BBA 1101 Quantitative Techniques Study Material

QUANTITATIVE METHODS: (BBA 1101)
STUDY MATERIAL
BBA 1101: QUANTITATIVE TECHNIQUES
BACHELOR OF BUSINESS ADMINISTRATION
AND
BACHELOR OF SCIENCE IN ACCOUNTING AND
FINANCE
STUDY MATERIAL FOR TEAM UNIVERSITY Page 1

Table of Contents
Preface.............................................................................................................................................5
Course Description..........................................................................................................................5
Course Outlines...............................................................................................................................6
Unit 1: Introduction.......................................................................................................................10
Statistics.........................................................................................................................................10
Statistical Terms And Concepts.................................................................................................10
The Methods Of Data Collection...............................................................................................14
The Needs Of Sampling.............................................................................................................26
The Basic Sampling Concepts...................................................................................................28
Central Location And Dispersion..................................................................................................44
Notation......................................................................................................................................45
Measures Of Skewness......................................................................................................................65
Symmetry....................................................................................................................................65
Measures Of Skewness..................................................................................................................67
Unit 3: Probability Theory.............................................................................................................72
Probability..................................................................................................................................72
Expectation......................................................................................................................................89
Mathematical Expectation..........................................................................................................91
Variance Of A Random Variable........................................................................................93
Unit 6: Distribution Theory..................................................................................................106
The Binomial & Poisson Distribution............................................................................106
Properties Of The Binomial Distribution.......................................................................107
Sampling And Tests Of Hypotheses............................................................................................109
Types Of Sample.....................................................................................................................110
Confidence Intervals...................................................................................................................115
Confidence Interval For The Sample Mean.............................................................................115
Confidence Interval For The Population Mean.......................................................................119
Estimation Theory............................................................................................................................133

Confidence Limits.................................................................................................................135
Small Samples................................................................................................................................138
The T - Distribution.................................................................................................................138
Estimation Of Population Proportions.............................................................................143
Proportions.....................................................................................................................................148
Hypothesis Testing Of Proportions...................................................................................148
Non – Parametric Tests................................................................................................................150
Regression Analysis........................................................................................................................155
Simple Linear Regression........................................................................................................156
Correlation................................................................................................................................158
Linear Programming....................................................................................................................168
Areas Of Application...............................................................................................................168
Formulating And Solving Linear Programming Problems......................................................169
Some Issues In Linear Programming.......................................................................................175
Calculus And Business Applications...........................................................................................182
Index Numbers..........................................................................................................................198
Types Of Index Numbers.....................................................................................................198
Weghted Aggregate Index Numbers.............................................................................................202
Network Analysis...........................................................................................................................207
Importance Of Network Analysis........................................................................................207
Time Analysis............................................................................................................................212
Cost Analysis...............................................................................................................................220
Appendix (Questions)..................................................................................................................223

PREFACE
Course Description
This course entails the basic and comprehensive examination of statistics, sampling techniques
statistical distribution and theory of probability. It prepares students to be able to organize,
tabulate analyze, test hypotheses and make inferences, estimation and predications from data
obtained from the field of study.
The course also explores the methods and concepts of calculus with applications to business and
economics, marginal functions, graphing, extreme values and area problems.
Course objectives
The objective of this course is to enable the learner to;
1) Present general statement in a precise and definite quantitative form.
2) Condense mass of data into a few significant figures.
3) Use figures to compare with others of the same kind.
4) Formulate and test hypotheses and develop new theories.
5) Provide helpful means of forecasting future new events.
6) Provide the basic materials for framing suitable policies to tackle economic problems.
7) This is designed to assist students in developing a sound background in descriptive
research.
Expected Learning Outcomes

Upon successful completion of this course, students will have demonstrated ability to:
1) An understanding of statistical methods used in decision-making
2) An understanding and application of statistical and mathematical models for estimation and
forecasting
3) An understanding and application of techniques used in solving optimization problems

COURSE OUTLINES
Detailed Course Description;
Unit 1: Introduction
a) Data collection
b) Definition, types, methods, (examples merits and demerits of each)
c) Sources, sampling techniques 2hrs
Unit 2: Data presentation
a) Tables, frequency distributions,
b) Graphs and charts
c) Histograms
d) Frequency polygon
e) O-gives
f) Pie-charts 2hrs
Unit 3: Probability Theory

a) Some Basic concepts of Probability
b) Sets and Events
c) Axioms of Probability
d) Statistical independence, dependence and conditional probability
e) Permutations and combinations 4hrs
Unit 4: Measures of Location
a) Arithmetic Mean (Grouped and Ungrouped data)
b) The median grouped and ungrouped data
c) The mode
d) Comparing the mean, Mode and the Median
e) Geometric mean and the Harmonic mean
f) Other measures of location; quartile, Decile, Percentiles etc 4hrs
Unit 5: Measures of Dispersion
a) The range

b) The mean (average) deviation

c) The variance and standard deviation
d) The coefficient of variation 2hrs
Unit 6: Distribution Theory
a) Normal distribution
b) Binomial distribution
c) Poisson distribution
d) Skewness
e) Kurtosis 4hrs
Unit 7: Sampling theory
a) Some basic concepts of sampling
b) Sampling distribution
c) Probability sampling techniques
d) Non-probability non-sampling techniques 2hrs
Unit 8: Hypothesis testing
a) Test of significance using large samples
b) Test of significance using some samples
c) Test of significance using probability values
d) Test of significance using proportions
e) Chi-square and goodness of fit
f) F-test and analysis of variance 4hrs
Unit 9: Linear Algebra and calculus
a) Equations – Linear, Quadratic and simultaneous
b) Functions and graphs
c) Differentiation: Role, rules, Maximum and minimum points; second derivatives, cost,
revenue and profit functions 4hrs
Unit 10: Regression and correlation Analysis
a) Regression uses,

b) Regression lines
c) Dependent and independent values
d) Interpolation and extrapolation
e) Correlation meaning and purpose
f) Correlation coefficient
g) Coefficient of determination
h) Spearman’s rank of correlation coefficient
i) Correlation versus causality. 6hrs
Unit 11: Index numbers
a) Definitions
b) Uses, limitations and construction
c) Computation and interpretation of simple index numbers
d) Time series relatives
e) Simple versus weighted averages
f) Indices computation, comparison and interpretation.
g) Published indices. 4hrs
Unit 12: Fore casting (time series analysis).
a) Definitions and types of forecasts
b) Classification of forecasting techniques
c) Moving averages
d) Exponential smoothing
e) Time series components and their interpretation 6hrs
Unit 13: Linear Programming
a) Definition
b) Meaning of decision valuables, objective function, shadow prices, constraints and
feasible region
c) Formulation of maximization and minimization problems
d) Graphical LP solutions

e) Simplex method –formulation

f) Interpretation of solutions. 6hrs
Unit 14: Network analysis
a) Activity, events, dummy activities, critical path, float, cost slopes
b) Drawing networks and ghantt charts
c) Time analysis
d) Cost scheduling
e) Crashing
f) Activity on modes
g) Use of computers in network analysis. 6hrs
Unit 15: Decision theory
a) Expectation
b) Decision rules
c) Decision trees
d) Redundancy 4hrs
Total lecture hours 60
Mode of assessments
Course work test 1 10%
Course work test2 30%
Final exam 60%
Total 100%
Teaching Methods
 Lectures
 Group and class discussions and presentations
 Role modeling
 Tutorials
 Case studies/Field Trips

Unit 1: Introduction
STATISTICS
Statistical Terms and concepts.

There are several terms that are used extensively in the field of business statistics. Amongst them
are the following.
Data.
This is a term you have come across time and time again so far, but what does “data”mean?Data
is simply a scientism term for facts,figures,information and measurements. Examples of data are
incomes of families, marks scored in an examination, number of goals scored by each football
team in the super division in a given season, the profit after tax of a company for the past five
years and so on. Before the data obtained from statistical surveys or investigations have been
worked on, they are known as raw data is written down in ascending or descending order, then it
is called ordered data. If the ordered data is arranged in arrays of rows or Columns, then it is
known to be presented in an ordered array.
Attribute.
An attribute is a non measurable characteristic that an individual or object has either got or not
got. Forexample, an individual is male or female, dark or light skinned, and so on. There is no
measure of how male or how female somebody is and therefore sex and other non measurable
characteristic of individuals and objects are attributes.
Variable.
A variable is any characteristic which can be measured and can assume different values.
Forexample, the heights, ages, and weight of persons are all variables because they can be
measured according to some scale and can assume different values for different persons. There
are two types of variables, namely, discrete variables and continuous variables.

Discrete variables
A discrete variable is one that can only take on finite or countable or whole number values
within a given range. Examples of discrete variables include, goals scored by a football team,
shoesize, number of children in a family and so on.
Continuous Variables.
A continuous is one whose values can theoretically take on an infinite number of values within a
given range of values. Continuous variables are measured rather than being counted.
Forexample, the height of a child may be any of the infinite number of points between, lets
say,40 inches and 40.2 inches.
Random variable.
This is phenomenon of interest in which the observed outcomes of an activity are entirely by
chance, are absolutely unpredictable and may differ from response to response. Forexample,
lottery drawings are considered to be random variables since each number has exactly the same
chance of being picked up. A random variable may be qualitative or quantitative in nature.
Qualitative Random Variables.
These yield categorical responses so that the responses fit into one category or another.
Forexample, a response to a question such as “Are you currently married” Fits in the category of
either “yes” or “no”.
Qualitative Random Variables.
These yieldnumericalvariables. Forexample, responses to such questions as, “How many

children are there in your family? Quantitative random variable can either be discrete
quantitative random variables or continuous quantitative random variables.

Discrete Quantitative Random Variables.
These yield responses which are whole number values. Forexample, number of people attending
a workshop, number of mangoes in a basket and so on.
Continuous quantitative Random variables.
These yield responses that are values which are measured but not counted. Examplesare, heights
of models in beauty contest, weights of people on a weight loss program and so on.
Population
In statistical terms, this refers to the totality of things, objects and persons under consideration.
Forexample, if we are interested in knowing the percentage of adult Ugandan travelers who go to
America annually, then all those adult Ugandans who travel abroad became our population.
Sample
A sample is a portion of the total population that is considered for study and analysis. it is
selected in such a way so as to be representative of the population. forinstance, if we want to
study the income of a pattern of lecturers at Makerere university and are 500 lecturers, then we
may take a random sample of only 50 lecturers out of the entire 500 lecturers for the purpose of
our study. Then this number of 50 lectures constitutes a sample.
Sampling.
This is the process of selecting a sample from the population. It is technically and economically
not feasible to take the entire population for analysis.
A random sample.

It is a collection of items selected from the population in such a way that each item in the
population has exactly the same chance of being selected as any other, so that the sample taken
from the population is truly representative of the population. Forexample, if we want to take a
random sample of 10 persons from a group of 30 persons, then each of the 30 must have the
same chances of being selected into the sample. A true random sample should be free from all
biases whatsoever.
Statistical Data.
Data for statistical purpose is of two types,i.e.Primary and secondary data depending from the
source from which it comes.
Primary Data.
These are data that are collected afresh and from the first time from the source. Primary data is
collected for a specific purpose or study or inquiry. Primary data are always original character.
Primary data is either survey data, if it is obtained in an uncontrolled situation by asking
questions or making observations or it is experimental data, if its obtained in a controlled
situation by making experiments.
Secondary Data.
This is data that has already been collected and has also passed through the statistical process. It
can be sourced from newspapers, journals, magazines, Reports, books and so on. The advantage
of using secondary data is that;
- it is reasonably cheap to obtain and to use and a relatively faster than the primary data.
But it is also disadvantageous in the following ways.
- In case of any arrears in it. Search errors may be passed on to other users of the data.
- It may have been collected for a different purpose from that of the current users, which
may cause the results to be faulty.
In practice, it is preferred to use the primary data whenever possible because of the following
reasons.

- Secondary sources may contain mistakes due to errors in transcription made when the
figures are being copied from their primary sources.
- Primary sources include definitions of terms and units used. this makes the data more
user friendly.
-
The characteristics of statistical units are,
a. The units of measurement must be definite and specific.

b. The units must be of such a nature that they can be correctly ascertained.
c. The units must be homogeneous and uniform.
d. The units must be stable.
e. The units must be appropriate for the purpose of the inquiry.
- Primary source give data in details. Secondary sources often omit part of the information
or combine categories.
- Primary sources often include a schedule or questionnaire and a description of the
procedure used in selecting the sample when collecting the data. This enables the user to
ascertain how much confidence may be put in the finding of the study.
-
The methods of data collection.
The methods of collecting primary and secondary data differ because primary data are original
from the source where as for secondary data; the nature of data collection is merely a work
compilation.
The collection of Primary data.
There are various methods of collecting primary data but the most important ones are;
i. Observation method
ii. Interview method
iii. Questionnaire method
iv. Through schedules.
v.
The Observation Method.
Under this method, the information is sought by way of the investigators or the enumerators own
direct observation without asking questions to the respondents or the sampling units of interest.
This method is particularly suitable in studies which deal with respondents who are not capable
of giving verbal reports of their feelings for one reason or another and in other inquiries which
do not involve verbal expressions like, Agriculturalsurveys. Observation can take on the
following terms;

i. Structured observation vs. Unstructured observation,

ii. Participant observation Vs non –participant observation,
iii. Disguised observation.
iv. Controlled Vs Un-controlled observation.
Structured Observation.
This is where the observation is characterized by a careful definition of units to be observed, the
style of recording the observed information, standardized conditions of observation and the
selection of pertinent data for observation.
Unstructured Observation.
This is the observation that takes place without the above characteristics of structured
observation first being sought in advance.
Participant observation.
This is when the observer, observes by making himself/herself, more or less a member of the
group he is observing, so that he can experience what the members of the group experience.
NonParticipantObservation.
This is when the observer, observes as a detached emissary without any attempt on his or her part
to experience through participation in what others feel.
Disguisedobservation.
This is when the observer is observing in such a manner that his presence may be unknown to the
people he is observing.
Controlledobservation.

This is the observation that takes place according to definite pre-arranged plans, involving
experimental procedure. It involves the use of mechanical (precision)instruments as aids to
accuracy and standardization.
Uncontrolledobservation.
This is observation that takes place in a natural setting. Here no attempt is made to use precision
instruments. The major aim of this type or observation is to get a spontaneous picture of life and
persons.
Theadvantagesofobservationmethod.
i. It eliminates subjective bias.

ii. The information obtained under this method relates to what is currently happening
and therefore it is not complicated by either past behavior or future intentions or
attitudes.
iii. Non response errors are never encountered since it is independent of the respondents
willingness to respond.
iv. It is free from errors due to memory lapse(forgetting) because the enumerator records
everything as he sees it.
The disadvantages of Observation method.
i. It is an expensive and time consuming method.

ii. The information provided by the method is very limited.
iii. It may be interfered with by unforeseen factors.
iv. Some groups of people are rarely accessible which creates an obstacle for this method
to collect data collectively.
v. It is not always feasible, especially when observation of human behavior is involved
because people have a tendency of changing their behavior during the process of
observation.
The interview method.

This is a method of data collection where the investigator or the enumerator is brought into
contact with the respondent and asks him(her) questions about the subject under study. The
method can be used in two ways, that is,
i. Personal interviews
ii. Telephone interviews.
Personal Interviews.
This is a method that requires a person who is known as the interviewer to ask questions
generally in a face to face contact to the other person(interviewee) or
persons(interviewee).sometimes the interviewee may ask some questions and the interviewer
responds to them, but usually it is the interviewer who initiates the interview and collects the
information. personal interviews are of any of the following forms.
i. Direct personal investigations

ii. Indirect oral investigations.
iii. Structured Vs Un structured interviews.
iv. Focused interviews
v. Clinical interviews
vi. Non-directive interviews.
Direct Personal Investigations.
This is where the interviewer has to collect information personally from the concerned sources.
he or she has to be on the spot and has to meet the people from whom data have to be collected.
This method particularly is suitable for intensive investigations.
Indirect Oral Investigations.
This is where the interviewer has to cross-examine other persons who are supposed to have
knowledge about the problem under investigation and the information obtained is recorded.
Most of the commission of inquiry appointed by the government make use of this method to
carry on their investigations.

Structured Interviews.
These are interviews, which involve the use of set of pre determined questions and highly
standardized techniques of recording. The interviewer follows a rigid procedure laid down,
asking questions in a form and order prescribed.
Unstructured Interviews.
These are interviewscharacterized by a flexibility of approach in questioning. These interviews

do not follow a system of predetermined questions and standardized techniques of recording
information. Unstructured interviews demand deep knowledge and greater skill on the part of the
interviewer.
Focused interviews.
These are interviews meant to focus attention on the given experience of the respondent in the
field of inquiry. Under the focused interview, the interview has the freedom to decide the manner
and sequence in which the questions would be asked and has also the freedom to explore reasons
and motives.
Clinical interviews.
These are interviews concerned with the broad underlying feelings or motivations or with the
course of individual’s life experience. The method of getting information under this interview is
left to the interviewers discretion.
Non-Direct Interviews.
In these interviews, the interviewers function is simply to encourage the respondent to talk about
the given topic with a bare minimum of direct questioning. The interviewer often acts as a
catalyst to encourage a comprehensive expression of the respondents feelings and beliefs about

the topic. Despite the variations in interview techniques, the major advantages and limitations of
personal interview can be discussed in a general way.
The Advantages of the personal interview method.
i. More information can be obtained and in a greater depth.

ii. Interviewer by his skill can overcome theresistance, ifany, of the respondents.
iii. There is greater flexibility under this method as the opportunity to restructure
questions is always there, especiallyin case of unstructured interviews.
iv. Personal information can as well be easily obtained under this method.
v. Non-response is generally low, since the interviewer is brought into contact with the
respondents.
vi. The language of the interviewer can be adopted to the ability or educational level of
the person interviewed and as such misinterpretations concerning questions can be
avoided.
vii. The interviewer can collect supplementary information about the respondent’s
personal characteristics and environment which is often of great value in interpreting
results.
viii. The interviewer may catch the respondent off-guard and thus may secure the most
spontaneous reactions than would be in the case if a mailed questionnaire is used.
ix. The interviewer can control which person(s) will answer the questions. This is not
possible In the mailed questionnaire approach.
x.
The limitations of the Personal Interview Method.
i. It is an expensive method especially when a large and widely spread geographical

sample is taken.
ii. It is subject to both interviewer and respondent bias. Bias is the extent to which an
answer is altered in meaning by some action or attitude either on part of the
interviewer or respondent.
iii. Certain types of respondents such as important officials or executives or people in
high income groups may not be easily approachable under this method and to that
extent the data may prove inadequate.
iv. This method is relatively more time consuming, especially when the sample is large
and also when re calls upon the respondents are necessary.
v. The presence of the interviewer on the spot may over simulate the respondent,
sometimes even to the extent that he may give imaginary information just to make the
interview interesting.
vi. Selection, training and supervising the field staff is more complex with formidable
problems.

vii. Interviewing at times may introduce systematic problems.
The Basic Requirements for Carrying Out a Successful Interview.
Interviewing is an art governed by certain scientific principles:
i. Interviewers should be carefully selected,trained and briefed.

ii. Interviewers should be honest,sincere,hardworking,impartial and must possess the
technical competence and other necessary practical experiences.
iii. Occasional field checks should be made to ensure that interviewers are neither
cheating nor deviating from the instructions given to them to do the job efficiently.
iv. Some provisions should be made in advance so that appropriate action may be taken
if some of the selected respondents refuse to cooperate or are not available when an
interviewer calls upon them.
v. Every effort should be made to create a friendly atmosphere of trust and confidence,
so that respondents may feel at ease while talking to and discussing with the
interviewer.
vi. The interviewer must ask questions properly and intelligently and must record the
responses accurately and completely.
vii. The interviewer must answer legitimate question(s), if any, asked by the respondent
and must clear any doubt that the respondent has.
viii. The interviewer should not show surprise or disapproval of a respondents answer but
must keep the direction of interview in his own hand, discouraging irrelevant
conversation and must make all possible effort to keep the respondent on track.
Telephone interview.
This is a method of collecting data by contacting respondents on telephone. It is not a very

widely used method, but plays an important part in industrial surveys, particularly in developed
regions.
The advantages of Telephone Interviews.
i. It is faster than any other methods I n obtaining the required data.

ii. It is cheaper than personal interviews since the cost per person is relatively low and
no field staff is required.
iii. Recall is simple since callbacks are simple and economic.
iv. Non response is generally very low.
v. Replies can be recorded without causing any embarrassments of the respondents.

vi. At times, access can be gained to respondents who otherwise cannot be contacted for
one reason or the other.
The limitation of telephone interviews
i. Little time is given to respondents for considered answers. This is because the
interview period is not likely to exceed five minutes in most cases.
ii. Interviews are restricted to respondents who have telephone facilities only.
iii. Cost considerations may restrict extensive geographical coverage.
iv. It is not suitable for intensive surveys where comprehensive answers are required to
various questions.
v. Possibility of bias of the interviewer is relatively more.
The questionnaire method.
This is a method of data collection where a questionnaire is sent(usually by post) to the persons
concerned, with a request to answer the questions and return the questionaire.the questionnaire
consists of a number of questions printed or typed in a definite order on a form or set of forms.
Thequestionnaire is mailed to respondents who are expected to read and understand the questions
and write down the reply in the spaces meant for the purpose in the questionnaire itself. The
respondents have to answer the questions on their own. This method of collecting data is quite
popular, particularly used in the case of big enquiries like economic and business surveys.
The advantages of theQuestionnaire Method.
i. It is relatively cheaper even when the population is large and widely spread
geographically.
ii. It is free from interviewer bias, since the answers are in the respondents own words.
iii. It gives respondents adequate time to give well thought answers.
iv. Respondents, who are not easily approachable, can also be reached conveniently.
v. It makes it possible to get correct information about sensitive issues, since people fill
the questionnaires privately.
vi. Large samples can be considered, which makes the results more dependable and
reliable.
The disadvantages of questionnaire method.

i. Bias due to non response is often indeterminate because of the low rate of return of
dully filled questionnaires.
ii. It can be used only when the respondents are educated and cooperative.
iii. The control over the questionnaire may be lost once it has been sent.
iv. There is in built inflexibility because of the difficulty of amending the approach once
the questionnaires have been dispatched.
v. A wrong respondent may fill in the questionnaire there by biasing the results.
vi. It is difficult to know whether willing respondents are truly representative.
vii. The method is likely to be the slowest of all since people fill in the questionnaire at
their own pace.
The Basic Considerations when Designing a Questionnaire.
It should be noted that, the quality of data collected using the questionnaire method depends on
the nature of the questionnaire used. This therefore makes the preparation of the questionnaire
and enumerators instruction manual very important aspects of data collection using this method.
The following factors need to be considered when designing the questionnaire.
i. Respondents should be assured that the information they provide will be treated in
utmost privacy, otherwise they might not be in position to give the correct
information.
ii. Questions asked should be in logical order for example, are you married? How old is
your wife/but not the other way round.
iii. The size of the question are should be kept minimum, that is the questionnaire should
be comparatively short and simple.
iv. Questions should proceed in a logical sequence, moving from easy to more difficult
questions and personal or intimate questions should be avoided in the questionnaire.
v. Technical terms and vague expressions capable of different interpretations should be
avoided in the questionnaire.
vi. Questions affecting the sentiments of the respondents should be avoided
vii. Adequate space for answers should b provided in the questionnaire to help editing
and tabulation.
viii. There should always be provision for indications of uncertainty, for example “do not
know”, “no preference” and so on.
ix. Brief direction with regard to filling up the questionnaire should invariably be given
in the questionnaire itself.
x. Questions may be dichotomous (yes or no answers), multiplechoice (alternative
answers listed) or open ended. But the open ended questions are often very difficult to
analyze and hence should be avoided in the questionnaire as much as possible.

xi. There should be some control questions in the questionnaire, which indicate the
reliability of the respondent. The control questions, thus introduce a cross check to
see whether the information collected is correct or not
xii. The physical appearance of the questionnaire affects the cooperation the researcher
receives from the recipient and as such an attractive looking questionnaire,
particularly in mail surveys, is a polus point for enlisting cooperation. The quality of
paper, along with its color must be good so that it may attract attention of the
recipients.
The collection of data through schedules.
This method of data collection is very much like the collection of data through the
questionnaires, with little difference that lies in the fact that schedules(the profoma containing
the set of questions) are filled in by the enumerators or investigators who are specially appointed
and trained for the purpose. These enumerators together with the schedules go to the
respondents, put to them the questions from the profoma in the order questions are listed and
record the replies in the space meant for the same in the profoma.
The collection of Secondary Data.
Secondary data is data that is already available. It also refers to the data which have already been
collected and analyzed by someone else. Secondary data may either be published data or
unpublished data.Souces of published data include.
i. Various publications of the central, state and local government.

ii. Various publications of foreign governments or of international bodies and their
subsidiary organizations.
iii. Technical and trade journals.
iv. Books magazines and newspapers.
v. Reports and publications of various associations connected with business and
industry, banks, stock exchanges and so on.
vi. Reports prepared by research scholars.
vii. Published records and statistics, historical documents and other sources of published
information.
Basic considerations when using Secondary Data.

