Chapter 7 Estimation

MEDITERRANEAN SCHOOL OF BUSINESS
C O UR S E : B US I N E S S S T A T I S T I C S 1 (Q M M 1 0 2 )
PROFESSOR: Dr. Amor Messaoud
DATE: September 2017
September, 2017 MEDITERRANEAN SCHOOL OF BUSINESS (FALL 2017-2018) 1

Chapter 7
ESTIMATION: SINGLE POPULATIONS (PART 1)

Session #4, september 18
Topic: Estimation and confidence interval for the mean
Readings: Text: Sections 7.1 to 7.3 of chapter 7: Pages 264 - 282
Objectives: After completing this class, students will be able to:
 explain the difference between point estimates and confidence intervals
for estimating a population parameter
 construct and interpret confidence interval estimates for the mean
(variance known and unknown)
 describe the characteristics of Student’s t distribution.
 use the Student’s t distribution to solve business problems.

What you should know
To reach the learning outcomes of this session, you should be:
 able to identify the relevant population, sample, study units (subjects) and
variables
 able to use the normal distribution to compute probabilities
 Able to describe the sampling distribution of a sample mean (last chapter)
September, 2017 MEDITERRANEAN SCHOOL OF BUSINESS (FALL 2017-18)

Learning objectives
After completing this class, you should be able to:
 compute probabilities related to the sample proportion
 Compute probabilities related to the sample variance
 describe and use the characteristics of the chi-squared distribution

INTRODUCTION

Introduction
 What is the average number of gallons of orange juice sold weekly by a local
 grocery store?
 How satisfied are customers who use an online pharmaceutical company with
the company’s actual delivery time?
 What proportion of customers is satisfied with a new product?
 Who will win an upcoming election for the presidency of the university’s student
government association, the mayor of a city, the senator of a state, or the
president of a nation?

Estimation Process
Point estimate:
μ is estimated by 50
Random Sample
Interval estimate
Population Mean
I am 95% confident that
μ is between 40 & 60
(mean, μ, is unknown) X = 50
Sample
BUSINESS STATISTICS II (FALL 2016-17) 8

Section 1
PROPERTIES OF POINT ESTIMATORS

Estimator and estimate

Point estimator and point
estimate

Properties of a good estimator
1. Unbiasedness
2. Efficiency
3. Sufficiency
4. Consistency

Point Estimates
We can estimate a population with a sample statistic (point
parameter estimate)
n
1
Mean µ X 
n
x
i 1
i
Proportion p p̂
n
Variance σ2 s 2 1
 i  x  x 2
n  1 i 1

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

Confidence Interval Estimate
An interval gives a range of values:
◦ Takes into consideration variation in sample statistics from
sample to sample
◦ Based on observations from 1 sample
◦ Gives information about closeness to unknown population
parameters
◦ Stated in terms of level of confidence
◦ e.g. 95% confident, 99% confident
◦ Can never be 100% confident

General Formula
The general formula for all confidence intervals is:
Point Estimate ± (Critical Value)(Standard Error)

 Point Estimate is the sample statistic estimating the population
parameter of interest
 Critical Value is a table value based on the sampling distribution of
the point estimate and the desired confidence level
 Standard Error is the standard deviation of the point estimate

Confidence Level (1-)
Confidence Level
◦Confidence the interval will contain the unknown
population parameter
◦A percentage (less than 100%)

Confidence Level (1-)
Suppose confidence level = 95%
Also written (1 - ) = 0.95, (so  = 0.05)
A relative frequency interpretation:
◦ 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

Section 2
CONFIDENCE INTERVAL ESTIMATION FOR THE MEAN
(VARIANCE IS KNOWN)

Confidence
Intervals
Population Population
Mean Proportion
σ Known σ Unknown

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

 Construction of the confidence interval:
 We know the sampling distribution of X
 Find z α/2 so that
Pr c1, / 2  X  c2, / 2   1  
 x 
Pr  z / 2   z / 2   1  
 / n 
 Solve for 

