BF1206: BUSINESS

STATISTICS

Confidence Interval Estimation

(Normal Distribution)

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 Point and Interval Estimates

 A point estimate is a single number,

 a confidence interval provides additional
information about variability

Lower Upper
Confidence Confidence
Point Estimate Limit
Limit
Width of
confidence interval

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 Point Estimates

We can estimate a with a Sample

Population Parameter … Statistic
(a Point Estimate)

Mean μ X

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 Confidence Intervals

 How much uncertainty is associated with a

point estimate of a population parameter?

 An interval estimate provides more

information about a population characteristic
than does a point estimate

 Such interval estimates are called confidence

intervals

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 Confidence Interval Estimate
 An interval gives a range of values:
 Takes into consideration variation in sample
statistics from sample to sample
 Based on observation from 1 sample
 Gives information about closeness to
unknown population parameters
 Stated in terms of level of confidence
 Can never be 100% confident

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 Estimation Process

Random Sample I am 95%

confident that
μ is between
Population Mean 40 & 60.
(mean, μ, is X = 50
unknown)

Sample

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 General Formula

 The general formula for all

confidence intervals is:
Point Estimate ±(Critical Value)(Standard Error)

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 Confidence Level

 Confidence Level
 Confidence in which the interval
will contain the unknown
population parameter
 A percentage (less than 100%)

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 Confidence Level, (1-)
(continued)
 Suppose confidence level = 95%
 Also written (1 - ) = .95
 A relative frequency interpretation:
 In the long run, 95% of all the confidence
intervals that can be constructed will contain the
unknown true parameter
 A specific interval either will contain or will
not contain the true parameter
 No probability involved in a specific interval

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 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

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 Confidence Interval for μ
(σ Known)
 Assumptions
 Population standard deviation σ is known
 Population is normally distributed
 If population is not normal, use large sample

 Confidence interval estimate:

σ
XZ
n
(where Z is the normal distribution critical value for a probability of
α/2 in each tail)
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 Finding the Critical Value, Z
Z  1.96
 Consider a 95% confidence interval:
1    .95

α α
 .025  .025
2 2

Z units: Z= -1.96 0 Z= 1.96

Lower Upper
X units: Confidence Point Estimate Confidence
Limit Limit

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 Common Levels of Confidence
 Commonly used confidence levels are 90%,
95%, and 99%
Confidence
Confidence
Coefficient, Z value
Level
1 
80% .80 1.28
90% .90 1.645
95% .95 1.96
98% .98 2.33
99% .99 2.57
99.8% .998 3.08
99.9% .999 3.27

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 Intervals and Level of Confidence
Sampling Distribution of the Mean

/2 1  /2
x
Intervals μx  μ
extend from x1
σ x2 (1- )x100%
XZ of intervals
n
to constructed
σ contain μ;
XZ
n ( )x100% do
not.
Confidence Intervals
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 Example

 A sample of 11 circuits from a large normal

population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is .35 ohms.

 Determine a 95% confidence interval for the

true mean resistance of the population.

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 Example
(continued)

 A sample of 11 circuits from a large normal

population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is .35 ohms.
σ
 Solution: XZ
n
 2.20  1.96 (.35/ 11)
 2.20  .2068
(1.9932 , 2.4068)
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 Interpretation

 We are 95% confident that the true mean

resistance is between 1.9932 and 2.4068
ohms
 Although the true mean may or may not be
in this interval, 95% of intervals formed in
this manner will contain the true mean

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 Example 1

A publishing company has just published a new college textbook. Before the
company decides the price at which to sell this textbook, it wants to know the
average price of all such textbooks in the market. The research department at
the company took a sample of 25 comparable textbooks and collected
information on their prices. This information produced a mean price of $145
for this sample. It is known that the standard deviation of the prices of all such
textbooks is $35 and the population of such prices is normal.

(a) What is the point estimate of the mean price of all such college textbooks?
(b) Construct a 90% confidence interval for the mean price of all such college
textbooks.
(c) Construct a 95% confidence interval for the mean price of all such college
textbooks.

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