The researcher must be very careful when using secondary data. By way of caution,
theresearcher, before using secondary data, must see that they possess the following
characteristics.
i. Reliability of data
Finding out such things about the data, can test its reliability.
- Who collected the data?

- What where the sources of the data?
- Was data collected with a proper collection method?
- When was the data collected? Was there any bias of the compiler?
- What level of accuracy was desired?
- Was the accuracy achieved?
ii. Suitability of data.

The data that are suitable for one inquiry may not necessarily be found suitable in another
inquiry, Hence if the available data are found to be unsuitable in another inquiry. Hence if the
available data are found to be unsuitable, the researcher should not use them. Suitability can be
tested by careful scrutiny of the definitions of various terms and units of collection used at the
time of collecting the data from the original primary source.
The objectives, scope and nature of the original inquiry must also be studied. Therefore if the
researcher finds differences in these; the data will remain unsuitable for the present inquiry and
should not be used.
iii. Adequacy of data.

If the level of accuracy achieved in data is found inadequate for the purpose of the present
inquiry, they will be considered as inadequate and should not be used by the researcher. The data
will also be considered inadequate if they are related to an area that may either be narrower or
wider than the area of the present inquiry.
The selection of an appropriate method of data collection.
There are various methods of data collection as already seen above. As such the researcher must
carefully select the method (s0 for his own study. The following factors should be kept in mind
when selecting an appropriate method of data collection.

i. Nature, scope and objective of the inquiry.

This is the most important factor affecting the choice of a particular method. The method
selected should be such that it suits the type of inquiry that is to be conducted by the researcher.
This factor is also important in deciding whether the data already available (secondary data) are
to be used or the data not yet available (primary data) are to be collected.
ii. Availability of funds.

The availability of funds to a large extent determines the method to be used for the collection of
data. When funds at the disposal of the researcher are very limited, he will have to select a
comparatively cheaper method although it may not be as efficient and effective as some other
costlymethods. Finance, infact, is a big constraint in practice and the researcher has to act within
the limitation.
iii. Time factor.

Availability of time has also been taken into account when deciding a particular method of data
collection.Some methods take relatively more time, whereas with others the data can be collected
in a comparatively shorter duration. The time at the disposal of the researcher, thus, affects the
selection of the method by which the data are to be collected.
iv. Precision required.

Precision required is yet another factor to be considered at the time of selecting the method of
collecting data.
Definition.
Sampling refers to the process of obtaining information about the entire population by examining
only part of it.This is done by selecting some items from the target population that are then
studied. These selected items are the ones that constitute what is technically called a sample. The
items in the sample must be representative of the population in relation to the characteristics
understudy so as to be able to get more valid and reliable conclusions about the entire target

population. The process or technique of selecting such items to constitute the sample is called the
sampling design.
The Needs of Sampling.

Sampling is used in practice for a number of reasons that include the following.
i. Sampling saves time and money.This is because a sample study is usually less
expensive than a complete study and produces results in a relatively shorter time
period.
ii. Sampling gives more accurate results than a complete inquiry. This is because
accuracy maybe lost because of the larger size of the population in the complete
inquiry.
iii. For those investigations, which require destruction of items under satudy, sampling
remains as the only choice.Example, such investigations may include discovering the
quality of eggs in a basket, the strength of textile materials and others.
iv. When sampling is used, it is easier to follow up cases of non-response as compared to
a complete inquiry
v. When the population under study is infinite, the only way to get information
regarding it is by sampling because records about all its elements will not be
available.
vi. Respondents may be willing to give detailed information when they know they
represent only a small part of the population, which increases the scope of inquiry.
vii. Sampling errors can easily be estimated, assessed and controlled unlike complete
inquires where errors cannot easily be determined.
viii. Sample surveys require fewer field staff. This can ease the hiring of better qualified
enumerators, their training and more accurate supervision. The total effect of all these
factors will be an increase in the reliability and accuracy of the data collected from
sample surveys.
ix.
The Limitation of Sampling.
The usefulness of sample surveys becomes questionable under the following circumstances;

i. When the information required relates small area. This is because, proportionally
large samples are always required, sampling in this case will be as expensive as a
total inquiry, and therefore it will be less useful.
ii. When the overhead costs associated with the sample survey are high. These costs are
normally due to the sample selection procedure and control measures when sampling
is undertaken.
The Need for a Complete Inquiry About the Population.
Sometimes complete inquiries about the target population may be preferred to sample surveys
because of the following reasons.
i. They provide bench mark data used for planning, social and economic development.
examples of these complete inquiries include,
-population and housing census.
-Agricultural censuses.
-Census of business establishments.
ii. When the target population is very small such that a sample survey is as costly as a complete
inquiry.
iii.complete inquiries do not suffer from sampling errors.
They are also preferred in situations where cost and time considerations are secondary factors.
The Limitation of Complete Inquiries.
i. Because of their extensive coverage of the population under study,complete inquiries

are extremely expensive in terms of money and time required in collecting and
analyzing data.
ii. Census data is normally untimely.This is because the processing of data takes a long
time and by the time the census results are out they are no longer up todate, to meet
the steadily increasing and changing data needs for planning in the inter censual
years.
iii. Census is limited in scope. This is because the questions asked in census are normally
simple, brief pre-coded to save on the costs of data collection and tabulation.
iv. Census data is limited in accuracy. This is because being a grand operation involving
a large number of people some of the people employed may not be very skilled and
adequately trained in the techniques of data collection and recording.also the
supervision of such a large number of people is difficult which may also cause bias in
the census results.

The relationship between complete inquiries (census) and sample surveys.
i. Sample surveys can be used as a substitute for census. This usually happens when
census are either too expensive or impractical especially when the population is
infinite.
ii. Sample surveys can be used to pretest census that are going to be carried out. In such
a case, sample sample surveys are known as pilot surveys.
iii. Sample surveys can be used to supplement census data. Administering two
questionnaires does this, where a long questionnaire is administered to the proportion
of the population, say 10% of the population
iv. Sample surveys can be used in census tabulation works. This is done because census
results take long to be processed; analysed and published Sampling methods are
therefore used to tabulate only a fraction of the total units enumerated in a census so
that advance estimates of the basic census results are obtained.
v. Census materials like census maps, previuous census results and other materials are
used as a basis for sample surveys carried out between censuses as supplementary
aids in the sample selection process.
The Basic Sampling Concepts.

i. The Universe or Population.
This refers to the total number of all items inthe field of inquiry about which information is
required. The population or universe can either be finite or infinite. A finite population is one
that consists of a fixed number of elements. It is possible to enumerate this population in totality
if it is not too large. An infinite population is that population in which it is practically impossible
to observe all its elements, and thus it cannot be completely enumerated in a reasonable period of
time.
ii. Thesampling Unit.

This refers to every available unit in the target population from which a sample is going to be
drawn. It can be an individual personaestablishment, ahousehold, a village depending on the
sampling design adopted.
For example if the researcher wanted to know the response of Maker ere University
Studentsabout the university policy on retake costs, every student in this University will be a
sampling unit.

iii. Statistics and Parameters.

A statistic is a characteristic of a sample where as a parameter is a characteristic of a population.
Forexample, when we find the mean, mode and the median for a sample, they are referred to as
statistics. Sample statistics are also known as estimates the population parameters. But if such
measures describe the characteristics of the entire population, they are known as parameters.
iv. The sampling Frame.

This refers to complete list or file of distinct and distinguishable units of the universe or
population, from which the sample is to be drawn. The sampling frame is a means of access to
the target population from which a sample is drawn. Thebasic requirement for a sampling frame
is that it must show the definite location,address,boundary or set of rules by which to identify
any sampling unit selected or drawn from the population, using this sampling frame.
Types of frames.
There are two types of frames;
i. List frames, for example, BBA II students at MUBS.

ii. Area frames, forexample, plots of land in Nakawa division.
Sources of Frames.
The source of frames include,previous censuses of population and housing, Tax payers lists,
Votersregisters, Land commissions in case of agricultural research and students registers.
Defects of Frames.
Most frames are defective especially in developing countries because of the following reasons.
i. Poor cartographic work. This problem arises because of shortage of qualified

cartographic staff, difficulties in obtaining physically identifiable boundaries and also
due to lack of maps.
ii. Problems of identifying units. This arises because of,

a. Lack of addresses and other identification particulars

b. Similarity of names of places and people.
c. Change of names of places and people
d. Mobility of units due to migration
e. Out-datedness.
iii. .The sampling design.

This refers to the technique or the procedure adopted in selecting the sample from which
inferences about the population are to be drawn
The basic principles of sample survey Design
There are two basic principles of sample survey designs.
a. Principle of validity.
The principle of validity states that, “Asample should be selected in such a way that an objective
interpretation of the simple results is possible.”This principle is satisfied by the selection of a
random sample.
b. Principle of Optimization.
This principle states that, “when carrying out a sample survey, you either maximize efficiency at
a given cost or minimize cost for a given efficiency”.Where, efficiency is defined as a function
of time and money spent on data collection and processing from the sampling units.
iv. The sampling error.

This is the difference between the statistics derived from a sample and the parameters that would
have been obtained from a complete enumeration. Sampling error is also known as sampling
variability or error of variance. The amount of sampling error depends on;
a. The size of the sample.

b. The extent of the variability of the population.

c. The sampling design used.

d. The way, in which results are calculated, forexample, are they rounded off, ifso, to what
extent and so on?
e. Sampling error can also be due bias of the investigator.
Such bias may take the form of;
a. Deliberate selection of the sample

b. Replacement of a unit actually in the chosen sample by another
c. Failing to enumerate all units in the sample.
d. The sampling of frame used.
v. ARandom Sample.
This is a sample selected in such a way that, every sampling unit in the target population has the
same chance as every other sampling unit of being included or excluded in a sample being
selected. It is very important in reducing bias when carrying out sampling.
vi. .Precision.
This refers to a measure of divergence between the sample result and the expected value of a
particular characteristic by the enumerator.
vii. Accuracy or Reliability

This refers to a measure of divergence between the sample result and the true value of the
characteristic.
viii. Standard Error.

This refers to the standard deviation calculated from the sampling distribution of a given statistic.
Notethat, the sampling distribution of any statistics has its own mean, standarddeviation, and
moments and so on.

Sampling Designs
There are two types of samples that can be used to make inferences about population
characteristics.
- Random or Probability or Scientific samples.

- Non Random or Non Probability or Judgment samples.
Random sampling design.
This is a sampling design in which the sampler does not influence the composition of the
required sample but is obtained by some chance mechanism after assigning the sampling units in
the target population equal probabilities of selection.
Examples of random sampling designs include
i. simple random sampling

ii. stratified sampling
iii. systematic sampling
iv. cluster sampling
v. multi stage sampling
The advantages of random sampling
i. Its sample results are objective and the inferences based on them are valid.
ii. The sampling errors involved in the estimation of the population characteristics can be
estimated and can also be controlled.
iii. When biased estimation procedures are used, the extent of bias can be estimated.
iv. Since the sample is objective and unbiased, it is defensible before the superiors or before
the courts of law.
v. The sample results can be assessed in terms of reliability and the sample can be accepted
or rejected on a consideration of the extent to which it can be considered representative.
Non Random Sampling.
This is a sampling design where the sampler influences the composition of sample.
Examples of non random sampling designs are;
i. Quota sampling

ii. Area sampling

iii. Deliberate or purposive sampling
iv. Convenience sampling
v. Judgment sampling.
The Advantage of Non-Random Sampling.
 It is not affected by problems of non-response since substitution of units in the selected

samples can be done at will.
 It does not require more amount of time and much money to execute since it permits the
investigator to do what he/she feels is viable.
 It is based on personal judgment and as that it can be easily changed to suit the situation
at hand.
 It requires a lesser level of technical skills and experience in sampling.
 It is easy to choose.
The limitations of non Random Sampling.
It is subjective and hence inferences based on it are questionable
Simple random sampling
This method of sampling is also known as unrestricted random sampling, or chance sampling. It
is a method of sampling where every elementary unit for sampling has the same probability of
being included or excluded in the sample as any other element of the target population. Simple
random sampling is of two types,
 Simple random sampling with replacement where the same unit of the population may
occur more than once, in the sample.
 Simple random sampling without replacement where the same population unit cannot
occur more than once in the sample.
The methods of selecting a simple random sample.
There are several ways of selecting a simple random sample, but we shall discuss two that are
commonly used.
i. The gold fish bowl method.

ii. The random sampling numbers method.

The Gold Fish Bowl Method.
Suppose there are N units in the population and a sample size,n,is required.
The procedureisasfollows;
i. Assign each of the N items a number from 1 to n.

ii. Put the number given on each unit on a card, ball or piece of paper. These articles
must be identical
iii. Put these cards or pieces of paper, in a dish or bowl and shake or shuffle them
thoroughly.
iv. Draw an article at random without replacement and note the number on it
v. The unit bearing that number will be selected in the sample
vi. Continue to process until the required sample size, n, has been selected and then
interview the units selected.
The random sampling Numbers Method.
In this method a table of random numbers is used to select the elements in a sample.
The Underlying Assumption of the Above Methods.
The above methods are both based on the following assumptions;
i. The population is homogeneous

ii. Sampling is without replacement since no unit can be interviewed more than once.
The Application of Simple Random sampling.
The simple random sampling method, whether gold fish bowl or random digit method can be
used if;
i. The sampling unit can be easily identified.

ii. The population is small and homogenous.
iii. When sampling is without replacement.
The Limitations of Simple Random Sampling.

i. It is expensive and time consuming if the population is large because of the necessity
of numbering all the items.
ii. The sample might not be representative of the population if the items close to each
other are more homogeneous than those far apart.
Stratified Sampling Method.
This is a method of sampling where the population is divided into non-overlappinggroups (or
strata) according to the different characteristics of the population. Within each stratum are placed
items that are more homogeneous with respect to the characteristics to be studied are measured.
From each stratum a sub sample is taken in proportion to the size of that stratum in the whole
population by the simple random sampling procedure where the overall sample is obtained by
combining the samples for all strata. The sample obtained by this method is known as the
stratified random sample.
Example 3(Stratified sample)
Suppose we wish to find the average height of a group of people where the group consists wholly
of men. Here a simple random sample would be appropriate, becausethe population is
homogeneous. But if the group consists of men and women, the population is no longer
homogeneous in as far as height is concerned since women are on the average shorter than men.
Because of the variability in the heights of the two groups, wedraw a stratified random sample.
Then suppose we wish to find the average height of a group of people where the group consists
wholly of men. Here a simple random sample would be appropriate, becausethe population is
homogeneous. But if the group consists of men and women, the population is no longer
homogeneous in as far as height is concerned since women are on the average shorter than men.
Because of the variability in the heights of the two groups, wedraw a stratified random sample.
This method is most effective in handling heterogeneous population.
The Advantages of Stratified Random Sampling.
The cost of conducting the actual sampling tends to be less as compared to simple random
sampling because of administrative convenience.

The data were more heterogeneous within each stratum than in the population as a whole. This is
due to reduced variability within each stratum that therefore leads to increased precision and
accuracy of the sample results.
When stratified sampling is used, separate estimates of population parameters can be obtained
for each stratum without additional sampling
The limitation of stratified random sampling
i. Prior knowledge of the relevant population characteristics needed for stratifying purposes
may not be available.
ii. There is need for sampling frame for each stratum that may also not be available or costly
to obtain.
Systematic Sampling.
This is a sampling method that involves the selection of sampling units at equal intervals, after
all the sampling units have been arranged in some order.
The advantages of systematic sampling.
It is easier to perform and hence it is less subject to interviewer errors
It often provides greater information per unit cost.
The limitations of systematic sampling.
If the sampling frame follows a systematic order with increasing or decreasingmagnitudes, then
the sample selected may not be representative.
Cluster sampling.
This is a simple sampling method in which each sampling unit is a collection of cluster elements.
This sampling method is particularly useful if the population is scattered in a wide geographical
area. It involves dividing the target population into groups or clusters, then obtaining a sampling
frame that lists all the clusters in the population.
The requirement for cluster sampling.

i. The elements within a cluster should be close to each othergeographically, in order to

minimize or reduce travel expenses when conducting interview.
ii. Elements within a cluster should not be close to each other geographically, but should
also have similar characteristics as much as possible.
iii. Clusters should also not be too large in size in relation to the population size though
the number of clusters in the sample should be reasonably large.
The application of cluster sampling
Cluster sampling is an effective design for developing a specified amount of information at a

minimum cost to obtain.
The cost of obtaining information increases as the distance separating the elements increases.
The two stage Cluster sampling and Multi-Stage Sampling.
This is further development of the idea of cluster Sampling.
This is where the required sample is divided into a number of groups called quotas, each
containing a definite number of elements, saypeople, to be interviewed, but without indicating
definite people. These quotas are chosen so that the sample reproduces a number of the different
characteristics of the population. In this sampling scheme the final selection of the actual people
to be interviewed in each quota is normally left to the interviewer without restricting him or her
to any form of randomness. Although instructions can be given to the investigator to avoid
excessively unrepresentative selection of items to the quotas, it is impossible to avoid bias.
The limitation of Quota Sampling Design.
i. A part from bias within the quotas, there are other weaknesses in this sampling design
which include the following.
ii. It may be difficult to determine the basis for forming quotas that are more relevant to
subject of inquiry.
Deliberate Sampling.
This is also known as purposive sampling. This is a method under which items for the sampling
are selected generally on the basis of a certain pre-determined Criteria.
This technique is meant for big inquires extending to a considerably large geographical area like
an entire country.
Two Stage Cluster Sampling

Two stage cluster sampling involves.
i. Obtaining a frame listing all clusters in the population.

ii. Drawing a simple random sample of clusters using simple random sampling
procedures already discussed.
iii. Sub-dividing the selected clusters into smaller clusters and obtains a frame listing all
these smaller clusters.
iv. Taking a random sample of these clusters and interviews all the elements in the
sample of smaller clusters obtained.
But if several stages of random sampling are taken before the final selection of actual elements
for interview, the result is called Multi-Stage Sampling.
The disadvantages of Deliberate Sampling.
i. The deliberate selection of sampling units introduces personal bias

ii. Inferences drawn under this method are not capable for further statistical treatment.
Convenience sampling.
This is a sampling method that involves selection of elements into a sample based on the ease of
access to these sampling units. Forexample, if a researcher wanted to get data about the teaching
methods in university, he may select a fixed number of students to whom he/she is easily
approachable and interview them. Although the method is easy and quick, it may give very
biased results especially where the population is not homogeneous.
Judgment sampling
This is a method where the researchers Judgment are used for selecting items that he considers to
be representative of the population under study.
Judgment sampling is used quite frequently in qualitative research where the aim is to develop
hypothesis rather than to draw conclusions about the population.
Area sampling.
This is closer to cluster sampling and it is appropriate when the total geographical area of interest
happens to be too big. The total geographical area is divided into a number of smaller non-over
lapping areas and then some of the smaller areas are selected. All units of the selected areas
constitute the sample. The method generally makes field interviewing efficient and is suited in
inquiries to be conducted over a large area, and where the list of the concerned population is not
available.

Errors in Sampling.
When data are obtained from a sample of a population, the analysis is faced with the problem of
determining to what extent those sample data represent the picture of the entirepopulation,
bearing in mind that sample data are only estimates of what a census would have shown. In
analyzing sample data, two types of errors must be kept in mind.
i. Sampling errors
ii. Non-Sampling errors,.
Sampling Errors.
As earlier defined, sampling error, also known, as sampling variability, is the difference between
statistics derived from the sample and parameters that would have been obtained from complete
enumeration. In practice, we cannot determine what a complete count would yield, and therefore,
the true sampling error cannot be measured precisely. The causes of sampling errors were
discussed earlier and such errors can be controlled either by increasing the sample size or by
changing the sampling design.
Non- Sampling Errors.
These are systematic errors that arise both in census and in sample surveys although they are
more pronounced in censuses.
When a complete count or census of the population is taken, the data obtained is often regarded
as the true depiction of that population. Sampling errors.Therefore, Non-Sampling errors are
defined as thedifference between parameters obtained from complete count and the desired or
“true value”. On-sampling errors tend to increase with the size of the operation.
The Causes of Non-Sampling Errors.
Non-sampling errors are caused by many factors that include the following.
i. Poor designed questionnaires.

ii. Defective sampling frames.
iii. Conceptual problems, thatis, how a person understands the question.
iv. Inadequate skilled enumerators and supervisors.
v. Response problems like misunderstanding the questions.
vi. Non response problems.
vii. Physical environment.
viii. Pool cartographic work.
ix. Language problems

x. Problem of measurement and processing.