Finding the Critical Value Zα/2
Consider a 95% confidence interval zα/2=±1.96
1  α  0.95 so α  0.05
α α
 0.025  0.025
2 2
Z units: Zα/2 = -1.96 0 Zα/2 = 1.96

Lower Upper
X units: Confidence Point Estimate Confidence
Limit Limit
Confidence interval estimate:
   
IC1 (  )   X  z / 2 , X  z / 2 
 n n
X
◦ is the point estimate
◦ zα/2 is the normal distribution critical value for a probability of /2 in each tail
◦ σ/ n is the standard error

Common Levels of Confidence
Commonly used confidence levels are 90%, 95%, and 99%
Confidence
Confidence Level
Coefficient, Zα/2 value
1 
80% 0.80 1.28
90% 0.90 1.645
95% 0.95 1.96
98% 0.98 2.33
99% 0.99 2.58
99.8% 0.998 3.08
99.9% 0.999 3.27
Intervals and Level of Confidence Sampling Distribution
of the Mean
/2 1  /2
Intervals x
extend from μx  μ (1-)x100%
x1 of intervals constructed
σ contain μ;
X  Zα / 2 x2
n ()x100% do not.
to
σ
X  Zα / 2
n

Interpretation
The interval is given by:
   
IC1 (  )   X  z / 2 , X  z / 2 
 n n 
 With (1-α)*100 percent probability the interval will
conatin the population mean µ
 If 1000 intervals are constructed, (1-α)*1000 intervals
will not contain µ.

Confidence Interval Example
Population has µ = 368 and σ = 15
If you take a sample of size n = 25 you know
◦ 368 ± 1.96 * 15 / 25 = (362.12, 373.88) contains 95% of the sample
means (distribution of the sample mean)
 When you don’t know µ, you use X to estimate µ
◦ If X = 362.3 the interval is 362.3 ± 1.96 * 15 / 25 = (356.42, 368.18)
◦ Since 356.42 ≤ µ ≤ 368.18 the interval based on this sample makes a
correct statement about µ
But what about the intervals from other possible samples of size 25?
BUSINESS STATISTICS II (FALL 2016-17) Chap 8-28

Confidence Interval Example
Lower Upper Contain
Sample # X
Limit Limit µ?
1 362.30 356.42 368.18 Yes
2 369.50 363.62 375.38 Yes
3 360.00 354.12 365.88 No
4 362.12 356.24 368.00 Yes
5 373.88 368.00 379.76 Yes

BUSINESS STATISTICS II (FALL 2016-17) Chap 8-29
Confidence Interval Example (continued)
In practice you only take one sample of size n

In practice you do not know µ so you do not know if the interval
actually contains µ
However, you do know that 95% of the intervals formed in this
manner will contain µ
Thus, based on the one sample you actually selected, you can be
(1-α)*100% (e.g., 95%) confident your interval will contain µ (this is a
(1-α)*100% confidence interval)
Note: 95% confidence is based on the fact that we used Z = 1.96

Example #2
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 0.35 ohms.
Determine a 95% confidence
interval for the true mean
resistance of the population

Example #2 (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 0.35 ohms.
Solution:
σ
X  Zα/2
n
 2.20  1.96 (0.35/ 11 )
 2.20  0.2068
1.9932  μ  2.4068

Example #2 (continued)
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
Chap 8-33
BUSINESS STATISTICS II (FALL 2016-17)
Chap 8-33
Application
Keller (2012), p. 347
The sponsors of television shows targeted at the children’s
market wanted to know the amount of time children spend
watching television because the types and number of
programs and commercials are greatly influenced by this
information.
As a result, it was decided to survey 100 North American
children and ask them to keep track of the number of hours of
television they watch each week

Application (continued)
From past experience, it is known that the population
standard deviation of the weekly amount of telivision
watche is σ=8.0 hours.
The telision sponsors want an estimate of the amount of
television watched by the average North American child
A confidence level of 95% is judged to be appropriate
The SPSS file « Xr10-40.sav » contains the data set

Application (continued)
 SPSS output
 Solution
IC0.95 (  )  25.62, 28.76

Section 3
CONFIDENCE INTERVAL ESTIMATION FOR THE MEAN
(VARIANCE IS UNKNOWN)

Confidence
Intervals
Population Population
Mean Proportion
σ Known σ Unknown

Do You Ever Truly Know σ?
Probably not!
In virtually all real world business situations, σ is not known
If there is a situation where σ is known, then µ is also known (since to calculate
σ you need to know µ)
If you truly know µ there would be no need to gather a sample to estimate it.

