ICFAI BUSINESS SCHOOL -Bangalore

1 Semester MBA BUSINESS STATISTICS - ©RB, IBS

HYPOTHESIS TESTING

Hypothesis Testing

A statistical hypothesis is some assumption or statement, which may or may not be true about a
population or equivalently about the probability distribution characterising the given population,
which we want to test on the basis of the evidence
from a random sample.

Procedure in Hypothesis Testing

1. Formulate a Hypothesis – Set a Null

Hypothesis and Alternate Hypothesis
2. Determination of a suitable Level of
Significance
3. Determination of a suitable Test Statistic

4. Determination of Critical region

Level of Two Tail Right Tail Left Tail
Significance
0.01 (10%) ± 1.654 + 1.28 -1.28
0.05 (5%) ± 1.96 +1.645 -1.645
0.01 (1%) ± 2.58 +2.33 -2.33
5. Compute, Draw Conclusion and
Making Decision
Types of Errors
Decision State of Nature
H0 is True H0 is False
Accept H0 Correct Decision (1-α) Type II error (β)
Reject H0 Type I error (α) Correct Decision (1- β)
Hypothesis Test about a population Mean: Large samples (n≥30)
1. A company is manufacturing automobile tyres finds that tyre-life is normally distributed with
a mean of 40,000 km and standard deviation of 3,000 km. It is believed that a change in the
production process will result in a better product and the company has developed a new tyre. A
sample of 100 new tyres has been selected. The company has found that the mean life of these
new tyres is 40,900 km. Can it be concluded that the new tyre is significantly better than the old
one, using the significance level of 0.01?
2. A company is engaged in the packaging of a superior quality tea of 500 gm each. The
company is of the view that as long as jars contain 500 gm of tea, the process is in control. The
standard deviation is 50 g. A sample of 225 jars is take at random and the sample average is
found to be 510 g. Has the process gone out of control.
Hypothesis Test about a population Mean: Small samples (n≤ 30)
3. A company is engaged in the manufacture of car tyres. Their mean life is 42,000 km with a
standard deviation of 3,000 km. A change in the production process is believed to improve the
quality of tyres. A test sample of 28 new tyres has a mean life of 43,500 km. Do you think that
the new car tyres are significantly superior to the earlier one? Test the hypothesis at 5% level of
significance.
Hypothesis Test Concerning Proportion
4. A pharmaceutical company, engaged in the manufacture of a patent medicine claimed that it
was 80) effective in relieving an allergy for a period of 15 hrs. A sample of 200 persons, who
suffered from allergy, were given this medicine. It was found that the medicine provided relief to
150 persons for atleast 12 hrs. Do you think that the company’s claim is justified? Use 5% level
of significance.
5. A company engaged in the manufacture of superior quality diaries, which are primarily meant
for senior executives in the employed in Delhi use its diaries. A random sample of 800
executives was taken and it was found that 570 executives did use its diary when the survey was
undertaken. Verify the company’s claim, using 5% level of significance.
Hypothesis Test Concerning the differences between two populations mean
6. A potential buyer wants to decide which of the two brands of electric bulbs he should buy as
he has to buy them in bulk. As a specimen, he buys 100 bulbs of each of the two brands – A and
B. On using these bulbs, he finds that brand A has mean life of 1,200 hours with a standard
deviation of 50 hrs and brand B has a mean life of 1,150 hours with a standard deviation of 40
hrs. Do the two brands differ significantly in quality? Use α = 0.05
Hypothesis Test concerning the differences between two proportions
7. You obtain a large number of components to an identical specification from two sources. You
may notice that some of the components are from the supplier’s own plant in Pune and some are
from the plant located in Bangalore. You would like to know whether the proportions of
defective components are the same or there is a difference between the two. You take a random
sample of 600 components from each plant and find that rejection rate p1 is 0.015 for Pune
components as compared to p2 = 0.017 for Bangalore components. Set up the null hypothesis and
test it at 5% level of significance.
8. A company is considering two different television advertisements for promotion of a new
product. Management believes that advertisement A is more effective than advertisement B. Two
test-market areas with virtually identical consumer characteristics are selected. Advertisement A
is used in one area and advertisement B is used in the other area. In a random sample of 60
customers who saw advertisement A, 18 tried the product. In a random sample of 100 customers
who saw advertisement B, 22 tried the product. Does this indicate that advertisement A is more
effective than advertisement B, if a 5% level of significance is used?