Types of non sampling errors.
These are four major types of non-sampling errors, namely;
i. Coverage errors
ii. Non-response errors
iii. Content errors
iv. Processing errors.
Coverage Errors.
These refer to the difference between the units actually enumerated and the units that should
have been enumerated.
Coverage errors are caused by several factors;
i. Failure to include all those who should be included which is called under counting.
ii. Inclusion so some persons or units who should have been excluded from the
population are beingenumerated. Forexample, when collecting statistics on industrial
employment, some non-industrial people, say agricultural employees, may be
erroneously enumerated as well, this may cause errors in the results.
iii. Defects in the sample design. This may be due to;
a. An Incomplete-sampling frame is which leads to under representation.
b. Under or over representation of certain subgroups, or including some units more than
once especially when using a sample frame constructed as a composite of several lists
where some units appear or more than one list.
iv. Problems of identifying housing Units.
v. Geographical problems.
vi. Problems of identifying and defining the population to be enumerated.
Non-response errors.
These occur in both census and sample surveys. On-response errors may take the following
forms:
i. Complete non-response to the questionnaire.

ii. Non response to particular items in the questionnaire.
Non-Response is caused by the following factors.

i. No contacts, where people are ever absent whenever the enumerator calls.
ii. Refusals, where some people are unwilling to cooperate due to various reasons ranging
from a sense of privacy, fear of the government up to outright stubbornness.
iii. When respondents are willing, but unable to respond due to some barriers like illness,
illiteracy or a language problem.
iv. Non-response to individual items may be caused either by lack of knowledge or refusal to
answer specific questions.
Techniques for adjusting Data for Non response.
In the case of non response errors, several statistical techniques exist where by adjustments can
be made to compensate for errors.
i. Imputation.
This is a useful technique in cases of items non-response. It involves the use of data reported by
other respondents as a substitute for the missing iems.This can be done in two ways.
Hot decking.
This is where the substitute data is obtained from the records of randomly selected respondent
with similar characteristic as those of thenon-respondent.
Cold decking.
The substitute data is obtained by averaging the responses from all respondents with
characteristics similar to the respondent whose record is incomplete.
ii. Non interview Adjustment.

In the case of non response to the entire questionnaire by a respondent, a non-interview
adjustment is applied to the estimator.
This factor is the sum of responses and non-response divided by the responses.
The use of this factor “blows-up” the estimate to the desired sample size
It should be noted that, bothimputation and non-interview adjustments may themselves introduce
non-sampling error, since in both techniques it is assumed that non respondents are similar to
respondents, which may not be the case.
iii. Follow-up.

Sometimes a special follow up survey of non-respondents is used to attempt to measure this

effect and/or to obtain the missing information.
Content Errors.
These are also known as reporting errors or response errors. They are errors due to incorrect
information. They occur in a number of ways and for a number of reasons.
i. Sometimes the respondent gives incorrect information because of lack of knowledge

about the situation.
ii. In some instances a wrong respondent may be interviewed.
iii. Some content errors occur because the respondent is not sufficiently motivated to
answer accurately.
iv. Others occur because of definitional misunderstanding or because of
misinterpretation of the question.
v. The questionnaire design is another important factor that causes content error. Too
many questions may lead to respondent fatigue, too few questions may result into
incomplete information, unclear wording may lead to misinterpretation and
difficulties with definitions, a confusing format may cause a response to be recorded
incorrectly or in a wrong place on the form.
vi. Insufficient training and instruction of enumerators likewise contributes to content
errors.
The types of content Errors.
Content errors are of two major types.
i.Telescoping.
This is where a respondent places an event within a wrong reference period yet it occurred before
or after the stated reference period. Telescoping can also happen when a respondent fails to
report an event occurred within the reference period because he thinks it occurred earlier or later.
Telescoping occurs in both sample surveys and censuses. For example,
-In a fertility study, a woman might report incorrectly the birth years of her children.
-In an employment survey, a person may say he has not worked since six months when his actual
period of unemployment is shorter or longer.
-In an expenditure survey, a family may report having purchased an item within a reference
period when it was actually acquired earlier or later.

This is another kind of content error and is particularly………about occupation or other

attributes that relate to status in the community. Some respondents tend to upgrade or inflate
their responses to such questions. This maybe done in order to impress the interviewer.
Processing Errors.
These are the errors that occur as the data is recorded, edited and tabulate. Recording errors that
occur when an enumerator enters the wrong information are one type. Another type may occur
during editing, when an editor either changes an entry that was correct in the first place, or fails
to correct an entry that is wrong. Some processing errors occur because of mistakes in coding or
classification. These errors may also occur in preparing the tabulations or analysis and
publication.
Technique for measuring Non-sampling errors.
The Study of non-sampling errors and their effects is an area of statistics in which much research
is being done and still needs to be done.
There are,however,several techniques that can be used to estimate the magnitude and effect of
non-sampling errors of different types.
i. Examination of data.
The analyst can often spot internal inconsistancies in a batch of data just by careful examination
of data.He can draw on his experience,judgement and knowledge of theory to evaluate whether
the data are consistent with what one might expect.However,judgement and theoretical
expectation are not sufficient for the quantification of non-sampling errors,but they are certainly
helpful in alerting the analyst about the possible existence of such errors.
ii. Re-interview.
This involves the selection and revitalization of a sample of respondents, and the reconciliation
of their responses between the original census or survey and the re-interview.re-interviews can
be used to spot both respondent error and interviewer error. Occasional discrepancies usually
indicate respondent error where as consistent discrepancies involving the work of one
enumerator usually indicates interviewer error.
iii. Balancing equation.

This involves comparison of data with similar data obtained elsewhere. There are numerous
examples of this technique.

Data with which to operate a balancing equation usually comes from administrative souirces, like
births and death registrations and immigration records.
Techniques for Minimizing Non-Sampling Errors.
i. Non sampling error can be reduced by careful planning and design of the survey.
ii. Attention should be paid to the questionnaire design.
iii. Carrying out presets can help to spot potential problems in time that are corrected
before the full-scale collection effort gets underway.
iv. Careful selection and thorough training of enumerators is also very important.
v. Placing more resources in areas where under enumeration is most severe can reduce
coverage errors.
vi. Care should be taken to ensure accuracy in sampling frames.
vii. Effective publicity campaigns may also reduce non-response.
CENTRAL LOCATION AND DISPERSION

Introduction
We saw in previous chapters that the use of tables and charts can help by giving a visual
impression of patterns and trends in data. Meaning can also be given to the original (raw) data by
calculating various measures of central location (average) and dispersion (spread of data around
the average).
Answers to the ‘self – check questions’ responses to each ‘pause for thought’ and answers to the
review questions’ can be found at the end of the book.
Objectives
When you have read this chapter you should be able to:-
i) Understand and use simple short-hand notation widely used in statistics.
ii) Identify and calculate the various measures of central location, such as arithmetic
mean, median, and modes;
iii) Find measures of central location for both ungrounded and grouped data;

iv) Be aware of the circumstances under which the various measures of central location
will be similar and under which they will differ.
v) Identify and calculate the various measures of dispersion, such as range, interquartile
range, mean deviation, variance and standard deviation.
vi) Find measure of dispersion for both ungrouped and grouped data;
vii) Understand and interpret measures which combine aspects of central location and
dispersion such as the coefficient of variation.
Notation
At least three types of average are in common use when seeking to describe raw data, namely
arithmetic mean, median and mode. The formulae used in their derivation (and indeed
elsewhere) make use of a type of notation with which you should become familiar.
⅀ = Greek letter sigma = sum of
when applied to some variable Xi the values of the variable which are to be summed are indicated
by the numbers imposed below and above the sigma sign. For example, suppose Xirefers to the
scores from the throws of a dice, and we wish to sum (add together) the scores on the first three
throws, we would write:
3
∑ X 1+ X 2 + X 3
i=1
= 3 + 5 + 1 (say)
Measures of central location
A number of measures of central location or ‘average’ are widely used in an attempt to give
meaning to raw data. Here we consider the arithmetic mean, media and mode for both ungrouped
data (all individual items known) and grouped data (items only identified within class intervals).

The arithmetic mean
This is the simple average of everyday use, and is often represented by the symbol X.
Ungrouped data
Where individual or ungrouped data are available, the following formula is commonly used:
∑ Xi
X= i=1
n
Where X = arithmetic mean
Xi = value of each item of data
n = number of items of data
suppose the daily takings of a small corner shop are as shown below
Mon Tue Wed Thur Fri
Daily Sales £620 £660 £600 £480 £710
Solution
Using the formula:
n
X
X=∑ 1 i=1
=
X 1 + X 2 + X 3 + X 4 + X 5 620+660+ 600+ 480+710 3,070
= = =£ 614
5 5 5 5
The average daily sales are £614 and this represents a typical figure around which the rest of the
data will cluster.
Grouped data

Data are grouped into a frequency table with various class intervals. To deal with such data the
simplifying assumption must be made that within any given class interval the items of data fall
on the class mid – point. This is equivalent to assuming that the items of data are evenly spread
within any given class interval
We may now make use of the following formulae;
∑ F1 X 1
F1 X + F 2 X +… F j X
i=1
X= 1 2 j
j
=
F 1 + F 2+ … … F j
∑ F1
i=1
Where Fi = Frequency of ith class interval
Xi= Mid – point of ith class interval.
j = number of class interval
Suppose that a survey of the prices of 60 items sold in a shop gives the results below (five class
intervals for prices):
Price of items (£) Number of items sold

1.5 – 2.5 15
2.5 – 3.5 2
3.5 – 4.5 19
4.5 – 5.5 10
5.5 – 6.5 14

Solution
We can use our formula for grouped data to calculate the average (arithmetic mean) price of the
items (see table below).
Price of items (£) Class mid – points Xi Number of items sold Fi FiXi
1.5 – 2.5 2 15 30
2.5 – 3.5 3 2 6
3.5 – 4.5 4 19 76
4.5 – 5.5 5 10 50
5.5 – 6.5 6 14 84
5 5
∑ F 1=60 ∑ F 1 X 1=246
i=1 i=1
∑ F1 X 1 246
X= i=1
5
=
60
=4.1
∑ Fi
i=1
In other words the average price of the items sold in the shop was £4.10 pence.
The median
This is that value which divides the data set into two equal halves; 50 per cent of values lying
below the median, and 50 per cent of values lying above the median. The approach we consider
below uses arithmetical methods for estimating the median value for both grouped and

ungrouped data.
Ungrouped data
To find the median;
i) Construct an array (i.e. place the data in numerical order – whether rising or falling).
n+1
ii) Find the median position where n = number of values.
2
iii) Find the median value.
Find the median value of machine output over a five day period
Daily output
310 340 360 320 330
Solution
Step 1 Place in array 310 320 330 340 360
n+1
Step 2 Find the median position using the equation where n = the number of values.
2
5+1
Median position = = third item.
2
Step 3 Read the value of the third item in the array, i.e. 330 units
Note: Where there is an even number of items there will be two middle items. If so, take the
average of these two middle items.

Grouped data
The following steps can be used to calculate arithmetically the median value for data presented
in a frequency tables:
- Find the median position,
- Find the class – interval in which the median observation lies.
- Assume that all items in this class interval are equally spaced.
- Estimate the median.
Example
Find the median height of students from the data given in the table below;
n+1
Median position =
2
20+1
=
2
= 10.5
The class interval in which this median position lies is 170 – 175
Xi Fi
Heights (cm) Frequency (number of students)
150 and under 155 1
155 and under 160 1
160 and under 165 2
165 and under 170 3
170 and under 175 6
175 and under 180 2
180 and under 185 4
185 and under 190 1
20
The median value can be found using the formula;

LCB + Class width x
number of observations ¿ median position ¿

total number of observations∈median class interval
Where LCB = lower class boundary (of median class interval)

3.5
Median = 170 cm + (5cm x ¿
6
Median = 172.9 cm
Figure below gives a visual picture of the use of our formula in finding the median height;
Cumulative 7 10.5
frequency
3.5 13
(students)
175cm
(UCB)
Height 170cm 173.5 cm
(LCB) Median position
The class interval in which the median position falls has a lower class boundary (LCB) of 170cm
and an upper class boundary (UCB) of 175cm, giving a class width of 5cm. Now the cumulative
frequency up to the LCB is seven students, which is less than the median position which occurs
with a cumulative frequency of 10.5 students.
Clearly the median value is larger than 170cm as we wish to go a further 3.5 students
(observations) to reach the median position. However there are six students assumed to be
equally spaced along this class interval of 5cm. we therefore wish to go 3.5 / 6ths of the way

along the 5cm interval in order to find the median height. This gives the formula:
3.5
170 cm + (5cm x ¿ = 172.9cm which we noted above.
6
The mode
This is that value which occurs with greatest frequency. When data are grouped, then the class
interval with the highest frequency is referred to as the modal class interval. In the table above
170 – 175cm is the modal class interval, with six students in the interval.
Normal and Skewed distribution
When the set of data is distributed in a perfectly symmetrical way, as in figure above, then all
three types of average have the same values. Such a symmetrical distribution is often referred to
as a normal distribution. However when, as is more usually the case, the set of data is skewed
in one direction or another, as in figures above and then the three types of average will cease to
be identical. In fact the arithmetic mean will always be most heavily influenced by the direction
of skew, i.e. the direction being described by the tail of the distribution, which represents the side
of the distribution with fewest observations. In other words, the arithmetic mean will be most
affected by a few extreme values, whether higher values (skewed to the right) or lower values
(skewed to the left).
Normal and skewed frequency distributions and measures of central location
Median
Mode
Mean Mode
Median
Mean
Mean Variable Variable (Xi) Variable (Xi)

Median (Xi) c) Negativity skewed
Mode a) b) Positively skewed distribution (skewed to
b) a) Normal distribution distribution (skewed to right) left)
When data are skewed to the right or left, you must be careful in interpreting any loose talk of
‘average’ values. For example if the distribution of wages in a firm is skewed to the right, as in
figure above, the employers might claim an ‘average’ wages of, say £180 per week and the trade
union an ‘average’ wage of, say £160 a week and both might be right! However the employers
may be selecting the type of ‘average’ (arithmetic mean) most favorable to showing them as a
high paying company and the union may be selecting the type of average (median) most
favorable as a basis for pressing for higher wages.
The following distribution shows the weekly output of production workers in the company;
Output (units) Number of employee

100 – 160 1
160 – 180 10
180 – 200 35
220 – 240 55
240 – 260 74
260 – 300 20
200
i) Find the arithmetic mean of the weekly output.

ii) Find the median weekly output.

iii) Why do (i) and (ii) differ?

Solution
i) Since we are dealing with grouped data we must take class mid – points for the
variable Xi. We then use the formula:
∑ Fi X i
i=1
X= j
∑ Fi
i=1
Where Fi= Class Frequency
Xi= Class mid – point
j = number of class intervals
Xi Fi FiXi
(class mid points) (class frequency)
130 1 130
170 5 850
190 10 1,900
210 35 7,350
230 55 12,650
250 74 18,500
280 20 5,600
7 7
∑ F i=200 ∑ F i X i=46,980
i=1 i=1

∑ F1 X 1 46,980
X= i=1
7
=
200
=234.9
∑ F1
i=1
The arithmetic mean of the weekly output is 234.9 units.

n+1 201
ii) The median position = = =100.5 employees
2 2
The median class interval for output is 220 – 240 units, as shown in figure below;
Cumulative
frequency 100.5
(employees) 51
49.5 106
5.5
Output 220 240
(LCB) ? (UCB)
Median position
Using our formula for the median, and assuming an equal spacing of the 55 employees along the
median class interval of 20 units of output, we have:
LCB + Class width x
number of observations ¿ median position ¿

total number of observations∈class interval
i.e.
49.5
Median = 220 + (20 x 55 ¿=238 units
iii) The arithmetical mean output (234.9 units) is lower than the median output (238

units). We would expect this to be the case since the data are clearly skewed to the
left. It is similar to figure above and the arithmetic mean (simple average) will be
pulled down by the few extremely low values.
QUESTIONS
1. Passenger cars produced for export (X1) in thousands in each month during the past
year were as follows;
69.3 75.5 76.3 94.4 88.7 77.2 86.4 75.5 79.0 83.3 82.2 78.1
a) What is the value of Xi when:
i) i=4
ii) i=7
iii) i = 10
b) what is the mean monthly production of cars?
c) What is the mean monthly production of cars over the final six months?
d) What is the mean monthly production of cars during months 4 – 9 inclusively?
2. The following figures show the annual salaries is £s of 20 workers in a small firm.
Calculate the arithmetic mean, median and mode salary and comment on your
results:
15,180 19,870 14,375 15,767 15,870 15,180 14,375 36,938

15,180 46,132 15,525 19,600 14,375 23,069 16,767 16,767
17,880 14,375 14,375 14,375

3. An investment analyst receives the following table of data showing the percentage
changes in labour costs of senior managers in a multi – national company over a 12
month period. The highest change observed was +172 per cent for a senior manager
in one of the plants in Latin America.
Percentage Change Frequency

- 5 to Under 0 2
0 to under 5 32
5 to under 10 25
10 to under 15 10
15 to under 15 8
20 to under 25 3
25 to under 30 2
30 to under 35 5
35 to under 40 4
40 to under 100 3
100 to 172 4
a) What is the mean annual percentage change in labour costs for senior managers
in this company?
b) What is the estimate of the median value?
c) What is the modal class interval?
As well as measures of central tendency or average, it is helpful to have a measure of the extent
of dispersion or spread around that average. The formulae and brief outlines for the most widely
used measures of dispersion are presented here.
As we can see in figure below, two distribution showing the prices of items sold in a shop may
have similar measures of central location but may be very different in terms of dispersion around
any ‘average’. Clearly distribution B is more widely dispersed than distribution A around the
same arithmetic mean X.

Range perhaps the simplest measure of dispersion is to take the absolute difference between the
highest and lowest value of the raw data. In figure below, the range for distribution A is £30, but
the range for distribution B is higher at £50.
Interquartile range: This is the absolute difference between the upper and lower quartile of the
distribution. We saw how to calculate these quartile.
Interquartile range = upper quartile – lower quartile
Fi
No. of
items B A A B
Xi(Price in £S)
0 10 X 40 50
Semi – Interquartile range: This is half the Interquartile range. It is sometimes called the quartile
deviation.
upper quartile−lower quartile

Semi – Interquartile range =
2
All measures of dispersion considered so far have involved comparing two different points on the

respective frequency distributions, such as the maximum and minimum points (the range) or the
upper and lower quartile (the Interquartile range). We now turn to more useful measures of
dispersion which compare all the points on the respective frequency distributions.
Mean deviation
This is the average of the absolute deviations from the arithmetic mean, ignoring the sign. Of course
if we did not ignore the sign, the average deviation from the arithmetic mean would always be zero!
When two straight lines (rather than curved brackets) surround a number or variable it is referred to
as the modulus and means ignore the sign.
The mean deviation is only rarely used as a measure of dispersion. However, it is worth some
consideration as it is the basis for the more widely used measures of variance and standard deviation.
Ungrouped data
Suppose three throws of a dice yield the following values;
X1 = 2, X2 = 4, X3 = 3
Clearly the arithmetic mean X, is 3. To find the mean deviation (MD) we need to find the average
deviation from the mean, ignoring the sign.
X 1 + X + X 2 + X + X 3− X
MD =
n
[ 2−3 ] + [ 4−3 ] + [ 3−3 ]

MD = = [−1 ] + [ +1 ] + ¿ ¿
3
2
On average, each score on the three throws of the dice is of a unit away from the average score of
3
3.
Mean deviation with ungrouped data

More generally MD =
∑ X 1− X
i=1
n
Where= modulus (i.e. ignore the sign)
n = number of observations
Grouped data
If we return to our example of the price of 60 items bought in a shop, we can now use the mean
deviation to give a measure of dispersion. We noted that average price (X) was £4.1 per item
sold. We now apply the formula for mean deviation with grouped data:
Mean deviation with grouped data
∑ Fi X i−X
i=1
MD = j
∑ Fi
i=1
WhereFi= class frequency
Xi= class mid – point
X= Arithmetic mean
= Modulus (i.e. ignore sign).
Solution
Price of item Class mid – point Number of items

(£) Xi Fi Xi - X Fi X i - X

1.5 – 2.5 2 15 - 2.1 -31.5

2.5 – 3.5 3 2 - 1.1 -2.2
3.5 – 4.5 4 19 - 0.1 -1.9
4.5 – 5.5 5 10 0.9 9.0
5.5 – 6.5 6 14 1.9 26.6
60 71.2
Note: X = 4.1
∑ Fi X − X i
71.2
i=1
MD = 5
= =1.19
60
∑ Fi
i =1
The average deviation from the arithmetic mean price is £1.19 per item.
Variance
If we square all the deviations from the arithmetic mean, then we no longer need to bother with
the signs since all the values will be positive. We can then replace the straight line brackets
(modulus) for the mean deviation with the more usual round brackets.
The resulting measure is now called the variance, when can then be regarded as the average of
the squared deviations from the mean. Note that all the units are squared, e.g. square pounds,
square meters, etc.
Ungrouped data
Variance for ungrouped data
n
Variance (S2) = ∑ ¿¿ ¿
i=1

Solution
X=
∑ Xi 120
i=1
= =15
n 8
Xi (Xi - X) (Xi –X)2

8 (-7) 49
10 (-5) 25
12 (-3) 9
14 (-1) 1
16 ( 1) 1
18 ( 3) 9
20 ( 5) 25
22 ( 7) 49
168
8
168
2
S = ∑ ¿¿ ¿ = =21 square units
i=1 8
Variance (S2) = 21 square units
Grouped data
The formula for calculating the variance when data are grouped is as follows;
Variance for grouped
∑ Fi ( X 1−X 2 )
i=1
Variance (S2) = j
∑ Fi
i=1
Where Fi= class frequency
Xi = Class mid – point

X = arithmetic mean
However it can be shown, that this formula simplifies to the following;
Variance for grouped data: operational formula
j j
2
Variance (S ) = j
∑ Fi
i=1
−
( )
∑ Fi X i ∑ F i X i
i=1 i=1
j
∑ F1
i=1
∑ Fi X 1
2 i=1
Variance (S ) = j
−¿
∑ F1
i=1
This is a useful formula for finding the variance since we will already have found the second
term when calculating the arithmetic mean.
Let us apply this formula to our earlier problem involving prices of items sold in worked
example.
Price of item Class mid – point Number of items

(£) Xi Fi FiXi Fi X2
1.5 – 2.5 2 15 30 60
2.5 – 3.5 3 2 6 18
3.5 – 4.5 4 19 76 304
4.5 – 5.5 5 10 50 250
5.5 – 6.5 6 14 84 504
60 246 1,136

❑ ❑ 2
( )
2
∑ Fi X i ❑ ∑ Fi Xi
s2
= ❑
❑ – ❑
❑
∑ Fi ∑ Fi
❑ ❑
❑
1,136 246
2
s=
60
−
60 ( ) =18.9−¿
s2 = 2.1 square pounds
j
Note: ∑ F i X i
2
= F i X i2 + F 2 X i2 +…….. F j X j2
i=1
In other words the square is only on the Xi term and not on Fi Xi.
We can obtain the column F i X i2by either multiplying the FiXicolumn by the corresponding Xi or
by multiplying the Ficolumn by the correspondenceX 12. Check this yourself in the table above.
Standard deviation
Rather than use square units, it is more realistic to express solutions in terms of single units. The
standard deviation does this by taking the square root of the variance.
The standard deviation (s) is then the square root of the average of the squared deviations from
the mean. The following formula applies to both ungrouped and grouped data:
Standard deviation = √ variance
i.e. s = √ s2
we can use our earlier data on 20 student heights to illustrate the calculations of both the variance

and the standard deviation as measures of dispersion.
Height (cm) Number Fi Mid – points FiXi F i X i2

Xi
150 and under 155 1 152.5 152.5 23,256.25
155 and under 160 1 157.5 157.5 24,806.25
160 and under 165 2 162.5 325 52,812.50
165 and under 170 3 167.5 502.5 84,168.75
170 and under 175 6 172.5 1,035 178,537.50
175 and under 180 2 177.5 355 63,012.50
180 and under 185 4 182.5 730 133,225.00
185 and under 190 1 187.5 187.5 35,156.25
20 3,445 594,975
∑ Fi X i 3,445
i=1
X= 8
= =172.25 cm
20
∑ Fi
i=1
8 8 2
2
s =
∑ Fi X
i=1
8
∑ Fi
i=1
2
i
–
( )
∑ Fi X i
i=1
8
∑ Fi
i=1
2
594,975 3,445
s2=
20 –( 20 )
MEASURES OF SKEWNESS
SYMMETRY
Symmetry refers to a situation where there is regularity, balance, equilibrium, evenness and

proportionality within the distribution.
In a symmetrical distribution, the mean, mode and median are equal as illustrated in the figure
below.
(i) Histogram
ii) frequency polygon
ASYMMETRY (SKEWNESS)
Where there is lack of symmetry in a distribution, skewness exists. The reason for this is that

the mode, mean and median have differing values. There two categories of skewness
exhibited by distributions and these include:
i) Negative skewness
ii) Positive Skewness
These are explained as below;
(i) Negative skewness
In a negatively skewed distribution, the tail of the distribution is pulled in the negative
direction.
In such a situation, Mean <Median <Mode; Where <is a symbol for "less than"
(i) Frequency Polygon
Mean Mode Median
When distributions are skew, the median generally lies between the mode and the mean, and
the following relation is satisfied;
Mean - Mode = 3 (Mean - Median)

MEASURES OF SKEWNESS
Measures of skewness study the degree of departure from symmetry of any given
distribution.
There are basically three relative mathematical measures of skewness and these include;
Karl Pearson's coefficient of skewness

This measures skewness on the basis of measures of central tendency that include the mode,
the mean and median plus the standard deviation (measure of dispersion) and the formula is
given by;
mean−mode
Sk = standard deviation
If mean> mode, the skew is positive.