Confidence Interval for μ (σ Unknown)
If the population standard deviation σ is unknown, we
can substitute the sample standard deviation, S
This introduces extra uncertainty, since S is variable from
sample to sample
So we use the t distribution instead of the normal
distribution (we can’t construct the confidence interval
using the z formula or normal distribution)

Confidence Interval for μ (σ Unknown)
Assumptions
◦ Population standard deviation is unknown
◦ Population is normally distributed
Use Student’s t Distribution

Confidence Interval Estimate:
S
(where tα/2 is the critical value of the t distribution with n -1 degrees of freedom
and an area of α/2 in each tail) X  tα / 2
n

Student’s t Distribution
The t is a family of distributions – a unique a unique
distribution for each value of its parameter, degrees
of freedom (d.f.).
The tα/2 value depends on degrees of freedom (d.f.)
◦ Number of observations that are free to vary after sample mean has
been calculated
d.f. = n - 1

Degrees of Freedom (df)
Idea: Number of observations that are free to vary
after sample mean has been calculated
Example: Suppose the mean of 3 numbers is 8.0
Let X1 = 7
Let X2 = 8
What is X3? If the mean of these three values is 8.0,
then X3 must be 9
(i.e., X3 is not free to vary)
Here, n = 3, so degrees of freedom = n – 1 = 3 – 1 = 2

(2 values can be any numbers, but the third is not free to vary for a given
mean)
Note: t Z (approaches) as n increases
Standard Normal
(t with df = ∞)
t (df = 13)
t-distributions are bell-shaped
(unimodal) and symmetric, but
have ‘fatter’ tails than the t (df = 5)
normal. Its mean is equal to 0
0 t
t distribution – flatter in middle and have more
area in their tails than the normal distribution
◦ t distribution approach the normal curve as n becomes larger
◦ t distribution is to be used when the population variance or population Std Dev is unknown,
regardless of the size of the sample

Reading the t Distribution
t table uses the area in the tail of the distribution
◦ Emphasis in the t table is on α, and each tail of the distribution contains α/2 of the area under the
curve
when confidence intervals are constructed
t values are located at the intersection of the df

value and the selected α/2 value

Student’s t Table
Upper Tail Area
Let: n = 3
df = n - 1 = 2
df .10 .05 .025  = 0.10
/2 = 0.05
1 3.078 6.314 12.706
2 1.886 2.920 4.303
3 1.638 2.353 3.182 /2 = 0.05
The body of the table

contains t values, not 0 2.920 t
probabilities
Selected t distribution values
With comparison to the Z value
Confidence t t t Z
Level (10 d.f.) (20 d.f.) (30 d.f.) (∞ d.f.)
0.80 1.372 1.325 1.310 1.28

0.90 1.812 1.725 1.697 1.645
0.95 2.228 2.086 2.042 1.96
0.99 3.169 2.845 2.750 2.58
Note: t Z as n increases

Example #3
The owner of a large equipment rental company wants to make a
rather quick estimate of the average number of days a piece of
ditch digging equipment is rented out per person per time. The
company has records of all rentals, but the amount of time
required to conduct an audit of all accounts would be prohibitive
The owner decides to take a random sample of rental invoices.
Fourteen different rentals of ditch diggers are selected randomly
from the files, yielding the following data
31325121421311

Example #3
Use these data to construct a 99% confidence interval to estimate the average number of
days that a ditch digger is rented and assumes that the number of days per rental is
normally distributed in the population.

