conditions. Such factors are new inventions,
changes in fashion, changes in economic and political spheres, economic and monetary policies of the
government, war, etc. These factors may affect and alter the duration of trade cycle. Therefore, it is
essential to keep in mind the present economic conditions since they have an important bearing on the
probable future tendency.
OBJECTIVES OF FORECASTING IN BUSINESS
Forecasting is a part of human nature. Businessmen also need to look to the future. Success in business
depends on correct predictions. In fact when a man enters business, he automatically takes with it the
responsibility for attempting to forecast the future. To a very large extent, success or failure would
depend upon the ability to successfully forecast the future course of events. Without some element of
continuity between past, present and future, there would be little possibility of successful prediction.
But history is not likely to repeat itself and we would hardly expect economic conditions next year or
over the next 10 years to follow a clear cut prediction. Yet, past patterns prevail sufficiently to justify
using the past as a basis for predicting the future.
A businessman cannot afford to base his decisions on guesses. Forecasting helps a businessman in
reducing the areas of uncertainty that surround management decision making with respect to costs,
sales, production, profits, capital investment, pricing, expansion of production, extension of credit,
development of markets, increase of inventories and curtailment of loans. These decisions are to be
based on present indications of future conditions. However, we know that it is impossible to forecast
the future precisely. There is a possibility of occurrence of some range of error in the forecast.
Statistical forecasts are the methods in which we can use the mathematical

THEORIES OF BUSINESS FORECASTING


There are a few theories that are followed while making business forecasts.
Some of them are:
1. Sequence or time-lag theory
2. Action and reaction theory
3. Economic rhythm theory
4. Specific historical analogy
5. Cross-cut analysis theory
SEQUENCE OR TIME-LAG THEORY
This is the most important theory of business forecasting. It is based on the assumption that most of the
business data have the lag and lead relationships, that is, changes in business are successive and not
simultaneous. There is time-lag between different movements.
Merits and Demerits of Sequence or Time-lag Theory
Merit
This method is largely used for business
forecasting.
Though this theory is based on statistical
techniques, yet it is easy to understand.
Time-interval between two events can be
ascertained.
Government can use this technique for the
purpose of economic stability of the economy by
exercising control over possible losses.

Demerit
This method studies only the action and not the
reaction.
This method cannot be regarded as accurate
because by using statistical techniques the results
can be up to the truth but not an accurate one.

ACTION AND REACTION THEORY


This theory is based on the following two assumptions.
1. Every action has a reaction
2. Magnitude of the original action influences the reaction
When the price of rice goes above a certain level in a certain period, there is likelihood that after some
time it will go down below the normal level. Thus, according to this theory a certain level of business
activity is normal or abnormal; conditions cannot remain so for ever. Thus, we find four phases of a
business cycle. They are:
1.
2.
3.
4.

Prosperity
Decline
Depression
Improvement
Merits and Demerits of Action and Reaction Theory
Merit

Demerit

This theory is better than other theories.


By this theory more reliable results can be
obtained because this theory gives attention to
action and reaction of an event.

The determination of normal level is very difficult.


It is not necessary that reaction is equal to the
action.

ECONOMIC RHYTHM THEORY


The basic assumption of this theory is that history repeats itself and hence assumes that all economic
and business events behave in a rhythmic order. According to this theory, the speed and time of all
business cycles are more or less the same and by using statistical and mathematical methods, a trendis
obtained which will represent a long term tendency of growth or decline. It is done on the basis of the
assumption that the trend line denotes the normal growth or decline of business events.
Merits and Demerits of Economic Rhythm Theory
Merit
Forecasting is made on the basis of past
conditions, hence they are more reliable.
This method is helpful in long-term forecasting.

Demerit
The business events are not strictly periodic and
prediction of business cycle on the basis of
statistical method is not satisfactory.
Past conditions are given more weight age than the
present conditions.

SPECIFIC HISTORICAL ANALOGY


History repeats itself is the main foundation of this theory. If conditions are the same, whatever
happened in the past under a set of circumstances is likely to happen in future also. A time series
relating to the data in question is thoroughly scrutinised such a period is selected in which conditions
were similar to those prevailing at the time of making the forecast. However, this theory depends
largely on past data.
Depicts the merits and demerits of specific historical analogy.
Merits and Demerits of Specific Historical Analogy
Merit
It is an easy method.
As the future is forecasted on the basis of past
business conditions, the forecasting is more
reliable.

Demerit
In this theory, forecasting is based on guess work,
not on a scientific method because the past and
present conditions are rarely found to be similar.
It is very difficult to select the past period with the
same business conditions like present.

CROSS-CUT ANALYSIS THEORY


This theory proceeds on the analysis of interplay of current economic forces. In this method, the
combined effects of various factors are not studied. The effect of each factor is studied independently.
Under this theory, forecasting is made on the basis of analysis and interpretation of present conditions
because the past events have no relevance with present conditions.
Merits and Demerits of Cross-cut Analysis Theory

Merit
Present conditions are preferred than past.
The effect of each factor is studied
Independently.
Forecast is nearer to the accuracy as it is based
on present conditions.

Demerit
Independent analysis of individual facts is very
difficult.
Past facts are equally important for the purpose of
forecasting, but in this method no importance is
given to past facts.
The forecasting made on the basis of this
technique cannot be regarded as reliable.

Q6. The weekly wages of 1000 workers are normally distributed around a mean of Rs. 70 and a
standard deviation of Rs. 5. Estimate the number of workers whose weekly wages will be:
(a). Between 70 and 72 (b). Between 69 and 72 (c). More than 75 (d). Less than 63
Ans: - Let X is a normal variable with parameters
M= Rs. 70 and
Than 2 =

XM
6

= Rs. 5 N= 1000
=

a) P ( 70 X 72 )

=P

X70 2

5
5

X70
5

=P

is equal is a normal variate.

7070 X 70 7270

5
5
5

= P [ 0 5 x350 10 ]
= P [ 0 5 x 360 ]
= P [ 0 X 72 ]
= P (x = 0.4772)
Number of workers whose weekly wage will be between 70 and 72
= 1000 x 0.4772 = 477 Ans.
b) = P [ 69 X 72 ]

=P

0.2

=P

X 70
0.4
5

6970 X70 7270

5
5
5

= P [ X=0.073+ X=0.554 ]
= P [ X=.2247 ]
Required number workers = 1000 0.2247 = 225 Ans.

c) P ( X 75 ) = P

X 70
3
+
5
5

= P [ X=0.2258 ]
Required number of workers = 226 Ans.
d) P ( X 63 ) = P

X 70 7263

5
5

= P [ X 1.8 ]
= P [ X=0.4641 ]
Required numbers of workers = 464 Ans.