If Mean <mode, the skew is negative,
If Mean = mode, the skew is zero and the distribution is symmetrical.
Alternatively;
Pearson's coefficient of skewness = 3 (Mean - Median) .
Standard deviation
The above equation implies that skewness can take any value between 3 and - 3.
Example;
The table below shows marks scored by 125 employees in an aptitude test.
Marks 25-28 28-29 29-30 30-31 31-32 32-33 33-34 34-35 35 - 40

Frequency 6 12 27 30 18 14 9 4 5
Draw a histogram to represent this data and compute the following:
(a) The median

(b) The mean
(c) Standard deviation
(d) Pearson's coefficient of skewness
(e) Comment on the skewness of this distribution.
Solution
(a) Median = 30.6
(b) Mean = 30.892
(c) Standard deviation = 2.219
Skewness= 3 (Mean - Median)

Standard deviation
= (30.892 - 30.58) = 0.42 (2dps)
2.219
Since skewness> 0, the distribution is positively skewed.
Now illustrate using the graphical method by constructing a histogram and frequency
polygon on a graph paper.

From your respective graphs, you should be able to observe that the histogram and the
frequency polygon further confirm that the distribution is skewed to the right i.e. positively
skewed.
The Quartile coefficient of skewness
Another measure of skewness is defined in terms of the quartiles. This measure of skewness
was forward by Bowel and is also referred to as the Bowel’s coefficient of skewness. It
measures skewness of a distribution basing on the relative positions of the median, the upper
plus the lower quartiles denoted by Q3 and Q1 respectively.
In this regard therefore, the coefficient of skewness is given by;
Sk = (Q3 – Q1) - (Q2 – Q1) = (Q3 – Q2)

Q3 – Q1 Q3 – Q1
Illustrations
(i) Symmetry Distributions
Q3 - Q2 = Q2 – Q1
Quintile Skewness = 0
Example
31 students tried to estimate the length of a line. The line was actually 60mm long. These are

their results in millimeters.
61 70 46 44 26 23 83 30 52 61 44 61 49 37 59 63 58 29 31 37 48 76 31
46 41 38 49 52 56 38 61 75
i) Find the median and the quartiles of this distribution and use the quartiles to estimate
the skewness.
Draw a histogram with equal class intervals to represent the data.
Solution
The frequency distribution table below shows a class width of 10.
Class
Length /mm Boundary F C.F
20-30 3 3
30-40 7 10
40-50 8 18
50-60 5 23
60-70 4 27
70-80 3 30
80-90 1 31
∑f=31
(a) Numerical Method
Ql = 37 Q3 = 61
J
Q3 – Q1 = 61 - 48 = 13
Q2 – Q1 = 48 – 37 = 11
Since Q3 – Q1>Q2 - Q1, the distribution is positively skewed.

Furthermore,
Quartile coefficient of skewness = (Q3-Ql) - (Q2-Ql

Q3-Ql
= 13 - 11
61- 37
= 0.083 (3dps)
This further confirms the positive skew.
Kelly's coefficient of skewness
Kelly's coefficient of skewness is also referred to as the Percentile coefficient ofskewness and it
measures skewness basing on the percentiles of the distribution, i.e. the 10 th and 90th percentiles
and the median or 50th percentile of the distribution.
Since percentiles are also positional averages like quartiles, Kelly's measure of skewness is also
applicable in situations as those of Bowel's measure.
It is given by;
Sk = P90 + P10- P50
P90 – P10
Where;
P90is the ninetieth (90th) percentile
P10is the tenth (10th) percentile

P50is fiftieth (50th) percentile
UNIT 3: PROBABILITY THEORY

PROBABILITY
Statistical inference and the testing of hypothesis involve the concept of chance or probability.
The word probability has been defined in several ways but the simplest definition is to state the
probability is the proportional frequency of occasions on which some stated event occurs.
Definition
If an event can happen in A ways and fail in B ways, all possible ways being equally likely, the
A B
probability of its occurring is and of its failing is
A +B A +B
Thus a probability number is the ratio of the number of favorite events to the total number of
events, and it is therefore necessary that we are able to enumerate events in order to arrive at a
probability number.
Probability
Probability is the chance or likelihood that an event will occur
The probability of an event is a number between 0 and 1. A probability cannot be less than zero
nor take on a value greater than 1. If you are certain that the event must occur then its probability
is equal to 1. On the other hand if you are extremely sure that the event cannot occur, then its
probability is O. Any other probability figure must lie between 0 and 1.

The probability of an event happening will be represented by
P(Event),
Thus, 0≤ p(x) ≤1
The probability of an event not happening will be represented by
P(Event’)
Suppose we toss a die. What is the probability
(i) Of obtaining a 4?
[ii] Of obtaining a 4 or a 6?
[iii] Of obtaining an odd number?

(iv) Of 3 not appearing?
Solution
Total number of outcomes = 6

The outcomes are: 1, 2, 3,4,5,6.
i) P(4) = 1
6
ii) P(4 or 6) = P(4) + P(6)
=1+ 1+ 2 =1
6 6 6 3
iii) P(odd number) = P(l or 3 or 5)
= P (l) + P(3) + P(5)

=1 + 1+1
6 6 6
=3 = 1
6 2
P (3not appearing) = P(3)
= 1 – P (3)
=1–1 =5
6 6
This is also obtained by P (getting any other number except 3); i.e.
P(3 not appearing) = P(1l or 2 or 4 or S or 6)

= P(l) + P(2) + P(4) + P(5) + P(6)
=1+1+1+1+1 + 5
6 6 6 6 6 6
Theorems of Probability
So far we have been dealing with a single event at a time. However most problems in probability
involve two or more events which lead us to two useful theorems. Therefore we state the
theorems to distinguish between two sets of events, mutually exclusive events and independent
events.
Definition: Two events A and B are mutually exclusive if they cannot occur at the same time.
This simply means that one event occurring excludes the other from occurring. A simple
example is when one tosses a single coin. A single coin can only show one face. The event
"falling heads uppermost” excludes the event "falling tails uppermost".
Definition: Two events A and B are independent if the occurrence of one event does not affect the
occurrence of the other event. If one event is a coin falling heads uppermost, and the other is
drawing a seven of hearts from a pack of playing cards, then the two events are clearly
independent. The fact that your coin has fallen heads uppermost does not mean that therefore you
cannot draw a seven of hearts from a pack of playing cards.

The theorem we are going to state, Theorem 1, generally, applies to any two events.
Theorem 1: If A and B are any two events, then
P(AUB) = P(A) + PCB) - p(A∩B)
Inparticular for mutually exclusive events,
P (A∩B) = ф
Hence for mutually exclusive events, Theorem 1 reduces to
P (AUB} = P (A) + P (B)

Equation 1 may be represented in a Venn diagram as in Fig 7.1 below.
A B
The two events do not intersect. From the Venn diagram we can conclude that
and Ă∩B = B
A∩B=A

Example
Suppose two dice are tossed, let A be the event that the sum is an odd number and B is the
event that the sum is a prime number. What is P (A U B)?
Solution
These events are not mutually exclusive since some odd numbers are also prime numbers. Hence
we use equation.
P (A U B) = P (A) + P (B) – P(A∩B)
Using table 1.1 we have

18
P (A) = P (Sum is odd) = 36
15
P (A) = P (Sum is prime) = 36
14
P (A ∩ B) =
36
18 15 14 19
Hence; P (AU B) = + − =
36 36 36 36
This can be verified by actual counting as follows;
The prime numbers in the sample space are;
2,3,3,5,5,5,57,7,7,7,7,11,11
These are 15 elements in the sample space. The odd numbers which are not prime are: 9,9,9,9
These are 4 elements in the samples space.

Total = 15 + 4 = 19 elements
Thus; P(A n B) = 19as the formula shows

36
Example
When two dice are tossed, what is the probability of getting a sum of 3 or a sumof 5?
Solution
These events are mutually exclusive since a sum of 3 and a sum of 5 cannot both occur on the
same toss.
P (sum is 3) = 2
36
P (Sum is 5) = 4
36
Using equation above we have
P(Sum is 3 U Sum is 5) = 2 + 4
36 36
=6 =1
36 6
Example
If A and B are mutually exclusive events and PCA) = 0.4 and PCB) = 0.5, find)
i) P(A U B)
ii) p(A)
iii) p(A n B)

Solution
Since A and B are mutually exclusive events, then A (l B = <P. Drawing a Venn diagram for the
problem above we have;
A B
0.4 0.1 0.5
i) P(A U B) = PCA) + PCB) = 0.4 + 0.5 = 0.9
ii) P(A) = 1 – P(A) = 1- 0.4 =0.6
iii) P(A n B) = PCB) = 0.5
Theorem 2 which we are going to state below refers particularly to independent events and
states as follows:
Theorem 2: Two events A and B are independent if only and only if
P (A ∩B) = (PA) . PCB)
We shall follow with some examples to illustrate this theorem.
Example
Suppose a boy tosses a die, and then tosses a coin, what is the probability of obtaining a six

on the die and a head on the coin?

Solution
Let A be the event of obtaining a six on the die, and B a head on the coin. These events are
clearly independent since obtaining a six on the die does not influence a head on the coin.
Hence using Equation 7.4 we have

P (A∩B) = P [A] . P (B)
=1 x1 =1
6 2 12
Example
If the probability that it will rain on the 1st of January 1999 is 0.7 and the probability that it
will rain on the 1st of January 2000 is 0.5, what is the probability that it will rain on both
days?
Solution
A particular place getting rain on the 1st of January 1999 and again getting rain on the 1 st of
January the following year are purely two independent events under normal circumstances.
Let A be the event "it will rain on the 1st January 1999"
Let B be the event "It will rain on the 1st January 2000"
Then using the Equation 5.7 we have
P (And B) = P(A) x P(B) = 0.7 x 0.5 = 0.35
Conditional Probability
The probability that an event A has already occurred is called a conditional

probability.
We denote this by P(B/A) which reads lithe probability that B will occur given that A has already
occurred".
Or simply
"the probability of B given that A".
To make the concept of conditional probability clear, let us illustrate with examples.
Example
A box contains 5 black and 3 white balls. Find the probability that when two balls are
drawn without replacement, the second ball will be black.
Solution
The probability that the second ball picked is black depends on what colour the ball
picked first was. Hence this is a conditional probability problem.
"Let B be the event "picking a black ball"
"Let W be the event "picking a white ball"
There are two possibilities: A second ball picked can be black when the first was white or
black. The probability that the first ball picked is white is
This would leave only 2 white balls and 5 black balls since the ball picked is not
replaced.
3 3
P (W) =
5+3
= 8
The probability that the second ball picked is black given that the first was white is

5 5
P (W) =
2+ 5
= 7
The probability that the first ball picked is black is;

5 5
P (W) =
5+3
= 8
This would leave only 4 black balls and 3 white balls. That is a total of 7 balls. The probability
that the second ball picked is black given that the first was also black is;
4 4
P(B / B) =
3+4
= 7
Therefore,
The probability that the second ball picked is black is given by
P(picking White and the Black) + P(picking Black and the Black
= P (W n B) + PCB nB)
= P (W) . P(B/W) + P(B) . P(B/B)
15 20 35 5
= + = =
56 56 56 8
Reasoning out the solution to a problem of this nature according to the outcome given above can
often lead to uncalled for errors because one can get lost in the whole argument. The best way
totackle the problem is to use a TREE-DIAGRAM.
A tree-diagram for the above problem is shown below.
P (W / W) =2 W P (W∩ W)
7

W P (B / W) =5
P (W) =3 7 B P (W∩ B)
5
P (B) =5 W P (B∩ W)
P (W/ B) =3
8 B 7
P (B / B) =4 B P (B∩ B)
7
From the diagram we observe the following;

P (W∩W) = P(W / W) . P (W) = 2 x 3 = 6
7 8 56
P (W∩B) = P(B / W) . P (W) = 5 x 3 = 15

7 8 56
P (W∩W) = P(W / B) . P (B) = 3 x 5 = 15

7 8 56
P (W∩W) = P(W / W) . P (B) = 4 x 5 = 20

7 8 56
When we add all the possible probabilities we obtain.
Total Probability = 6 + 15 15 + 20 = 56 = 1
56 56 56 56 56
This exhausts all the possibilities!

For the previous examples consider the branch, where second ball is black i.e WB and BB
P (W ∩ B) + P (B∩B) = 3 x 5 + 5 x 4 = 15 + 20 = 35 =5
5 7 8 7 56 56 36 8
An alternative method of illustrating the above possibilities is to draw what is called a

CONTINGENCY TABLE.
∩ FIRST DRAW

W B
SECOND DRAW W 6 / 56 15 / 56 21 / 56
B 15 / 56 20 / 26 35 / 56
21 / 56 35 / 56 56 / 56
From the foregoing example we can state the MULTIPLICATIVE RULE of Conditional
probability, thus:
If A and B are events, then the conditional probability of A given B is denoted by P(A/B)
and is defined by;
P (A / B ) = P (A ∩ B)
P (B)
We can also write Equation in the form
P(A n B) = P(A/B) . PCB)
For independent events we can state the following rules:
Two events A and B are independent if

i) P (A / B) = P (A∩B) = P (A) . P (B) = P (A)
P (B) P (B)
ii) P (B / A) = P (B∩A) = P (B) . P (A) = P (B)

P (A) P (A)
Example
An urn contains 20 mangoes of which 5 are bad. If 2 mangoes are selected at random from
the basket in succession without replacing the first, what is the probability that both mangoes
are bad?

Solution
Let A represent the event 'first mango is bad"

Let B represent the event "second mango is bad",
Then
P (A) = 5 = 1
20 4
P (B/A) = 4
19
P (A ∩ B) + P (B / A) . P (A) = 4 x 1 = 1
19 4 19
THE TREE – DIAGRAM FOR THE PROBLEM IN SHOWN BELOW
B 5 x 4 x 4
20 19 76
4
19
B
15 5 x 15 x 15
The contingency table is as given
5 below; 19 A 20 19 76
20
∩ FIRST DRAW B 15 x 5 x 42
15
20 W B 5 20 19 76
19
SECOND DRAW W 4 / 76 A 15 / 76 19 / 76
14
5 x 14 x 42
B 15 / 76 42 / 7619 57 / 76
A
20 19 76
TOTAL 19 /76 57 / 76 76 / 76
Example
A bag contains 6 oranges and 4 lemons; sampling is random without replacement. Obtain the
probabilities of the following events:

i) The first drawn is an orange.

ii) The first two fruits drawn are oranges.
iii) The second fruit is a lemon, given that the first was an orange.
iv) The third fruit is an orange.
Solution
Let 0 represent the event "picking an orange".
Let L represent the event "picking a lemon".
The following Tree-diagram shows all the possibilities for sampling three fruits from the bag
without replacement.
O P (O∩O∩O) = 120
4 720
8
P (O∩O∩L) = 120
O 4 L
8 720
5
9 5 O P (O∩L∩O) = 120
8 720
O L 3 L
4 P (O∩L∩L) = 72
6 8
10 9 720
5 O
O 8 P (L∩O∩O) = 120
6 720
3 L
9 P (L∩O∩L) = 72
4 8
10 720
L 3 6 O P (L∩L∩O) = 72
9 8
L 720
2
8 L P (L∩O∩L) = 24
720

The answers are easily deduced from the Tree-diagram as follows:

i) First fruit is an orange:
P (O) = 6
10
ii) The first two fruits drawn are oranges:

P (O ∩ O) = 6 x 5 = 30 = 1
10 9 90 3
iii) The second fruit drawn is a lemon given that the first was an orange:
P (L / O ) = 4
9
iv) The third drawn is an orange
= P (O ∩ O∩O) + (O∩L∩O) + P (L∩O∩O) + P (L∩L∩O)
= 120 + 120 + 120 + 72 + 432 = 3
720 720 720 720 720 5
EXAMPLE
One bag contains 5 White and 7 black balls, and another contains 3 white and 9 balls. One ball is
taken from the first bag and placed in the second. After thorough mixing one ball is taken from
the second bag and placed in the first bag, what is the probability that there are 5 white balls in
the first bag at the end?
EXERCISE
1. One bag contains 4 white and 3 black balls, and a second bag contains 3 white balls and 5 black balls. One
ball is drawn from the bag and is placed unseen in the second bag. What is the probability that a ball now
drawn from the second bag is black?
2. A box contains 3 red, 2 green and 5 blue crayons. Two crayons are randomly selected

from the box without replacement. Find the probability that:

i) the crayons are of the same colour.
ii) at least one red crayon is selected.
3. In an experiment, a box contains 2 green and 5 black balls. A second box contains 5 green and 3 blue balls.
One ball is drawn at random from the second box and placed into the first box. What is the probability that
aball now drawn at random from the first box is green?
4. A box contains 36 beads, 28 of which are white and the rest yellow. One bead is
picked from the box at random and not replaced. A second bead is then picked at random.
Find the probability that:
(i) The first bead picked is white
(N) The second bead picked is yellow
(iii) both beads picked are white.
(iv) Both beads picked ate yellow.
5. A box P contains 4 white and 6 red balls and a box Q contains 6 white and 2 red balls. A box is chosen at
random and a ball is drawn at random from it.
(i) Find the probability that the ball drawn is red.
(ii) Given that the ball selected is white, find the probability that the box P was selected.
6. Given that A and B are mutually exclusive events, such that P(A) = 0.5, P(A u8) = 0.9,
find
(i) P (ᾹU B)
(ii) P(ĂU B)
7. If A and B are events and P (B) = 1/6, P (A and B) = 1/12, P(B/A) = 1/3, calculate;
i. P (A)

ii. P(A / B)
iii. P(A / Ḃ), where Ḃ is the event “B does not occur”
8. Given that A and B are independent events in a sample space such that P(A∩B) = 2/5 and P (AU B) = 4/5 find
i) P (B)
ii) P (Ᾱ U B)
9. A fair die is tossed 5 times. Calculate the probability that;

i) a 3 or 5 appears on the first throw
ii) a 5 appears on each throw.
iii) Four 6’s appear in the five throws.
EXPECTATION
Introduction
Imagine that you have a chance (probability) of 1/10 of winning a prize of Shs.100,000. Your
mathematical expectation is given by
The amount x probability (your chance)
That is,
100,000 x 1/10 = shs. 10,000
This means that mathematically you expect to get Shs. 10,000 only.
Thus if p(x) is the probability that a person will receive a sum of money x, the
mathematical expectation is defined as xp(x). That is,

Expectation = xp (x)
The following two examples will clarify further the meaning of mathematical expectation.
Example
In a given business venture a person can make a profit of Shs. 300,000 with a probability of 0.6
or take a loss of Shs. 100,000 with a probability 0.4. Find his expectation.
Solution
Expectation = xp(x)
= (300,000 x 0.6) + (-100,000 x 0.4)
= 180,000 - 40,000
= Shs. 140,000
Example
A box contains 12 cards. Two cards are labelled 1, three cards are labelled 2, four cards are
labelled 3, two cards are labelled 4, and one card is labelled 5. A person draws one card at
random. Determine his expectation.
Solution
We draw a table showing the probabilities of drawing each card. We then

calculate the quantity xp(x) for each value of x and include this as well in the table.
x 1 2 3 4 5
p(x) 2 3 4 2 1
12 12 12 12 12
xp(x) 2 6 12 8 5
12 12 12 12 12
The total expectation is given by

❑
2 6 12 8 5 33
∑ xp ( x )= + + + + = =2 .27
❑ 12 12 12 12 12 12
On the other hand the probabilities can be replaced by the relative frequencies. Then we can
form a table as follows:
x f fx
1 2 2
2 3 6
3 4 12
4 2 8
5 1 5
❑ ❑
∑ f =12
❑
∑
❑
fx =33
From which we obtain
⅀ fx 33
= =2 . 75
⅀ f 12
⅀ fx
We note that the quantity is identical to the quantity xp (x),But we already know that the
⅀f
⅀ fx
quantity the mean, 11.This means that if the probabilities are replaced by the relative
⅀f
frequencies, then the expectation reduces to the arithmetic mean. We can interpret this by saying
that expectation represents the mean of the population from which the sample is
drawn.