Example #3
s
xt
n
or
s s
x t    xt
n n
df  n  1
Solution of Example #3
x  2.14, s  1.29, n  14, df  n  1  13
 1  .99
  0.005
2 2
t .005,13  3.012
s s
x t    xt
n n
1.29 1.29
2.14  3.012    2.14  3.012
14 14
2.14  1.04    2.14  1.04
1.10    3.18
Example #4
A random sample of n = 25 has X = 50 and
S = 8. Form a 95% confidence interval for μ
The confidence interval is

Example #4
A random sample of n = 25 has X = 50 and
S = 8. Form a 95% confidence interval for μ
t α/2  t 0.025  2.0639
◦ d.f. = n – 1 = 24, so
The confidence interval is

S 8
X  t α/2  50  (2.0639)
n 25
46.698 ≤ μ ≤ 53.302

Example of t distribution confidence interval
Interpreting this interval requires the assumption that the population you are
sampling from is approximately a normal distribution (especially since n is only
25).
This condition can be checked by creating a:
◦ Normal probability plot or
◦ Boxplot

 Robustness?
 We use nonparametric techniques if the data are not
normally distributed

Application #2
Bankers and economists watch for signs that the economy is
slowing. One statistic they monitor is consumer debt,
particularly credit card debt. The Federal Reserve conducts
surveys of consumer finances every 3 years.
The last survey determined that 23.8% of American households
have no credit cards and another 31.2% of the households
paid off their most recent credit card bills. The remainder,
approximately 50 million households, did not pay their credit
card bills in the previous month

Application #2
A random sample of these households was drawn. Each
household in the sample reported how much credit card debt
it currently carries (Xr12-34.sav)
The Federal Reserve would like an estimate (with 95%
confidence) of the total credit card debt in the United States.
Assume that the random variable is normally distributed.
(Hint. Construct a confidence interval for the mean and
multiply it by the population size, 50 millions)

Application #3 (SPSS)
Select Analyze/Compare Means /One-Sample t Test…

IC0.95 (T )  50 000 000 . 15545.34, 15729.44

Checking the
normality
assumption
Curve of the normal

distribution with μ =
15137.39 and σ
=5263.144

Thank you

Chapter 7 Estimation

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MEDITERRANEAN SCHOOL OF BUSINESS

PROFESSOR: Dr. Amor Messaoud

DATE: September 2017

September, 2017 MEDITERRANEAN SCHOOL OF BUSINESS (FALL 2017-2018) 1

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An interval estimate provides more information about a population

Such interval estimates are called confidence intervals

BUSINESS STATISTICS II (FALL 2016-17) 14

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Point Estimate ± (Critical Value)(Standard Error)

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Z units: Zα/2 = -1.96 0 Zα/2 = 1.96

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BUSINESS STATISTICS II (FALL 2016-17) Chap 8-28

2 369.50 363.62 375.38 Yes

3 360.00 354.12 365.88 No

4 362.12 356.24 368.00 Yes

5 373.88 368.00 379.76 Yes

In practice you only take one sample of size n

BUSINESS STATISTICS II (FALL 2016-17) 30

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IC0.95 (  )  25.62, 28.76

BUSINESS STATISTICS II (FALL 2016-17) 36

September, 2017 MEDITERRANEAN SCHOOL OF BUSINESS (FALL 2017-2018) 37

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Use Student’s t Distribution

BUSINESS STATISTICS II (FALL 2016-17) 41

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Example: Suppose the mean of 3 numbers is 8.0

Here, n = 3, so degrees of freedom = n – 1 = 3 – 1 = 2

BUSINESS STATISTICS II (FALL 2016-17) 45

t values are located at the intersection of the df

BUSINESS STATISTICS II (FALL 2016-17) 46

2 1.886 2.920 4.303

3 1.638 2.353 3.182 /2 = 0.05

The body of the table

0.80 1.372 1.325 1.310 1.28

BUSINESS STATISTICS II (FALL 2016-17) 48

September, 2017 MEDITERRANEAN SCHOOL OF BUSINESS (FALL 2017-2018) 49