MATHEMATICAL EXPECTATION
Definition: Let X be a discrete random variable with the following probability

distribution
x x1 x2 x3   xn
P (X = X) p(x1) p(x2) p(x3)   p(xn)
The expected value of X or the mathematical expectation of X is
n
x1p (x1) + x2p+( x2) + x3p(x3) +……+ xn = ∑ xp (x)
x=1
Equation is a more general expression of Equation.
NOTE: The mathematical expectation E(X) of a random variable X is also its

mean μ.
That is, we can also write

n
Mean = μ= E ( x )=∑ px (x )
x=1
Example
A die is tossed once. Let X, be the number which appears on top. Determine the expectation
of X

1
Each of the numbers 1, 2, 3, 5 and 6 occurs with a probability of . Hence we have the following
6
probability distribution.
x 1 2 3 4 5 6
p(x 1 1 1 1 1 1
6 6 6 6 6 6
)
The mathematical expectation of X is therefore
6
E (X) = ∑ xip(xi)
1=1
=1 ( 16 )+2 ( 16 )+3 ( 16 )+ 4 ( 61 )+5 ( 16 )+ 6 ( 16 )

1 2 3 4 5 6
= + + + + +
6 6 6 6 6 6
21
= =3 .5
6
This means that on average when a person tosses a die very many times; his mathematical
expectation is 3.5, which is exactly the mean ofthe numbers which occur.
Example
Three coins are tossed once. Let X denote the possible number of heads. Determine the
expectation of X.
Solution
The possible number of heads is the set {I, 2, 3}. The p.d.f. is therefore;
x 0 1 2 3
p(x 1 3 3 1
8 8 8 8
)

The mathematical expectation of X is therefore;

n
E (X) = ∑ xp (x)
x
=0 ( 18 )+1 ( 38 )+2 ( 38 )+3 ( 18 )

= 0+ ( 36 )+( 68 )+( 38 )
= ( 128 )=1 . 5
Variance of a Random Variable
The variance of a discrete variable X is defined by
Var (X) = σ 2=E ( X 2 ) −¿
= ⅀ x 2 p ( x )−¿
= ⅀ x 2 p ( x )−µ 2
Example
Let X be a random variable with the following probability distribution;
x -2 1 4
P(X = X) 0.2 0.5 0.3
Find the standard deviation of X.
Solution
From Equation (9.4) we see that we have to calculate the mean, µfirst.

µ = ⅀xp = -2(0.2) + 1(0.5) + 4 (0.3)

= -0.4 + 0.5 + 1.2
= 1.7 – 0.4
= 1.3
Hence;
σ 2=¿ ¿ 4 ¿
= - 0.8 + 0.5 + 4.8 – 1 .3 2
= 6.1 – 1.69
= 4.41
The standard deviation is obtained by taking the square root of 0'2, thus
√ σ 2 = √ 4 . 41 = 2.1
EXERCISE
A discrete random variable X has the following probability:
x 1 2 3 4 5
P(X = x) 1 2 3 4 5
15 15 15 15 15
Calculate the variance of the distribution.
The number of bids submitted by Mukisa Construction Company prior to winning a

competitive government contract from the small – scale business administration in
Uganda is given in the following distribution.
X 1 2 3 4 5

P (X= x) 0.1 0.2 0.4 0.2 0.1
Compute
i) The mean
ii) The variance
iii) The standard deviation
X is a random variable that denotes the sum of two numbers that show up when two
dice are rolled. Copy and complete the following distribution table.
X 2 3 4 5 6 7 9 1 1 1
0 1 2
p(x) 1 2 3 4 1
36 36 36 36 36
Find
i) The expected value of X
ii) The variance x
The table below shows the probability of a random variable X
x -3 0 2 3
P(X=x) 1 1 1 1
4 4 8 4
Given that Y and Z are the random variables defined by Y = x 2, Z = X(X-1)
i) Draw a table to show the probability distribution of Y and Z

ii) Determine E (Y) and E (Z).
iii) Show that E(Z) = E( x 2 ¿ – E(X)
x -3 6 9
P(X=x) 1 1 1
6 2 3
i) Find E(X) and E( x 2 ¿
ii) Evaluate E(2X – 1)
A shipment of 6 television sets contains 2 defects. A hotel makes a random purchase of 3

of the sets. If X is the number of defective sets purchased by the hotel, find E(X).
Find the expected number of jazz records when 4 records are selected at random from a
collection consisting of 5 jazz records, 2 classical records and 3 polka records.
X -2 3 5
P (X= x) 0.3 0.2 0.5
Find the standard deviation of X.
In a gambling game a man is paid $2 if he draws a jack or queen and $5if he draws a
King or ace from an ordinary deck of 52 playing cards. If he draws any other card, he
losses. How much should he pay if the game is fair?
A race – car driver wishes to insure his car for the racing season for $10,000. The insurance

company estimates a total loss may occur with probability 0.002, a 50% loss with probability
0.01, and a 25% loss with probability 0.1 ignoring all other partial losses, what premium should
the insurance company charge each season to make a profit of $10?
Confidence intervals
We use the term confidence intervals to refer to those ranges of values from the
arithmetic mean (μ) expressed in terms of the standard deviation (σ ), within which we can
expect a particular value of the variable Xito lie.
Standard normal distribution

The calculation of probabilities under any Normal distribution can be taken a step further by
transforming the values of the variable X; into the numbers of
Xi−μ
Zi =
σ
0.0228
0.0228
-Zi -2 0 +2 + Zi
standard deviations (σ ) from the mean (μ). The resulting distribution is often referred to as the
standard Normal distributionand the transformation which brings it about is often
called the Z score or Z statistic:

Xi−μ
Zi = = Value of variable - Arithmetic mean
σ
Standard deviation
In other words the Z statistic simply calculates the number of standard deviations from the
arithmetic mean. If the distribution of the variable X1is Normal, then the distribution of the Z
statistic will also be Normal, as shown in Figure above.
Using tables
For example, for a Z score of +2.0 we will have 0.0228 (2.28 per cent) of the distribution to the
right of that Z score.
Of course, since the Z statistic is normally distributed, a Z score of -2.0 will give us an
equivalent area, hut this time to the leftof that Z score.
In other words, if the particular value for Xi is two standard deviations above (or below) the mean
for a normally distributed variable, then we can expect 0.0228 (2.28 per cent) of the distribution
to be above (or below) that value.
If Z = +, then area in right-hand tail
If Z = -,then area in left-hand tail
Note that the mean of the standard Normal (Z) distribution is a Z score of O. In other words
when the value of Xiis the mean (p) itself, then we arc zero standard deviations from the mean,
so the L score is O. It therefore follows that for Z = D, 0.5 (50 per cent) of the distribution will
lie to the right, and 0.5 (50 per cent) to the left.
To help you become familiar with using the full Z table,a small section of that table is shown
below:

z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.158 0.156 0.153 0.151 0.149 0.146 0.144 0.142 0.140 0.13
1.0
7 2 9 5 2 9 6 3 1 79
1.1 0.135 0.133 0.131 0.129 0.127 0.125 0.123 0.121 0.119 0.11
7 5 4 2 1 1 0 0 0 70
1.2 0.115 0.113 0.111 0.109 0.107 0.105 0.103 0.102 0.100 0.09
1 1 2 3 5 6 8 0 3 85
1.3 0.096 0.095 0.093 0.091 0.090 0.088 0.086 0.085 0.083 0.08
1.4 8
0.080 1
0.079 4
0.077 8
0.076 1
0.074 5
0.073 9
0.072 3
0.070 8
0.069 23
0.06
8 3 8 4 9 5 1 8 4 81
For example, if the Z score is found to be +1.15, then go down the Z column to
the 1.1 row and across the 1.1 row to the position underneath the 0.05 column. We read
off the value 0.1251, which tells us that 0.1251 or 12.51 per cent of the distribution is in
the right-hand tail. Of course had the Z score bee – 1.15, then 0.1251 or 12.51 per cent of
the distribution would have been in the left hand tail.
Check that for Z = + 1.38 you would read 0.0838 (8.38 per cent) in the righthand tail,
and for Z = -1.42 you would read 0.0778 (7.78 per cent) in the lefthand tail.
Suppose a variable X1has a Normal distribution with a mean of 100 and a

standard deviation of 10. Suppose that we want to find the probability of X1being:
(a) 115 or more
(b) 75 or less
(c) between 75 and 115
Solution
We can use Figure 6.3 to help solve this problem. Note that we show both the variable X1

and its associated Z scores, Z, on the same diagram.
σ =10
P2 = 0.0662 Pi = 0.0668
X2 μX1X1
75 100 115
Zi
Z2 0 Z1
- 2.5 1.5
X 1−μ 115−100
a) For X1 = 115, Z1 = = = +1.5
σ 10
From the Z tables abovewe find that Z, = +1.5 gives 0.0668 as the area
in the right-hand tail.
i.e. Zi= +1.5
Pi=0.0668
Pi= 6.68%
There is a 6.68 per cent chance ofXibeing 115 or more.

X 2−μ 75−100
b) X2= 75, Z2 = = = - 2.5
σ 10

There is a 0.62 per cent (i.e, less than 1 per cent chance) of X1 being 75 or less
From the Z tables (p. 314), we find that Z2 = -2.5 gives 0.0062 as the area in the left-hand
tail.
i.e. Z2 = - 2.5
P2 = 0.0062
P2 = 0.62%
There is a 0.62 per cent (i.e. less than 1 per cent chance) of Xi being 75 or less.
(c) The whole area beneath the Z curve is 1.00, so the area between X2= 75and Xi = 115 is
1.00 - (0.0062 + 0.0668) = 1 - 0.0730 = 0.9270. In other words there is a 92.7
per cent chance of Xi being between 75 and115.
In solving problems of this kind it is always helpful to draw a sketch diagram to indicate
what has been given in the question and what needs to be found, as in Figureabove.
Sometimes we will need to make use of the fact that the area to each side of the mean under
the normal curve is 0.50 (50 per cent). You will see in Worked in Example below that
sometimes we must subtract the area in the respective tails of the distribution from 0.50 in
order to obtain the area required. Note also that whenever we seek to find an area which
extends across the mean (μ)then it is usually helpful to solve for each side of the mean
separately before combining the result.
The attendance at a night club is thought to be normally distributed, with a mean of80
persons and a standard deviation of 12 persons. What is the probability that on any given
night the attendance is:
a) 74 persons or more

b) 83 persons or less
c) Between70 and 85 persons?
Solution
Figurerepresents the areas we require in each case.
A1 A2 A2 A1
A2 A1
P1 P1 P1
P2
σ =12 persons σ =12 persons

σ =12 persons
Xi Xi Xi
X1 μμ X1 X2μ X1
7480 8083 70 80 85
Z1 Z1 Z1
Z1 0 0 Z1 Z2 0 Z1
(a) X1 ≥ 74 persons (b) Xi ≤ 83 persons ( c) 70 ≤ Xi ≤ 85 persons
The areas required are shaded (A1 and A2): the areas given in Z tables are unshaded
(P1 and P2)
Remember that when we calculate the Z score, the Z tables (p. 314) give us the area in the
tails of the distribution.
a) To findXi≥74 means we require the shaded areasAiand A2in Figure above
Xi−μ 74−80
ForXi= 74 =Z1 = = = - 0.5
σ 12
Z1= -0.5
P1= 0.3085

A1= 0.5000 - 0.3085 = 0.1915

A2= 0.5000
Al+ A2= 0.6915
There is a 0.6915 (69.15 per cent) probability that the attendance will be 74
persons or more.
(b) To find X1≤83 means we require the shaded areas Ai and A2 in Figure (b).
Xi−μ 74−80
For X1= 83, Z1= = = - 0.5
σ 12
Z1= +0.25
P1= 0.4013
A1= 0.5000 - 0.4013 = 0.0987
A2 = 0.5000
A1+ A2= 0.5987
There is a 0.5987 (59.87 per cent) probability that the attendance will be 83 persons or less.
c) To find 70≤ ,Xi≤85 persons we required the shaded areas Ai and A2in figure above
X −μ 85−80 + 5
for X1 = 85, Z1 = 1 = = +0.42 (above)
σ 12 12
Z1= +0.42
Pl= 0.3372
Al= 0.5000 - 0.3372 = 0.1628
A1= 0.1628
X 1−μ 70−80 −10

For X2= 70,Z2 = = = +0.83
σ 12 12
Z2 = -0.83
P2= 0.2033
A2 = 0.5000 - 0.2033
A2 = 0.2967
A, + A2 = 0.4595
There is a 0.4595 (45.95 per cent) probability that the attendance will be between 70 and
85 persons.

Finding the variable value when probability known

So far we have known the specific valuesof the variable Xiand found the probabilities with which
these values might occur. Here we reverse the process. Suppose we know the probabilisticwith
which specific values of the variable Xi might occur, how can we then find these values of Xi?
Worked Example above, shows how we go about solving such problems.
The life of a machine component is normally distributed with mean 60 hours and standard
deviation 30 minutes. If 2.5 per cent (0.025) of components last more than X, hours, find
the value ofX1.
Solution
In a question like this, do make sure that you express all values in the same unit, here
hours or minutes. If we use hours, then the standard deviation is 0.5 hours, as shown in
Figure below;
Probability known, value of variable unknown
σ =0.5 hours
Pi=¿¿0.025
μ X1
60 ? Zi
P1= 0.025
0 Z1

We can therefore look in the body of the Z tables (p. 314), to find the Z value (Z 1)
which would give us the probability in the right-hand tail of 0.025.

Z1= +1.96
We know that
X 1−¿ μ
Z1 = σ
¿
x1− μ
i.e. +1.96 = σ
In other words we would expect 2.5 per cent (0.025) of the machine components
to last more than 60.98 hours.
Note: if the left-hand tail had been involved then the calculations would have used
a negative value for Z. You can check this yourself by finding the number of hours
(X2) for which 2.5 per cent (0.025) of the components last less than X2hours.
Check that your answer is 59.02 hours and that -1.96 was used in your calculation.
QUESTIONS
1. Find the area beneath the (Normal) curve over the following values for the
Z score. Draw diagrams in each case and use the Z tables.
a) Z1= 0 and Z2= 0.2
b) Z1= 0.5 and Z2= 1.0
c) Z1= 0.95 and Z2= 2.55
d) Z1= 1.55 and Z2= (+) infinity
e) Z1= -1.5 and Z2= 0
f) Z1= -1.85 and Z2= -1.05

g) Z1= -1.55 and Z2= (-) infinity
2. Attendants at rock concerts in a stadium are normally distributed with mean

20,000 persons and standard deviation 4,000 persons. For a future event,
what is the probability?
(a) More than 28,000 persons will attend
(b) less than 14,000 persons will attend
(c) Between 17,000 and 25,000 persons will attend.
3. Use the same data as in question.

(a) If you know that there is a 5 per cent (0.05) probability that more than
a certain number of people (X1)will attend, what is the value of (X1)?
(b) If there is a 1 per cent (0.01) probability that less than X 2 people will attend, what is
the value of (X2)?
UNIT 6: DISTRIBUTION THEORY
THE BINOMIAL & POISSON DISTRIBUTION
The Binomial Distribution

An experiment consisting of repeated trials that have only two outcomes; a "success" and a
"failure" denoted by Sand F is referred to as a Binomial experiment or a Bernoulli trial. The
probability of success is denoted by p and of failure by q and are such that p + q =1 or q =1 -
p.

Properties of the Binomial Distribution

i) The experiment consists of x repeated trials.
ii) Each trial results in an outcome that is either a Success or a Failure.
iii) The probability of a success p remains constant from the trial and of failure
becomes 1 - p.
iv) The repeated trials are independent.
The number of successes X in n trials of a binomial experiment is a binomial

random variable. The probability distribution of this random variable is
called a binomial distribution.
A binomial distribution therefore is the probability of a random variable X,

the number of successes in n independent trials.
The probability of X successes in n independent trials denoted by b(x;n, p) with probability

of successes p and of failure q = 1 - P is given by
b(x;n,p) = ( nx ) p q
x n−x
;x = 0,1,2,…..,n
where
( nx )= x ! ( n−x
n!
)!
Suppose n = 1,000 and p = 0.0002 use the Poisson distribution to find:

(a) P(X = 0) (b) P(X = 4) (c) P(X> 1) (d) P(X:5: 4)
mean value }J. = np = 1,000 x 0.0002 = 0.2
The average number of trips per family to amusement parks in the UK is Poisson distributed

with a mean of 0.7 trips per year. What is the probability of randomly selecting a family and
finding that:
(a) The family did not make a trip to an amusement park last year?
(b) The family took two or more trips last year?
(c) The family took three or fewer trips over a three year period?
(d) Took exactly four trips over a six year period?
If the variable Xi follows a Normal distribution with mean =' 100 and standard deviation =' 5,
find the probability that:
(a) P(Xi>107) (d) 1'(101 <Xi < 1(9)
(h) "(Xi> 98)(e) 1'(91 < Xi < 94)
(e) (P(Xi< 95) (f) P(9} < Xi < 106)
Find, using the standard Normal tables (L tables, p. 314), the value of II for each of the
following:
(a) I'(L >LI) =' 0.3300
(b) 1'(0 <L <Zl) =' 0.4732
(e) I'(L <L1) =' 0.H212
(d) P(L <LI) =' O.547H
SAMPLING AND TESTS OF HYPOTHESES
Introduction

Answers to 'Self-check questions', responses to each 'Pause for thought' and answers to 'Review
questions' can be found at the end of the book.
The Normal distribution and the Z statistic, In this chapter we continue to applythese
ideas, but in the context of sampling. Most firms would find it either impractical or too
expensive to survey all their customers or to carefully examine every item that flows from their
production line. Instead they usually resort to selecting a samplefrom the whole group or, as it
is often called, the population. Of course here the term ‘population’ can refer to all the items
under consideration as much as to all the people.
We briefly consider the types of sample that might be selected, and when each type might he
most appropriate. We then go on to consider the distribution of sample means which, as
we shall see, can under certain conditions be regarded as being normally distributed, thereby
allowing us to use the Z table probabilities
Central Limit Theorem is suggesting that even when the 'population' is skewed, a random
sampling procedure using large samples can still result in a Normal distribution for the sample
means.
We move on to explore confidence limits, i.e. the ranges of values within which we can,
with varying degrees of confidence, expect an observation to lie. This is used as the basis for
testing various theories or hypotheses. When we use large samples(n ≤ 32) for such tests, then
the Z tables are still appropriate. However when we use small samples (n< 32), then we must
use the student t distribution. Finallya number of other distributions used to test
hypotheses are introduced such as theChi squared distribution.
The term statistic is often used to refer to the many procedures discussed in this chapter whereby
attributes arc ascribed to the ‘population’ based on the results of our sample investigations.

Objectives
When you have read this chapter you should be able to:
 appreciate the key features of the different types of sample;
 be aware of the properties of the distribution of sample means, e.g. the
standard error;
 apply the 'Z' score and tables to the distribution of sample means drawn from a
Normal population;
 understand the Central Limit Theorem;
 apply the 'Z' score and tables to the distribution of sample means drawn
from a skewed population;
 understand and calculate confidence intervals for either the population mean
or the sample mean;
 know when and how to use the Student t distribution;
 know when and how to use the Chi-squared distribution.
Types of sample
Different types of sample may be used, depending in part on the characteristics or attributes of
the 'populations' to be sampled and on the objectives of those undertaking the sample. Here we
briefly review some of the key features of the various types of sample.
Random sampling
A random sample is used when the intention is to give each item in the ‘population’ as
much chance of being selected in the sample as every other item. A common way to conduct
random sampling is to list all the ‘members’ or items in the population and then to userandom
numbertables (merely a collection of random digits) or computer generated random

numbers to help select the sample. Such procedures avoid various types of 'bias' which might
creep into the selection of items to be included in the sample when undertaken
by humans. Even the selection of numbers by individuals might be influenced by unconscious
preferences for odd, even numbers, etc.
Tile key objective of random sampling is to obtain a sample that fairly reflects the population as
a whole. Random sampling is more likely to be used when the population itself is relatively
homogeneous, i.e. is composed of items of broadly the same type. Of course there may be
considerable practical difficulties in actually locating and interviewing each 'member' of the
population that has been randomly selected. For example, if the chosen adult is not at home
or otherwise available a researcher may have to return or seek to contact that individual on
another occasion - another member of the household, etc. will not be acceptable.
Suppose the random number table is used in seeking a random sample of, say, 40 items. This
might involve linking together two columns of the five digits displayed in the table. These might
begin 83635 ... , suggesting we choose the first listed item in the first column, then 66791, and
so on.
Random sampling
 each item selected has an equal chance of being drawn;
 usually adopted when the population is largely homogeneous, i.e. when it

is difficult to distinguish between items;
 implementation often involves the use of computer-generated random

numbers;

 selection is unbiased;
 a major drawback is that a population listing is required and the chosen

items need to be located, then questioned or measured.
The random sampling procedure will also be important should we wish to apply the Central
Limit Theorem
Stratified sampling
Of course there will be times when we might prefer a non-random sampling procedure. Such
a non-random procedure might, for example, be preferred when the population is segmented
or heterogeneous, i.e. when it contains very different sub-sets of items or subjects. If, say, 40
per cent of all adults have incomes over £x and 15 per cent have incomes below £y, then we
might wish our sample of adults to exactly mirror such proportions, rather than give every
adult an equal chance of selection. This is the basis of stratified sampling. Note that the
intention here is still to obtain a representative sample, but one which ‘fairly’ reflects a
population which itself is heterogeneous. We might say that such a sample is free from
'selective bias', since the proportion of any identified attribute in the sample is merely a
reflection of its contribution to the population as a whole.
Stratified sampling
 used when the population has a number of identifiable attributes;
 populations stratified in this way are known as heterogeneous;
 the composition of the sample must reflect the attributes present in the
population, e.g. the proportion of low-, middle- and high-income earners;
 individuals or items within each stratum may still be selected randomly;
 a stratified sample is free from selective bias, since it reflects the proportions of
any given attribute present in the population as a whole.
Quota sampling

The use of quota sampling is widespread in market research. Here the intention is often
to deliberately introduce selective bias into the samples, in the sense that attributes of the
members or items selected will represent the choice of the samples rather than the attributes
of the population as a whole. In this sense there is to those with incomes over £x, then the
sample may contain 80 per cent of such adults even if they only comprise, say, 40 per cent of
the population. Nor is there usually any attempt to use random sampling within the quotas
selected, as often happens within the different strata in stratified sampling. It is often left into
the discretion of interviewers, etc. to include specified numbers (quotas) of
subjects possessing given attributes within the sample. To do so accurately may be costly,
requiring highly trained interviewers. no attempt to seek a representative or unbiased sample
from the population. For example, if a firm sells most of its product
Quota sampling
 widely used in market research:
 sample includes a specified number or quota of subjects with given attributes:
 interviewers must be highly trained as they are often responsible for identification and
selection of respondents:
 a 'biased' sample therefore results, but one which may be useful in representing the
customers seen as most likely to purchase the firms products.
Multi-stage and cluster sampling

Other types of non-random sampling include multi-stage and cluster sampling.

Multi-stage sampling
 usually involves sampling of subjects With a given attribute:
 often occurs where there IS a wide geographical spread of such subjects which makes
sampling expensive:
 whole geographical area IS therefore divided into regions:
 a small number of such regions IS then selected randomly;
 regions selected are further broken down into sub-regions (e.g. North West
England Into parliamentary constituencies), from which a random sample is selected:
 sub-regions selected are further broken down Into units (e.g. towns or
streets), from which a random sample IS again selected;
 eventually Individual households or persons With a given attribute are
identified in specific towns or streets;
 costs of interviewing IS then much reduced, though some risks of bias in procedure
especially If only small numbers of regions, sub-regions, etc. are selected.
Cluster sampling
 items chosen in clusters rather than individually:
 example, cluster might be all residents In a particular road or group of roads:
 useful method where the population is widely spread geographically but where the
various clusters are broadly representative of that population:
 Similar to above sampling method. Except that the cluster itself isthe single-stage
involved.
Distribution of sample means

If tile distribution of tile population (Xi)is normal then tile distribution of the '
arithmetic means (Xi) of samples of sizen taken from that population will he Normal
The new distribution will have the same arithmetic meanμbut a different standard deviation. We
call this the standard deviation error (SE) and it can be found by dividing the standard deviation

of the population (σ ) by the square root of the sample size (i.e. √ n ¿ ¿
Standard error (SE) = standard deviation of distribution of sample means

SE or SE
CONFIDENCE INTERVALS
A confidence interval is a range of values within which we can have a certain level of
confidence (usually 95 per cent or 99 per cent) that a particular value of a variable will lie. In
the context of sampling, we are usually interested in one of two possible types of confidence
interval.
Confidence interval for the sample mean

This is the range of values around the population mean (μ) within which we can be 95 per
cent or 99 per cent confident that a particular sample mean (X1) will lie.
95 per cent confidence interval

In terms of Figure below, we wish to find the values forX1and X2,which are 47.5
per cent (0.475) either side of the population mean μ .
Of course this will imply 2.5 per cent (0.025) in each tail of the distribution forX1.
We have already seen (p. 130) how we calculate the 21 and 22 scores (+1.96 and - 1.96
respectively) which will give us 0.025 in each tail. We can then use our formula for the
2statistic (as applied to the distribution of sample means) to calculate X1 and X2:
Finding the 95% confidence interval for the sample mean (X1)

0.025
0.025
Xi
σ
X2 μ X1( )
√n
Z2 0 Z1
- 1.96 Z1 = Xi−μ +1.96
σ
√n
196 = Xi−μ
σ
√n
σ
+1.96 ( )
√n
= Xi−μ
μ + 1.96 ( √σn ) = X 1
We can use the same procedure for finding Z2except that we insert -1.96 for the Z 2score. You
should then be able to show that:
σ
μ + 1.96 ( )
√n
= X2
The end values of the confidence interval are called the confidence limits. Here X1 and X2 are the
confidence limits for the 95 per cent confidence interval.
In general, the 95 per cent confidence interval for the sample mean can be written as

follows:
X1=μ ±1.96 (σ / √ n )
i.e X1= μ± 1.96 SE
In other words we can be 95 per cent confident that single samples mean(Xi) will lie within 1.96
standard errors (SE) of the population meanμ.
99 per cent confidence interval
The approach here is exactly the same as above except that we wish to find the values for the
distribution of sample means, namely X1 and X,which are 49.5 per cent (0.495), either side of the
population meanμ. Of course this will imply 0.5 per cent (0.005) in each tail of the distribution
for X1.
As we shall see in Figure below, the only difference will be that our Z1and Z2scores respectively
will be +2.58 and -2.58 in order to give 0.005 in each tail.
In general the 99 per cent confidence interval for the sample mean can be written as
follows:
X1=μ ±2.58(σ / √ n )
i.e X1= μ± 2.58 SE
In other words we can be 99 per cent confident that a single sample mean (X1)
will lie within 2.58 standard errors (SE) of the population mean (μ).
The end values of this 99 per cent confidence interval, X 1 and X2will be the 99 per cent
confidence limits.
A large number of random samples of size 100 are taken from the production line
for glass panels which is thought to produce panels with mean thickness 4 cm and standard

deviation 1 cm.
Find (a) the 95 per cent and (b) the 99 per cent confidence intervals and associated
confidence limits for the sample mean.
SOLUTION
σ
SE = σ
√n SE =
√n
1
SE = = 0.1 1
√ 100 SE = = 0.1
√ 100
0.025 0.025 0.005

0.005
0.457 0.457 0.495 0.495
X2 μ X1 X2 μ X1
4 cm 4cm
Z2 0 Z1 Z2 0 Z1
-1.96 +1.96 -2.58 +2.58
X1 = μ ± 1.96 (σ / √ n )
a) Finding the 95% confidence b) Finding the 99% confidence interval for the
X1 = 4 ± 1.96Interval
(1/ √ 100 )
for the sample mean sample mean
X1 = 4 ± 1.96 (0.1)
X1 = 4.196 and 3.804
The 95 per cent confidence Interval is 3.804 cm to 4.196 cm

In terms of Figure above the confidence limits are:

X1 = 4.196cm
X2 = 3.804cm
(b) X1= μ ±2.58 ¿
Note: if you check the Z tables you will see that 2.575 is strictly the Z score giving 0.005
in each tail. Rounding up the 5 in the third decimal place gives 2.58.
X1= 4 ±2.58 ¿
X1= 4 ±2.58 ¿)
X1 = 4 ±0.258
The 99 per cent confidence interval is 3.742 cm to 4.258cm. In terms of Figure above
the confidence limits are:
X1= 4.258 cm
X1 = 3.742cm
Confidence interval for the population mean

This is the range of values around the sample meanwithin which we can be 95 per cent or 99 per
cent certain that the population meanwill lie.
The previous analysis applies here except that in this case we are likely to be given
information about a particular sampleand asked to find the ranges of values within which we
might expect to find the populations meanμ .
It may be that instead of being given information about the population standard deviation (σ

)we are only given information about the sample standard deviation (s). However we have
already noted that we can use s as an approximation to σ in calculating the standard error for
the distribution of sample means:
σ s
i.e. SE = =
√n √n
We have seen that the Z statistic for the distribution of sample means is:
X i−μ
±Z = s ¿ √n
i.e ± Z ¿
s
μ= X 1 ± Z ( )
√n
All we have done is re-arrange the terms to have μon the left-hand side this time instead
ofXi.As before the confidence intervals for populationmean can be written as
follows:
μ= X i ± 1.96 ( √sn ) for a 95% confidence interval

s
μ= X i ± 2.58 ( )√n
for a 99% confidence interval
Estimate (a) the 95 per cent and (b) the 99 per cent confidence intervals and associated
confidence limits for the population mean when we are given the following sample
data:

Sample mean ( X i )= 950kg

Sample standard deviation (s) = 15 kg
Sample size (n) = 36
Solution
(a) 95 per cent confidence interval and confidence limits forμ.

μ=¿X1= 4 ±1.96 ¿
μ=950= 4 ±1.95 ¿
μ=950= 4 ±1.96 (2.5)
μ=950= 4 ± 4.9
μ=945.1 kg ¿ 954.9 kg
In other words we can be 95 per cent confident that the population mean μwill lie in the
interval between 945.1 kg and 954.9 kg, given the sample data provided. These values are
the 95 per cent confidence limits for the population mean.
(b) 99 per cent confidence interval and confidence limits for μ

μ=¿X1= ± 2.58 ¿
μ=950 ±2.58 ¿
μ=950 ±2.58(2.5)
μ=950 ±6.45
μ=943.55 kg ¿ 956.45 kg
We can be 99 per cent confident that the population meanμwill lie in the interval
between 943.55 kg and 956.45 kg, given the sample data. These values are the 99 per
cent confidence limits for the population mean.

SELF CHECK QUESTIONS

1. The management of a company claims that the average weekly earnings of their
employees is £120. A sample of 144 employees is taken. Calculate (a) the 95 per cent
and (b) the per cent confidence intervals for the sample mean.
2. A random sample of 64 households was selected in a town and the average
expenditure per week on a certain product was found to be £6.15 with a (sample)
standard deviation of £1.30. calculate (a) the 95 per cent and (b) the 99 per cent
confidence intervals for the population mean.
Tests of hypotheses: principles
We can use our work on the distribution of sample means and the Central Limit Theorem for
testing hypotheses (theories). A hypothesis is an assumption about a situation. We usually
want to testthis assumption against one or more alternative assumptions.
It will be useful at this stage to become familiar with the terminology widely used in this topic
area. For simplicity we assume that we are testing a main hypothesis (Null hypothesis, Ho)
against one other hypothesis (Alternative hypothesis, H1).
Null hypothesis (Ho): the hypothesis to be tested.

For example that the mean thickness of glass panels is 4cm:
Ho : μ = 4cm
Alternative hypothesis (H1): the hypothesis we wish to accept if we reject

the null hypothesis.
For example that the mean thickness of glass panels is not equal to 4crn.
H1 : μ ≠ 4cm
In testing our null hypothesis, there are essentially two types of error we might
wish to avoid.

 Type 1 error: rejecting the null hypothesis when it is, in fact, true.
 Type 2 error: accepting the null hypothesis when it is, in fact, false.
Avoiding a Type 1 error is usually the main concern of problems in this topic area. When testing
the null hypothesis we usually state the maximum risk we are willing to take of committing a
Type I error, i.e. of rejecting the null hypothesis when it is, in fact, true. This is called the level
of significance and is typically either 5 per cent (0, 05) or 1 per cent (0.01).
Levels of significance
The maximum risk we are willing to take of making a Type 1 error, i.e of rejecting the null
hypothesis when it is, in fact, true.
Confidence limits and critical values

If we look back to Figure above, we can usefully illustrate the idea of the level of Significance.
It is clear that there is a 95 per cent (0.95) chance of any sample mean Xi lying within 1.96
standard errors (SE) of the true population meanμ. However there is still a 5 per cent (0.05)
chance of a single sample mean lying outside this 95per cent confidence intervaleven though
the population mean really isμ.
Here this 5 per cent (0.05)chance is split evenly to be 2.5 per cent (0.025) in each tail. If the
sample mean lies outside the confidence limitsX1 or X2 then our decision will be to reject Ho
even though we might be wrong in rejecting H o. However the chance of our being wrong is less
than 5 per cent, since there was a less than 5 per cent chance of actually getting a sample mean
X1 outside X1 andX2when μreally is the population mean.
These confidence limits for the population mean, μ ,can therefore be regarded as the critical
values for tests of hypotheses. In other words they are the values of X1(or their Z1equivalents)

outside of which we are willing to reject the null hypothesis (H o). In that sense they are the
values 'critical' to the decision we are about to take in our test of the null hypothesis (Ho).
Critical values
These are the values of Zior Zifor the sample outside of which we are willing to reject the null
hypothesis (Ho) at a particular level of significance.
Two- and one-tailed tests

Two-tailed tests
The approach so far has involved a two-tailed test, i.e. where we split the risk of being wrong
in rejecting the null hypothesis equally between each tail of the distribution.
Let us formally set out the null (Ho) and alternative (H1) hypotheses for a two-tailed test. We use
our earlier example of thickness of glass panels by way of illustration.
Ho : μ ≠ 4cm
H1 : μ ≠ 4cm
Since the alternative hypothesis (H1) says H1 : μ ≠ 4cmit is clear that we are just as
interested in situations where μ>¿ 4 cm as we are in situations where μ>¿ 4 cm.
Two tailed test

We divide the risk we are willing to take in making a Type 1 error equally between each tail of
the distribution

If we test the null hypothesis at a 5 per cent (0.05) level of significance, we place 2.5 per cent
(0.025) in each tail. Here we will reject (Ho)if we think that μ ≠ 4cmor if we think μ ≠ 4cm.
Acceptance and rejection regions
- The region within which we are willing to accept the null hypothesis (Ho)(we call the
acceptance region.
- The region outside which we are willing to reject the null hypothesis(Ho)we call the
rejection region.
F F 0.01 level of
0.05 level of
significance
significance
(2-tail test)
(2-tail test)
0.025 0.005 0.005

0.025
X1 X1
X2 μ X1 X2μ X1
1.96 SE 1.96 SE 2.58 SE 2.58SE
Rejection Acceptance Rejection Rejection Acceptance Rejection

region region region region region region
(a) (b)

EXAMPLE
X1and X2, correspond to the critical values, i.e. the sample means at the boundary between
the acceptance and rejection regions for the null hypothesis (Ho).
Find the critical values for a two-tailed test at the 5 per cent (0.05) level of significance for
the earlier example of glass panels, mean (μ)= 4cm, standard error (σ / √ n )= 0.1 cm.
Solution
μ ±1.96 SE=Critical values
4 ±1.96 (0.1)=Critical values
3.804 cm= X 2 ; 4.196 cm= X 1
We can be 95 per cent certain of getting a sample mean in the acceptance region
3.804 cm to 4.196 cm if the true (population) mean is 4cm.
If, however, we get a sample measurement outside these critical values (i.e. in the
rejection region), then we can reject Ho : μ=4 cm with less than a 5 per cent (0.05)
chance of being wrong. This is because there is a less than 5 per cent (0.05) chance
ofXibeing outside these critical values if H o : μ=4 cm is true.
EXAMPLE
Find the critical values for a two-tailed test at the 1 per cent (0.01) level of significance

for the earlier example of glass panels, mean (μ) = 4cm, standard error (σ / √ n ) =
0.1cm.
Solution
This time we place half of 1 per cent (0.005) in each tail, giving a Z score of ±2.58.
μ± 2.58 SE = critical values
4 ± 2.58 (0.1) = critical values

3.742 cm = X2; 4.258 cm = X1
We can be 99 per cent certain of getting a sample mean in the acceptance region
3.742 cm to 4.258 cm if the true (population) mean is Ho : μ=4 cm.
If however, we get a sample measurement outside these critical values (i.e. in the
rejection region), then we can reject Ho : μ=4 cm with less than a 1 per cent (0.01) chance
of being wrong. This is because there is a less than 1 per cent chance ofX1, being outside
these critical values if Ho : μ=4 cmis true.
One-tailed test
Here we do not split the risk of being wrong in rejecting the null hypothesis equally between
each tail of the distribution. Here we are only concerned with one side(and therefore one tail)of
the distribution when testing our null hypothesis (Ho) against an alternative (H1). We therefore
place all the risk of making a Type 1 error in one tail.
One-tailed test

We place the risk we are willing to take in making a Type 1 error in one tail of the
distribution.
Let us formally set out the null (Ho) and alternative (H1) hypotheses for a one- tailed test. We
again use our earlier example of thickness of glass panels by way of illustration.
EITHER
Ho : μ=4 cm
H1 : μ> 4 cm
In testing Ho, against H1we are only interested in rejecting Ho (i.e. accepting H1)
if the sample means suggest a true (population) mean greater than 4 cm.
In testing Ho against H1 we are only interested in rejecting H1 (i.e. accepting HI)

if the sample mean suggests a true (population) mean less than 4 cm.
Acceptance and rejection regions
Figure 7.8 indicates the relevant acceptance and rejection regions for a one-tail test at 5 per cent
(0.05) and 1 per cent (0.01) levels of significance. Remember the Z scores are calculated using
the Z tables (Appendix 1, p. 314) and are used to give the area in the respective tails.
Find the critical values for a one-tailed test at the 5 per cent (0.05) level of significance for
the earlier example of glass panels, mean (μ ¿= 4crn, standard error (σ / √ n )= 0.1cm.
Solution
X1= μ + 1.65 SE

X1= 4 + 1.65 (0.1)
X1 = 4.165cm
X2 = μ + 1.65 SE
X2 = 4 + 1.65 (0.1)
X2 = 3.835cm
Acceptance and rejection regions for the null hypotheses (Ho): one tailed tests
at (a) 5% (0.05%) (b) 1% (0.01%) levels of significance.
0.05 level of
Ho : μ=4 0.05 level of
Ho : μ=4 significance
significance (1 –
H1 : μ> 4 (1 – tail test)
tail test) H1 : μ< 4
0.05 0.05
X1 X1
μ=4 X1 X 2 μ=4
1.65 SE 1.65SE
Acceptance Rejection Rejection Acceptance
region region region region
(a)
Ho : μ=4 0.01 level of 0.01 level of

Ho : μ=4
significance (1 – significance (1 –
H1 : μ> 4
tail test) H1 : μ< 4 tail test)
Critical values: Z scores or sample mean values

0.01 0.01
X1 X1
μ=4 X1 X 2 μ=4
2.33 SE 2.33 SE
Acceptance Rejection Rejection Acceptance

region region region region
(b)
If the sample mean X1, lies outside these critical values then we would be outside the acceptance
region and in the rejection region.
For Ho : μ=4 cm
H1 : μ> 4 cm
Reject Ho if X1> 4.165cm
For Ho : μ=4
H1 : μ< 4
Reject Ho if X1, < 3.835cm
Test of hypotheses: Practice

In this section we develop a simple seven step plan for tackling all problems involving tests of
hypotheses. This seven step plan draws on the ideas presented in the previous section.
However before we outline these steps let us select one of two alternative approaches to finding
critical values.
α = level of significance
(a) Two – tailed test (b) One – tailed test (c) one – tailed test
Ho : μ=¿ Ho : μ=¿ Ho : μ=¿
H1 : μ ≠ H1 : μ>¿ H1 : μ<¿
Accept Ho Accept Accept
Ho Ho
Reject Reject
Reject
prob. Ho prob. Ho
STUDY MATERIAL FOR TEAM UNIVERSITY Page 130 prob. Ho
a/2 a/2 a/2
Reject
prob.
Ho a/2
Z1 Z1 Z1
Z20 Z1 0 Z1 Z2 0
Critical values
Critical values Critical values
α = 0.05: Z1 = + 1.96
Critical values: Z scores or sample mean α = values
0.05: Z1 = + 1.65 α = 0.05: Z1 = - 1.65
Z2 = - 1.96
Asαwe saw Zin α = 0.01: Z1 = + 2.33 α = 0.01:
Figure above of the critical values, this can be expressed in terms of the
Z1 =sample
- 2.33
= 0.01: 1 = + 2.58
means
Z2 = - X 1 and X2,respectively. However they can just as easily be expressed in terms of the Z
2.58
scores, i.e. the number of standard errors from u, the population mean.
In Figure abovea (alpha) is the level of significanceat which the test is conducted. The Z scores
are shown for the respective critical values...These Z- scores can be said to depend on both the
level of significance and on whether the test is one- or two-tailed.
In this approach we calculate the Z - scoreusing the sample data provided. If the Z score for the
sample data lies outsidethe relevant Z critical values, then the decision rule will be to rejectthe
null hypothesis (Ho).
It will be useful at this stage to go through a worked example before using this to illustrate our
seven-step plan for testing hypotheses.
It is thought that the average wage for a large company is £130 a week with a standard
deviation of £30. A sample of 100 employees finds the sample average to be £123.
Solution
Test Ho : μ = £130
H1 : μ = £130
using a 5 per cent level of significance.
This is a two-tailed test since the alternative hypothesis (H ,) has been

expressed as≠ .
If the Z score is calculated for the sample data and found to be outside the Z critical value,
then reject Ho.
Do not reject
Ho
Reject Ho
(0.025) Reject Ho
(0.025)
0.475 0.475
X1
X2 μ X1
σ
Z2
130
0 (
Z 1 S . E=
√n ) Z1
=1.96 1.96
Here X = 123,
X −μ
Gives Z = σ /¿ ¿
√n
123−130
Z=
30/ √ 100

123−130
i.e. Z =
3
7
Z=- 3
Z = - 2.33
Our Z score is outside the Z critical value of -1.96, so we reject Ho.

We can now formally set out our seven-step plan for testing a hypothesis, using
this example to illustrate each step.
ESTIMATION THEORY
Introduction
We have seen in chapter 1 that if a sample is taken from a population, then the mean
of the sample is a good estimate for the mean of the population itself. Let us now
consider what one can say about the population variance.
Most samples have a variance which is less than that of the population from which
the samples were taken. The reason for this is that the extremes of the population
were probably not included in the sample. Another reason is that each sample has
its variance calculated from its own mean and not from the mean of the population.
Hence we need a way of estimating the variance of the population from that of the
sample. This can be started in form of a theorem.
Theorem 14.1 If samples of size n are drawn at random from a parent population
with variance a2, the sample variances, S2, constitute a population with mean
n−1
Mean of sn = = σ2
n

This implies
n−1 2
E( s2) = σ
n
But since E (S2) is still an approximation of σ 2, then we replace σ 2by σ 2stands for
the approximate value of the population variance.
Hence we can write (without loss of generality) e.g equation above

n−1
s2 = = σ2
n
n−1 2
σ2 = s
n
Where s2is the mean sample variance.
n
We note that as long as n is large the factor is very close to 1. We consider a
n−1
sample to be small if it has a size of less than 30.
Now a single number estimating a whole population is by itself of little value. It is more useful to
know a set of values between which the parameter lies. This is why often we have to give what
we call confidence limits or a confidence interval of population parameters. If we did not give an
interval but only single values for μ∨σ 2 then we would have given what are called point
estimates. It is better to give an interval because we are more likely to have enclosed in the
interval of the correct population parameter.
Confidence limits

a) The 950/0 confidence interval.
The 95% Confidence interval

The 95% confidence interval for a population parameter implies that the
population parameter lies within an area of 0.95 of the normal curve.
The z-values which determine this interval are

Z1 = -1.96 and Z2 = 1.96
(from the normal curve tables – schedule 1)
The 95% limits are given by;
1.96 1.96 s
X± =X±
√n √n
(b) The 99% confidence Interval.

The 99% confidence interval
The 99% confidence interval for a population parameter implies that the population
parameter lies within an area of 0.99 of the normal curve.
The z-values which determine this interval are
The 99% confidence limits are given by
2.58 σ 2.58 s
X± =X±
√n √n
Example
In a sample of size 100 we have a mean of 40 and standard deviation of 11. Determine the
95% confidence interval for the mean of the population.
Solution
1.96 σ 1.96 σ
μ± =μ ±
√N √N
11
= 40 ± 1.96 x
√100
1.96 x 11
= 40 ±
10
= 40 ± 2.16
Implying that the population mean lies in the interval

37.84 to 42.16
Or 37.48 < μ< 42.16

We are 95% confident that the population mean lies between 37.84 and 42.16.
Example
A sample of size 70 has a mean of 65 with a standard deviation of 4.2. Find 98% confidence
limits for the mean of the parent population.
Solution
The 98% confidence limits are given by;
2.33 σ 2.33 s
X± =X±
√n √n
2.33 s
= 65 ± 2.33 x
√n
2.33 x 4.2
= 40 ± = 40 ± 1.17
8.37

63.83 to 66.17
We are 98% confident that the population mean lies between 63.83 and 66.17.
Example
An anthropologist measured the heights (in inches) of a random sample of 100 men
from a certain population, and found the sample mean and variance to be 71 and 9
respectively. Find the 99% confidence interval.
Solution
n=100 men;X = 71; s = √ 9 = 3
2.575 σ 2.575 s
X± =X±
√n √n

3
= 71 ± 2.575 x
√ 100
2.575 x 3
= 71± = 71 = 71 ± 0.77
10
i)
70.23 to 71.77
We are 99% confident that the mean of the population lies between 70.23 and 71.77.
When the sample is large, that is greater than 30, we can use the sample variance as an
approximation to the population variance [σ 2].
SMALL SAMPLES
The t - distribution
By small sample we mean a case where n <30. Here the situation is not the same as
the case where n ≥30. In this case there is greater difficulty in estimating the
n
variance σ 2because the term is no longer close to 1.
n−1
Furthermore, if the sample size is smaller i.e n<30, the arithmetic means of small
samples are not normally distributed.
Where the statistic, t, is given by;
x−μ
t= s
√n
Where, S, is an estimate of σ
Features of thet-distribution
i) It is an exact distribution which is unimodal and symmetric about O.

ii) It is flatter than the normal distribution i.e. the area near the tails are greater
than the normal distribution.
iii) As the sample size becomes larger, the t-distribution approaches the
normal distribution.
Degree of freedom
t-distributions are used hand in hand with the appropriate degrees of freedom denoted by;
v=n–1
where; n is the number a/items in the sample.
The use of the t-distribution and its accompanying tables is best illustrated with an
example.
A random sample of size 20 taken from a normal distribution has a mean .x= 32.8
and a standard deviation s = 4.51. Determine the 95% confidence interval of μ.
Solution
For small samples where n <30, the 95% confidence limits are given by
s
x ± ta /2 √n
x=μ
where
t a /2 = t 0.05/ 2=t 0.025
a=1−95 %
= 1-0.95 = 0.05

∝
2
= 0.025 ∝
0.025 =
0.95 2
Z1 a
t
2
v = n – 1 = 20 – 1 = 19 degrees of freedom.
Hence we want to.025 for 19 degrees of freedom from the tables. This is found to be 2.093.
Hence the 95% confidence limits are given by;
2.093 x 4.51
=x± √ 20
2.093 x 4.51
= 32.8 ± 4.47
= 32.8 ± 2.11
Implying that the population mean, μ, lies between
30.69 and 34.91
We are 95% confident that the mean lies between 30.69 and 34.91
Example
Estimate the 99% confidence interval of the parent population if a sample of tendrawn from it
had a mean of 15.0 and a standard deviation of 1.8.

Solution
For small samples where n <30, the 98% confidence limits are given by
x ± t 0.02 /2
α = 1 – 98%
= 1 – 0.98
= 0.02
∝
= 0.01 ∝ 0.02
2 = =
0.98 2 2
t1 t 0.01
In this problem v = n – 1 = 10 - 9 degrees of freedom.
Hence;
s 2.821 x 1.8
x ± t0.01 = 15.0 ±
√n √ 10
2.821 x 1.8
= 15.0 ± 3.16
= 15.0 ± 1.61
Implying that the mean μ of the population lies between

13.39 and 16.61
We are 98% confident that the mean lies between 13.39 and 16.61
Example

Sixteen weather stations at random locations in a state measure rainfall. They

record an average of 10 inches and standard deviation of 1.5 inch. Construct a 99%
confidence interval for the mean rainfall for the state.
Solution
This is a small sample; therefore we use the t – distribution
99% α = 1% = 0.01
Which implies that α / 2 = 0.005
v = n – 1 = 16 – 1 = 15 degrees of freedom
Hence the confidence limits are given by
s 2.947 x 1.5
x ± t 0.05 = 10.0 ±
√n √16
2.947 x 1.5
= 10.0 ±
4
= 10.0 ± 1.11
Implying that the mean rainfall for the state lies between
8.89 and 11.11
Example
The weights of 10 boxes of cereal are 10.2, 9.7, 10.1, 10.3, 10.1,9.8,9.9, 10.4, 10.3 and
9.8 ounces. Find a 99% confidence interval for the mean of all such boxes of cereal,
assuming an appropriate normal distribution.
Solution
10.2+ 9.7+10.1+10.3+9.8+ 9.9+10.4+10.3+ 9.8
Mean, x =
10

The mean x = 10.06

n
2 2 2
s2 = ∑ 2 = ( 0.14 ) + (−0.36 ) + …..+(−0.26) = 0.544 = 0.0604

i=i
( xi−x) (10−1) 9
n−1
Therefore, s = √ 0.0604 = 0.246
For the 99% confidence interval we have

ta/ ¿2 ¿ = t 0.01 /2¿ t 0.005
N = 10, hence v = n 1 = 9 degrees of freedom
Hence the confidence limits are given by
s 3.250 x 0.246
x ± t0.05 = 10.06 ±
√n √ 10
3.250 x 0.246
= 10.06 ±
√3.16
= 10.06 ± 0.25
Implying that the mean of all such boxes of cereal lies between;
ESTIMATION OF POPULATION PROPORTIONS
Proportions represent an attribute of a population rather than the value of a

variable. A proportion may represent the ratio of defective to non-defective goods
produced in a factory or the proportion of consumers who plan to buy a given
product or some similar information.
Estimating populations from sample statistics follows the same pattern as outlined

for means, only that this time round binomial distributions are involved.
Theorem:
If P represents the proportion of successes then q will represent the proportion of
failures in a sample of size n; the standard error of the sample proportion will then be given
by;
pq
s ps =
√ n
The confidence interval is given by;

ps ± Z cl s ps
Example
A random sample of 400 passengers is taken and 15% are in favor of the proposed new time
tables. Determine at the 95% confidence level the proportion of all rail passengers in favor of
the proposed time tables.
Solution
n = 400, p = 0.55, and q = 1 – 0.55 = 0.45
Hence;
0.55 x 0.45
Ssp = = 0.025
400
Therefore, we are 95% confident that population is between the two values;

ps ± 1.96 S ps since Z 95%=1.96
= 0.55 ± 1.96 (0.025) = 0.55 ± 0.049 = 0.501 to 0.599
EXERCISE
1. Suppose that the education level among adults in a certain country has a mean of 11.1
years and a variance of 9. What is the probability that in a random survey of 100 adults
you will find an average level of schooling between 10 and 12?
2. An elevator is designed with a load limit of 2000 lb. It claims a capacity of 10 persons. If
the weights of all the people using the elevator are normally distributed with a mean of
185lb and standard deviation of 22lb, what is the probability that a group of 10 persons
will exceed the load of the elevator?
3. An instructor wishes to estimate the mean performance of his students in a statistics class.
He selects a random sample of 100 students, administers a test and obtains a mean of 15.5
and standard deviation of 5. You are required to construct a 90% confidence interval for
the mean performance of the students.
4. A random sample of 10 items is taken and found to have a mean weight of 60g and
standard deviation of 12g. Determine the mean weight of the population:
(i) With 95% confidence (ii) with 99% confidence
5. From a random sample of 529 televisions off the production line it was found out that
each set has 18 faults on average with a standard deviation of 3.45 faults. Determine the
confidence limits for the production as a whole at:

(i) 99% level (ii) 95% level
6. An inspection department is trying to determine the appropriate sample size to use. They
wish to be within 1 % of true population with 99% confidence. Past records show that the
population defective is 3 in 100. What sample size should they use?
7. ABC Limited manufactures light bulbs whose life span follows a normal distribution with
mean of 1680 hrs and standard deviation of 20 hrs. In a certain period, ABC Ud produced
2000 bulbs.
a) Compute the number of bulbs that will last for less than 1700hrs.
b) ABC Ltd guarantees to replace bulbs which burn for less than 1640 hrs. What
percentage of the bulbs will they replace?
c) A new machine was bought to improve the product. What should be the new guarantee
if ABC Ltd replaces only 0.8% of the bulbs produced?
d) Calculate the probability that the bulbs selected at random burns within the range of
1400 and 1600 hours.
8. A random sample of 10 packets was taken and found to have a mean weight of 50g and a
standard deviation of 9g. Compute, the mean weight of the population at both;
(a) 95% confidence and (b) 99% confidence
Hypothesis testing of the difference between means

When two random samples are taken, frequently its required to know if there is a
difference between the two means.
The distribution of sample mean difference is normally distributed with standard
errors of the difference means given as;

S 2A S 2B
S¿ ¿ =
√ nA
+ nB
Where; SA = Standard deviation of sample A, size n A

SB= Standard deviation of sample B, size n B
Therefore; the Z – score will be calculated from;

X A −¿ X
Z= S¿ ¿¿ ¿
¿ B
Example
A company is known to depreciate all machines in the category A and category B of
assets using the same depreciation rate. It is required to test if the mean
depreciation rate of the two categories is the same. A random sample of 144
machines from category A had a mean depreciation rate of 36.4% with a standard
deviation of 3.6%, while a random sample of 225 machines from category B had a
mean depreciation rate of 36.9% with a standard deviation of 2.9%.
You are required to test if the mean depreciation rates are significantly different at
the 5% level
Solution
Ho: Mean of A = Mean of B

H1: Mean of A ≠ Mean of B
This is a two tailed test, since we are concerned with the direction of the variation.
S 2A S 2B
S¿ ¿ =
nA√ +n
B

3.6 2 2.92
S¿ ¿ =
√ 144
+ 225
= 0.357
Z= |36.40−36.90
0.357 |
= 1.4
The calculated Z – score i.e. z = 1.4 is within the range ±1.96 (Acceptance zone),
hence, Ho is accepted.
Therefore, there is no significance difference between the mean depreciation rate

of the two categories A and B of the asset group.
i.e The depreciation rate of A = Depreciation rate of B.
PROPORTIONS
Hypothesis testing of Proportions

Proportions are variables that follow a binomial distribution. The general standard
error of proportions is given as;
pq
SP =
√ n
With Z – score given as;
p−n
Z= s
p
Where; p = proportion found in the sample

π=¿ the hypothetical proportion

Hypothesis testing of the difference between Proportions

If two samples are randomly selected from the same population, the best estimate of
the two sample proportions is given as;
p1 n
p=
1+ p 2n
2
n1 +n2
Finally, the Z – score is computed as below;
( p1− p2 ) −¿- π 2
Sn -n2
1
Hypothesis testing for small samples (t-distribution)

As previously discussed, small distributions are those with a sample size less than 30. The means
of small samples are distributed around the population mean in a manner similar to but not
exactly, a normal distribution.
The probability distribution of small sample means is calculated using the t-distribution
discussed in the previous chapter.
Example
A firm ordered sacks of chemicals with a normal weight of 50kg. a random sample of 8 sacks
was taken and it was found that the sample mean was 49.2Kg with a standard deviation of
1.6Kg.
You are required to test whether the mean weight of the sample sacks is significantly less than
the nominal weight, using a 5% level of significance.
Solution
This is a one-tailed test as we are interested in whether the mean weight is less than
the nominal.

Therefore;
Ho: mean = 50kg
H1: mean <50kg
Degrees of freedom = n - 1 = 8 - 1= 7
x −μ 49.2−50
t= s /¿√ n ¿ = 1.6 / ¿√ 8 ¿ = |49.2−50
0.566 | = 1.413
In order to find a one-tailed 5% probability point, we look up the 0.10 (two tailed) point in the t-
distribution table. This value is 1.895.
Therefore, the calculated t-score i.e 1.413 lies between the interval ± 1.895 therefore we can
accept the null hypothesis and reject the alternative hypothesis at the 5% level.
NON – PARAMETRIC TESTS

THE CHI – SQUARED ( x 2 ¿ DISTRIBUTORS
Introduction
The tests described in the previous chapters i.e the t-tests and others are used on data comprising
specific measurements i.e quantitative data. These are known as “parametric tests”.
The chi – distribution tests are used on non – parametric data and such are tests that simply
compare frequencies of occurrence. These tests are particularly used when one wishes to test a
theory about qualitative observations e.g the “type of company” or “quality of a product”.
The Test Statistics of a x 2 distribution

Supposewe have a set of observed (Actual) frequencies 01,02….0n and we wish to test some
hypothesis about these frequencies.
Assuming our hypothesis is exactly true then we would have expected the frequencies E1,
E2…..,Enthe expected frequencies; and the test statistic for testing the difference between the

observed and expected frequencies is;
¿¿¿ + ¿¿¿ + ………+ ¿ ¿ ¿

Summarized as;
(0−E)2
x 2=¿❑ ¿❑
E
Critical values and levels of significance
If the hypothesis is true, we would expect the
x 2 statistics to be small because the difference
between the corresponding observed and

expected frequencies would be small,
but if the hypothesis was totally incorrect, then some of the differences would be large and hence
the x 2 statistic would be large.
The x 2statistic test is conducted as a one tailed (upper tail) test. The calculated value of the
test statistic can lie either in the main bulk of the x 2 distribution or the upper tail "critical" (or
rejection) region; where the boundary of the critical region is called the critical value.
The critical value depends on the level of significance of the test often (5% or 1 %).
2
Where: x 5 %(v) = critical value
x 25 %(v) = critical Region (Rejection Zone)

Acceptance Zone
If the test value lies in the critical region, then the null hypothesis H 0 is rejected in
favor of the alternative hypothesis H1

Example
A survey of job satisfaction was undertaken for systems analysts and computer programmes
employed by a large firm. A questionnaire asked 100 workers of each type whether or not
they were satisfied with their job. The results are shown below;
Type of employee Satisfied Not satisfied Totals
Systems analysts 63 37 100
Computer programmes 53 47 100
Totals 116
Is there a significant relationship between the type of employee and job satisfaction? Test at
5 per cent level of significance.
Solution
This is a x 2 test since we are testing the null hypothesis (H o) of no association between type
of employee and job satisfaction against the alternative hypothesis (H 1) that there is such an
association. We are using observations from sample data (200 employees) to help test H o.
If everything is in proportion, and there is no association, then H o is true. We should then

expect that the overall proportion of satisfied employees should be reflected in the totals for
each type of employee claiming to be satisfied.
We return to this idea below when working out the ‘expected’values (E).
Sometimes tabular data are given with row and column totals provided. If not, it will help if
you insert such row and column totals. Note also that the sum of the respective row and
column totals is referred to as the ‘grand total’, here the 200 employees involved in the

survey.
We can follow our usual seven steps, but remembering to apply the procedures already
mentioned for data in tabular form;
Step 1 Ho: no association between type of employees and job satisfaction (i.e. responses are
in proportions).
H1: Association between type of employee and job satisfaction (i.e. responses are in
proportions).
Step 2 α =0.05
Step 3 v=( r−1 ) x ( c−1 )
v = (2-1) x (2-1)
v=1
(Note: When using tabular data, do not count the row total or column total when calculating
v)
x 2 α , v = x 20.05.1 = 3.84
Step 4 Calculate the x 2 statistic from the sample data.
4
2 ( O−E )2
x =∑
i=1 E
Where O = Observations
E = expected value if Ho
(no association) is true.
Here we can apply our formula to work out expected values.

column total
E = row total x
grand total

116
E (systems analysts satisfied) = 100 x 200 =58
84
E (systems analysts not satisfied) = 100 x =42
200
116
E (Computer programme satisfied) = 100 x
200
=42
84
E (Computer programme not satisfied) = 100 x 200 =42
The formula simply helps us impose the overall proportions of satisfied / not satisfied on the
totals for systems analysts and computer programmers respectively. The resulting values tell us
what to expect if the null hypothesis Ho (no association) is true.
We can express our table of expected values (E) as:

Expected values
Satisfied Not satisfied
Systems analysts 58 42
Computer programmes 58 42
We can now calculate x 2, as follows;

O E (O – E) (O – E) ( O−E ¿ 2
¿
E
63 58 +5 25 25/58 = 0.431
37 42 -5 25 25/42 = 0.596
53 58 -5 25 25/58 = 0.431
47 42 +5 25 25/42 = 0.596
2.054
x 2 = 2.054
Step 5: 2.054 < 3.84

Step 6: Accept Ho

Step 7: No association between type of employee and job satisfaction. There is not
enough evidence to conclude that these different types of employees have
different views as to job satisfaction.
REGRESSION ANALYSIS
Objectives
By the end of this chapter you should be able to:
 Calculate the unique 'line of best fit' (least squares line) between dependent variable (y)
and an independent variable (x). In other words you should be able to find the equation of
that unique line Y = mx + c which minimizes the sum of squared deviations from the
line. This is sometimes called the linear regression line.
 Calculate the coefficient of determination (R2) and Pearson's coefficient of correlation
(R) between the two variables, thereby helping to establish the 'goodness of fit' of your
least squares line.
 Calculate and interpret Spearman's 'coefficient of rank correlation'. This seeks to
establish whether or not there is a strong linear relationship between two sets of ranked
data.
 Appreciate the approach to finding the regression line (linear or non-linear) which best
fits more than two variables. In other words be broadly familiar with
the techniques and problems of multiple regression analysis.
Business activity is an aggregate of tens of thousands of decisions taken daily by small and large
firms alike. Decisions bring about change and, hopefully, such change will benefit the firm and
the wider economy. For example, 'If I spend more on advertising, sales volume will grow', 'If I
invest in the latest equipment, productivity will increase’
The cornerstone of many of these expectations is usually past experience by the firm in question,

or the widely reported experiences of other firms. Of course we can be more confident that the
expected outcome will in fact occur, if it is supported by the recorded experiences of a large
number of decision takers.
The statistical techniques of regression and correlation arc important in helping determine
whether such relationships can be established. Usually the firm is interested in whether changing
some independent variable (say advertising) will have the desired effect on some
dependent variable (say sales volume). As we shall see, the section on regression will help us
identify the equation of t he line or curve which 'best fits' the recorded data, often displayed in
the form of a scatter diagram. The section on correlation will help us determine
'how well' that line or curve actually fits that recorded data.
Throughout this chapter we shall present two alternative approaches to calculation. The first will
use the original data for the dependent and independent variables, Y and X respectively. The
second will use redefined data for these variables, giving us the opportunity to use much simpler
'coding formulae' for our calculations. Although both approaches will be presented, you can
concentrate on that approach followed by your lecture course (or the approach you find the
easiest').
Regression analysis involves establishing a relationship between two or more variables.

Here we initially illustrate in terms of a linear relationship, although more sophisticated
approaches can establish similar non - linear relationships. In 'simple' regression analysis we
assume two variables only, Y the dependent variable and X the independent variable.
Simple linear regression
We consider the equation of a straight line (linear equation) in more detail in incoming chapters
Here we note that the general equation of a straight line is:

Y = MX + c
Where Y = dependent variable
X=independent variable
m = gradient of the line
c = point where the line intersects the Y axis
Figure below shows a scatter diagram with dots representing the different coordinates (X, Y)
plotted on the diagram. Our aim is to find an estimated line (Ŷ = mx+ c) which best fits the data.
We use the symbol Y to refer to the estimated value of Y from the least squares line.
Y

Ŷ = mX + c
2
d n


d 21
 di = deviation of each
m observation from the line
c
c = the intercept
0 X

Figure: Finding the least squares line (LSL) Ŷ = mX + c
Prediction
Of course, once we have obtained our estimated least squares line we can use it for prediction
(forecasting). We can insert values of the independent variable (Xi) not yet experienced and
predict values of the dependent variable (Yi). Of course the confidence we can have in any such
prediction will depend upon:
 the past relationship between Y and X continuing into the future,
 The estimated least squares line (f') fitting the past data rather well.
CORRELATION
The idea here is to measure how well the regression line fits the actual data.
Two key measures are frequently used in this respect.
 the coefficient of determination (R2)
 Pearson's coefficient of correlation (R)
Yi Yi
Ŷ = mX + c ● ● ● ● ● ● ● ●
● ● ● ● ● ● ● ●
●
● ● ● ● ● ● ● ●
● di = d e ● ● ● ● ● ●
Ŷ ●
Ŷ
● ● ● ● ● ● ● ●
● ● ● ● ● ● ● ●
STUDY MATERIAL FOR TEAM UNIVERSITY Page 158 ● ● ● ● ● ● ● ●
● ● ● ● ● ●
●
c
0 Xi 0 Xi
n n
2
a) R = ; all variation
(∑ )
i=1
2
d is explained
1
2
b) R = 0; all variation
(∑ )
i=1
d12 is
Coefficient of determination (R2)
R¿total variation ¿
The coefficient of determination (R2) is the ratio of 'explained variation to 'total

variation', clearly when R2 = 1, then all the deviation and therefore variation can be explained or
accounted for by the regression line. We have a perfect fit.
Similarly when R2 = 0 (or close to 0) as in Figure 3.6(b), none 01 the deviation and therefore
variation can be explained or accounted for by the regression line. We effectively have a random
scatter of points to which any regression line fits as well as any other.
The closer R2 is to 1, the better the fit of the least squares line to the actual data.
Pearson's coefficient of correlation (R)
R¿total variation ¿
Pearson's coefficient of correlation (R) is the square root of the coefficient

of determination R2.
Just as R2 varies between 1 and 0, so R varies between ±1 and 0. Perfect correlation' implies a
value for R of + 1 when the relationship between Y and X is direct, and - 1 when the relationship
between Y and X is indirect (inverse).

Introduction
The methods of statistical analysis examined so far have been such that only one variable
corresponding to each member of a particular universe has been considered, e.g. the marks
obtained by a group of students in a certain subject or the age of a group of individuals. The
statistical tests have been developed utilizing the probability distribution of the particular single
variable x. However it is good to note that one of the main tasks of management decision and
business investigation is the analysis of the interrelations of the variables being investigated.
As frequently done in business administration, the interrelationships can be obtained by studying

how one variable x changes with respect to another variable, y. For example, as a manager of a
company you may want to know how total costs are affected by an increase in output or how
increase in sales has affected the increase in advertising costs.
The relationship between total sales and advertising costs will help the manager to make analysis
about the movement of such a relation (i.e. whether the movement is positive or negative).
160
140
Total 120
sales 100
(millions)
80
60
40
20

0 100 200 300 400 500 600 700 800 1000 1100
advertising Costs (Millions)
By plotting the two variables on a straight line graph we can obtain the nature of the
relationship and which one variable can be deduced from another and vice versa .
Figure above is an example of the graph of sales versus advertising costs.
It can be seen that the points lie almost on a straight line. By eye one can very easily draw a
straight line that very nearly passes through all the points.
However one should note that there are cases where the relationship may not be clearly
marked so that the relationship sought can only be approximated. Such cases are most likely
to occur in instances where the variables concerned may be height and weight of N
individuals from the N pairs of observations. One may be in need to determine the
mathematical form of the relationship existing between the two variables. In this case the use
of a scatter diagram becomes essential.
The scatter diagram
Ten adults have their weight taken and their height measured. The results obtained are shown
in the table below.
Weight and heights of 10 adults
Adult Weight (Kg) Height (ft.)
A 60 5.1
B 61 5.3
C 62 5.2
D 63 5.5
E 64 5.6
F 65 5.6
G 66 6
H 67 5.7
I 68 6.2
J 69 6.2

From such data one may want to ask – how does the height of an individual vary with his
weight? One way to answer this question is to plot the above data in graphical form. By
using coordinate paper and using suitable intervals we can plot on the y axis the height of the
individuals and on the x – axis their weight. The points are then marked off with say crosses.
The resulting figure is called scatter diagram.
6.4
x
6.2 x
x
6.0 x
Height
5.8
(ft) x
5.6 x
x
5.4
x
5.2
5.0
60 62 64 66 68 70
Weight (Kgs)
As we can see from the scatter diagram above the points show that there is an obvious linear
relationship between the weight of an individual and his height. However, if one were to fit
by freehand drawing to the set of points, then different lines could easily be obtained by
different people. Hence in order to be consistent we should devise a mathematical technique
by which line fitting to such data produces a line of “best” fit reproducible by everyone.
Curve of Regression
Under normal circumstances a relation between two variables has one of the variables being

independent and the other being dependent. In a formula connecting two variables the
subject is taken to be dependent variable, and when represented graphically, the independent
variable is usually plotted along the “x-axis”. However in most bivariate distributions the
same relation exists although either variable can be taken to be dependent or independent.
This normally depends on what questions are being asked about the distribution in
consideration.
Consider a bivariate distribution (x1,y1), (x2, y2), etc. One may seek to find the formula for a
curve which expresses x in terms of y or y in terms of x. In general these two formulae will
not be the same. They can only be identical under the special circumstances when all pairs of
the distributions are all identical. That is, the curve passes exactly through all the points.
Therefore in practice we have two formulae.
a) In general terms, the equation which expresses y in terms of x is given by

y = a1 + b1x + c1X2 +……
b) the one which expresses x in terms of y is given by

x = a2 + b2x + c2X2 +……
c) Equation (a) is called the equation of regression of y on x. equation (b) is called

equation of regression of x on y. we call the resulting curves of regression. In the
cases dealt with here. We are interested in linear relationship between two pairs of
distributions. Hence strictly speaking we are interested in the equation of regression
of y on x given by.

y = m1x + c1
d) And the equation of regression of x on y given by

x = m2y + c2
Equation s (c) and (d) are just special cases of equations (a) and (b) respectively;
Figure below shows a line “best” fit drawn by eye.
6.4
6.2 x
Height
6.0
(ft) x
G x
5.8
x x
5.6 x x
x x
5.4
x
x
5.2
x
5.0
60 62 64 66 68 70
Weight (Kgs)
The procedure for drawing a line of best fit is as follows: Find the mean centre, G of the
estimated line of regression. This is the point G(x,y), where x is the mean of the x values and
y is the mean of the y values. Using a ruler, the line of regression is drawn to fit the plotted
points as closely as possible while passing through G. the equation of the estimated line of
regression can be obtained easily by first calculating its gradient (slope), m. obtain this by

using the coordinates of two points on the line which are far enough apart and then substitute
the value of the gradient into the equation.
y – y = m (x-x)
Using this procedure the line of best fit of Fig. is found to be (depending on the person who
draws the line)
y=0.125 x−2.42
As we said above we must have a mathematical technique by which everyone should be able
to reproduce a line of best fit. We shall now study this technique of how to obtain a line of
best fit by calculation and then compare this equation with the one obtained by estimation.
Calculation of Regression Lines
Table 1 Calculation of regression lines
x y X2 y2 xy
60 5.1 3600 26.01 306.0
61 5.3 3721 28.09 323.3
62 5.2 3844 27.04 322.4
63 5.5 3969 30.25 346.5
64 5.6 4096 31.36 358.4
65 5.6 4225 31.36 364.0
66 6.0 4356 36.00 396.0
67 5.7 4489 32.49 381.9
68 6.2 4624 38.44 421.6
69 6.2 4761 38.44 427.8
⅀x= 645 ⅀y= 56.4 ⅀x2= 41685 ⅀y2= 319.48 ⅀xy= 3647.9

In order to calculate a regression line we need a table with columns for x, y, X2, xy as
shown below. Consider the example of ten adults above. Consider the foregoing table.
645 56.4
x= =64.50∧ y= = 5.64
10 10
The gradient of the regression line of y on x is calculated from the equation;
⅀ ( xy )−n . x . y
m 1=
⅀ ( x )2−n . x 2
The gradient of the regression line of x on y is calculated from the equation
⅀ ( xy )−n . x . y
m 2=
⅀ ( y )2−n . y 2
From the table above we have

⅀ ( xy )−n . x . y 3647.9−10 x 64.5 x 5.64
m 1= =
⅀ ( x )2−n . x 2 41685.0 x 64.5 x 64.5
3647.9−3637.8 10.1
= 41685.0−416025 = 82.5 =0.122
Substituting for mi in equation i.e. y – y = m (x - x) we have

y−5.64=0.122( x −64.5)
y−564=0.122 x−7.87
y=0.122 x−2.23
Comparing with the estimated regression line one can see that the difference is very small.
Hence the estimated regression line was quite accurate.

Example
The following table shows the number of units of a good produced and the total costs incurred
Units Total cost 100 200 300 400 500 600 700
Shs 40,000 45,00 50,000 65,000 70,000 70,000 80,000
Required
i) Calculate the regression line for Y on X
ii) Assuming 250 units were produced, compute the total costs incurred.
SELF-CHECK QUESTIONS
1 (a) Use the data below to create a scatter diagram
X 1 2 3 4 5 6 7 8
Y 2 5 6 7 9 12 15 16
(b) Find the regression line relating Y (as dependent variable) to X (as
independent variable).
(c) Comment on your results.
2 (a) Use the data below to create a scatter diagram.

X 1 2 3 4 5 6 7 8 9 10
Y 19 18 16 16 20 13 6 6 11 9
(b) Find the regression line relating Y (as dependent variable) to X (as
independent variable).
(c) Comment on your results.

Find the 'line of best fit' (least squares line) for the following data.
X 4 5 6 12 13 13 16 16 17 18 19
Y 47 11 12 24 20 27 30 30 30 25 33
1 4 0 5 6 5 9 2 9 4
X 20 22 24
Y 30 37 24
2 1 1
LINEAR PROGRAMMING
INTRODUCTION
Linear programming was first developed by George B. Danzig in the late 1940's and was first
used by the United States Air Force as an aid to decision making during the second world
war.
Linear programming became a very popular tool in operations research in the postwar era.
It is a mathematical programming technique used in balancing many variable factors so as to
obtain/achieve a predetermined objective, e.g we may wish to apply linear programming to
balance production capacity so as to minimise costs. In order to apply linear programming,
there must be a linear relationship between the factors, some of which are variable, and some
non-variable.
Fortunately many relationships can be "linearised" i.e. reduced to a kind of linear form.
Programming is used to refer to the mathematical technique used to get the best possible
solution to a problem involving limited resources.
AREAS OF APPLICATION
There are several areas of application for linear programming. The point to remember is that

resources are scarce and their use involves opportunity cost. The use of resources must be
optimal. Potential areas include:
i. Product mix problems (recipe)
ii. Job assignment problems
iii. Capacity allocation problems
iv. Production scheduling
v. Transportation problems
vi. Purchasing
vii. Investment problems
viii. Location problems
FORMULATING AND SOLVING LINEAR PROGRAMMING PROBLEMS.
Requirements of linear programming problems

i) Objective: The firm must have an objective to achieve
ii) The problem must have alternative courses of action
iii) Constraints: there must exist resource constraints.
iv) Mathematical Relationship: We must be able to express the objective and its
limitations in terms of mathematical equations or inequalities.
Definitions and Formulation of a linear Programming problem

a) For a linear function x and y
z = ax + by
Where a and b are constants.
In a linear programming equation, we require that the corresponding constraints be represented

by a system of linear inequalities (involving “≤∨≥” or linear equations in x and y. The
formulation of a linear programming problem involves the following stages / conditions:

a) The objective function: the function to be maximized or minimized.

b) Feasible solution: Area of feasible points showing different combinations of solutions.
c) Optimum solution: the solution which gives the maximum or minimum value of the
objective function.
d) Non-negativity conditions e.g x ≥ 0 ; y ≥ 0
Example
A company, B & K Enterprises, makes two products, tables (T) and chairs (C) which must be
processed through assembling and finished product departments. Assembly has 60 hours
available and finishing has 48 hours. Manufacturing tables requires 4 hrs in assembly and 2
hrs in finishing. Manufacturing each chair requires 2 hrs in assembly and 4 hrs in the finishing
department. If profit is 8/= per table and 6/= per chair, determine the best possible
combination of tables and chairs that should be produced for sale to maximize profits.
Solution
Table (T) Chairs (C) Total Hrs
Available
Assembly Dept. 4 2 60
Finishing Dept. 2 4 48
Profit per unit 8 6
Objective Function: to maximize profit

8T+ 6C =Z
Subject to the constraints

4T+ 2C = 60
2T+4C =48
Non-negativity conditions: T ≥ 0 ; C ; ≥ 0
Graph the Constraints
Chairs
(0,30)
4T + 2C = 60
D
(0, 12)
(12, 6)
C
2T + 4C =48
(24, 0)
A T
B (15,0)
Tables
4T + 2C ≤ 60 ;

If T = 0, C = 30; if C = 0, T = 15
T + 4C = 48; if T = 0, C = 12 if C = 0, T = 24
To obtain point of intersection solve the constraint equations simultaneously
4T + 2C = 60
2T + 4C = 48
T = 12; C = 6
To find point where profits are maximized test the corners of the bounded area for
Z = 8T + 6C
A (0,0) ----0
B (15,0)----120
C) (12, 6)-----132
D) (0,12)-----72
Example 2
A company produces two types of widgets, Manual and Electric. Each requires in its
manufacture the use of 3 machines: A, Band C. The production process use up time as in the use
up time as in the following table.
A B C Profit /
unit
Manual 2hr 1hr 1hr 4
Electric 1hr 2hr 1hr 6
Hrs available 180 160 100
SOLUTION

Let x and y denote the number of manual and electric widget respectively.
x ≥ 0 ; y ≥0 (Non-negativity)
The constraints are as follows
2x + ≤180
x+2y ≤160
x + y ≤100
The objective function is P = 4x + 6y (we wish to maximize this function)
= y = -2/3x + P/6.
The line y = -2/3x + p/6 defines a family of parallel lines, each having a slope -2/3 and y
intercept (0, p/6) e.g if
p = 600 then y = -2/3x + 100
This line is called an ISOPROFIT LINE; (gives all possible combinations of x and y which
give the same profit).
Graphing the constraints
2x+y=180; ifx =0; y=180

If y = 0; x =90
x + 2y = 160 if x = 0; y = 80.
If y = 0 ; x = 160
x + y=100 If x= 0; y=100
if y = 0; x = 100.
Y (electric)

160 2x + y = 180
120
x + y = 100
B
x + 2y = 160
The points bounded by the polygon ABCDE which is the area of feasible solutions give the
following coordinates.
A = (O,O) B = (90,0) C = (80,20) D = (40, 60) E = (0,80)
To find D we solve
To find C we solve
x +y = 100 and
2x + y = 180 simultaneously;
x = 80 y = 20O
To find D we solve
x +2y = 160 and
2x + y = 100 simultaneously;
x = 60 y = 40
To evaluate the objective function P = 4x + 6y at each point we find that

P(A) = 4(0) + 6(0) = 0

PCB) = 4(90) + 6(0) = 360

P(C) = 4(80) + 6(20) = 440
P(D) = 4(40) + 6(60) = 520
P (E) = 4(0) + 6(80) = 480
You may wish to practice and internalize the above principles using the following exercises.
Always remember the steps required to solve the problem.
Maximize Z = 45x = 55y
subject to constraints
6x + 4y ≤ 120
3x + 10y ≤180
x ≥ 0 ; y ≥0
2- Determine the optimum Z = 2x + 10y, subject to the constrains

2x + y ≤6
5x + 4y ≥20
x, y ≥ 0
3. Determine values of X I, X2 that maximize the function

f(X1, X2) =3XI + 5X2
subject to the constraints
X1 + 2X2 ≤10
3XI +X2 ≤0; X1 ,X2 ≥0
SOME ISSUES IN LINEAR PROGRAMMING
a) Infeasibility
This occurs m the case where no solution satisfies the constraints. When graphed, infeasibility
shows there is no area of feasible solutions which satisfy all the constraints. Infeasibility implies
that more resources be required to satisfy the objective.

EXAMPLE
Z= 2X1 + l0X2
2X1 + X2 ≤ 6
5X1 + 4X2 ≥40
For 2X1 +X2≤6
if X1 = 0; X2 = 6
X2 =0; X1 = 3
For 5X1 + 4X2 ≥ 40
if X1 = 0 X2 = 10
if X2 = 0 X1 = 8
(0.10)
(0.6) 5x1 + 4 x 2 = 40
2x1 + 4 x 2 = 6
(3.0)
(8.0)

The two equations are infeasible because they do not merge. Hence no optimum solution can
be found.
b) Un boundedness
There are some sets of constraints for which the region of feasible solutions is not bounded.
This may imply incorrect formulation of the problem.
e.g. given the constraints

L1 = 2X1 + X2 ≥ 6
L2 = 5X1 + 4X2 ≥ 40

L1
L2
This region lies above the line L2 = 5X1 + 4X2 ≥40

Suppose a feasible region is defined by y = 2, x ≥ 0 and y ≥ O. The region is the horizontal line y
= 2. The region is unbounded since it has no definition. If the solution to be maximized is
Z=x+y
subject to the constraints,

x ≥ 0;≥ y ≥ 0
then Z=x+2
Since y = 2 as x increases without bound, so does Z. Thus no feasible point maximizes Z.

However, if we wish to minimise Z = x + y over the same region. Since Z = x + 2, then Z is a
minimum when x = 0, and the optimum solution is the comer point (0, 2).
Z=2 Z=6 Z = 10

Y=2
4 8
Let us now use a real world problem to illustrate the application of Linear programming to a
product mix problem.
A produce grower is purchasing fertilizer containing three nutrients, A, B, and C. The

minimum needs are 160 units of A, 200 units of B and 80 units of C. There are two popular
brands of fertilizer on the market. Fast grow, costing 4/= per kg, contains 3 units of A, 5
units of B and 1 unit of C.
Easy grow, costing 3/= a kg, contains 2 units of each nutrient. If the grower wishes to minimise
cost while still maintaining the nutrients required, how many kgs of each brand should be
bought?
The solution can be tabulated and the objective function and key constraints laid out as follows
A B C Cost / kg
Fast Grow (x) 3 5 1 4
Easy Grow (y) 2 2 2 3
Units required 160 200 80
We wish to minimize the function C= 4x + 3y

subject to the constraints
x ≥0; y≥0
3x + 2y ≥ 160

5x + 2y≥200
x + 2y≥ 80
For 3x + 2y = 160
if x = 0; y = 80
y = 0; x = 53.3
For 5x + 2y = 200
if x=0; y=100
y = 0: x = 40
For x+2y=80
if x = 0; y =40
y = 0 ; x = 80
Graphing the constraints
Easy grow
3x + 2y = 160 D
80
C
x + 2y = 80
40
B
A
40 80
5x + 2y = 400 Fast grow

The feasible region is unbounded. The member of the family of lines C = 4x + 3y (Isocost line)
which gives them a minimum cost subject to the constraints, intersects the feasible region at
comer point B. This IS the ISOCOST line whose v-intercept is closest to the origin and has at
least one point in common with the feasible region. The coordinates of B are found by solving
the following system of equations:
3x + 2y = 160
x + 2y = 80
x = 40; y = 20.
In which case C = 220shs. The produce grower should buy 40 kgs of fast grow and kgs of easy
grow.
[A = (80,0), B = (40,20), C=(20,50), D = (0,100)] Suppose we want to maximize C?
c) Multiple Optimum Solutions
an objective function may attain its optimum value at more than one feasible point. In this case,
MULTIPLE OPTIMUM SOLUTIONS are said to exist.
Example:
Maximize Z = 2x + 4y subject to the constraints.
x – 4y ≤−8
x + 2y ≤ 16
x ≥0, y≥0
Z has maximum values at B(8,4) and C(0,8), this maximum also occurs along the line
x + 2y = 16 which has the same slope as Z = 2x + 4y.
8 z x – 4y = - 8

x x + 2y = 16
Evaluating the objective function at X, Y, and Z gives
Z(X) = 2(0) +4(2) = 8

Z(X) = 2(8) + 4(4) = 32
Z(Z) = 2(0) + 4(8) = 32
CALCULUS AND BUSINESS APPLICATIONS

INTRODUCTION
In this chapter we look at the idea of calculus and its application to the solution of a number
of business related problems. We can find maximum or minimum solutions involving linear
relationships between variables. Here we how calculus help us find maximum or minimum
solutions involving non – linear relationships between variables.
Calculus can, for our purposes, be regarded as involving two key processes, namely
differentiation and integration. We consider each of these processes separately, beginning
with differentiation.
Objectives
When you have read this chapter you be able to;

i) Use the process of differentiation to calculate turning points, both maximum and
minimum.
ii) Solve a variety of business related problems using the process of differentiation,
such as the output / price the business must set if it seeks the maximization of
revenue or profit, or the minimization of cost, etc.
iii) Use the process of integration to calculate areas under a curve.
iv) Solve a variety of business related problems using the process of integration such
as the total revenue, profit or cost of producing various levels of output, etc.
Differentiation
Differentiation refers to the process whereby calculate the gradient to a curve at any point.
Clearly for a linear function or equation y = mx + c, the gradient, m is a constant at every
point. However to find the gradient to a non linear function. We would need to draw a
straight line touching the curve at each particular point (the tangent to that point) and then
find the slope (gradient) of that tangent.
We can short circuit this whole process by using the technique of differentiation. We can
then establish a formula which will give the value of the tangent drawn at any point on the
curve. This formula is often referred to as the first derivative of the curve. So important is
this technique to understanding much of the analysis underpinning the solution of business
related problems that we shall consider it in some details.
Gradients and limits
The idea of limits is central to understanding the process of differentiation. In fact we shall
see that the slope of a tangent just touching a curve is in fact the limit of the slope of a chord
joining two points along that curve.
The relationship y = x 2
¿¿ + ∆ X¿
∆Y
P R
y¿
−x 0 x¿ x
¿¿ + ∆ X¿
Points along the curve, the slope of PQ will never actually equal the slope of PT, but it will
become so close to the value of I'T that for all intents and purposes it can be regarded as
identical. We can use the following shorthand to express this.
Slope of tangent PT = limit to the slope of the chord PQ, as Q approaches p
i.e Slope of tangent PT = ❑limit

PR → 0 ( QR
PR )
We now apply these ideas to curves involving the dependent variable y and the independent
variable x. For purposes of illustration we shall use the simple quadratic relationship y = x" as in
Figure above. The symbol ∆refers to a change in any variable.
We construct a chord PQ connecting point P (with co-ordinates x*, y'*) and point Q (with co
ordinates x* + ∆ x , y* +∆ y ¿
Following our earlier reasoning we can state the following:
Slope of tangent to curve at P=¿limit

PR → 0 ¿ ( QR
PR )
∆y
¿ (
∆x)
PR → 0
dy
PR → 0 ¿ ( )
dx

dy
The expression is merely shorthand for the expression directly above it and is termed the
dx
first derivative. Put another way we have differentiated the variable y with respect to x. Of course
what we have done is to find an expression for the slope of the tangent to any point on the curve
as being the limit of a known expression for the slope of the chord to that curve.
From figure above, we can show that for the curve y = x 2, the first derivative will always be
dy
= 2x at each point on that curve. The workings behind this solution are indicated in Box 1 at
dx
the end of this chapter.
This extremely powerful result tell us that for any given value of x we can find the slope of the
tangent to the curve at that point.
Thus for x = 1, the slope of the tangent to the curve at x = 1 is

dy
= 2x = 2(1) = 2;
dx
For x = 2, the slope of the tangent to the curve at x = 2 is

dy
= 2x = 2(2) = 4; and so on
dx
If we repeat this process for other curves then we shall see that a pattern emerges which forms
the basis for an important formula used in differentiation.
dy
Suppose we differentiate (find for) the curve y = 3x 2 using our earlier approach. As we can
dx
dy
see from Box 2 at the end of this chapter, the solution will be that =6 x
dx

dy
Thus for x = 1, the slope of the tangent to the curve y = 3 x 2 at x = 1 is = 6x 6(1) = 6;
dx
dy
For x = 2, the slope of the tangent to the curve at x = 2 is =6 x=6 ( 2 )=12 ;
dx
And so on.
General Formula for Differentiation

In fact the pattern which will always result from such differentiation will give us the following
general formula;
If y = axn
When a = any constant
x = any variable
n = any power
dy
then = naxn – 1
dx
thus if y = 1 x 2
dy
= 2.1 x2 – 1 = 2x
dx
and if y = 3x2
dy
= 2.3x2-1 = 6x
dx
This extremely powerful result will allow us to find (in the limit) the slope of the tangent drawn
to any point on a and so on.
particular curve.
Can you suggest what we get if we differentiate, respectively, the equations for the following
curves:
a) Total cost
(b) Total revenue

(c) Total profit?

dy
Use the rule for differentiation to find the gradient ( ) to each of the following expressions
dx
x3 1 3 x4
a) y = 9x b) y = 4 x 2 c) y = 3x 3 d) y = 5x 4 e) y = (i.e y = x ) f) y = (i.e y=
3 3 4
1 4
x
4
For each of the curves or lines given by the expressions in Question 11.1 above, find
the value of the gradient at:
(i) x = 1
(ii) x = 2
Turning points
Clearly the ideas of maxima and minima (i.e. turning points) are vital to many business
related problems. As we can see from Figure below the value of the first derivative (the gradient)
dy
will be zero for any turning point, whether maximum or minimum. In other words we can
dx
dy dy
differentiate the equation of the curve y = x 3 by finding . If we plot (= 3 x 2) against x, as in
dx dx
Figure.
dy
Set = 0 and solve for x, then for a quadratic equation we can expect two solutions for the
dx
turning points x1 and x2.
Unfortunately we will not, at this stage, be able to distinguish between the maximum and
minimum solutions. However by taking second derivatives (i.e finding the gradient of the
gradient), we can distinguish between the different turning points.
Using differentiation to identify turning points
A A: Gradient = 0
a) B: Gradient = 0
STUDY MATERIAL FOR TEAM UNIVERSITY Page 187 C: Point of inflexion
e.g. (y = x3)
B
x1 x2 x
Plots gradient at each point of
b) curve e.g ( dydx ) = 3x 2
( dydx )
x1 x2 x
Now differentiate again

= 2nd derivative e.g
d2 y
c) ( dx 2
=6 x )
d 2y
( ) dx 2
If 2nd derivative is – (minus), then maximum at point A in diagram (a)

If 2nd derivative is + (plus), then minimum at point B in diagram (a)

Figure shows gradient ( dydx ) or the gradient ( dydx ) already displayed in figure part (b) above. This
2
d dy dy
d x dx dx )
(
y
is known as finding the second derivative and is expressed as 2
of
Where we have the minimum at x1 the value of the first derivative is

zero, and the value of the second derivative (at x1) is positive.
The following worked example illustrates this approach.

y=x3 - 27x+3
Find the turning points for this equation Distinguish between maximum and minimum
turning points.
Solution
dy
= 0 at a turning point
dx
dy
i.e. = 3x2 - 27 = 0 (applying our general formula for differentiation to each term
dx
separately)
3 x 2 = 27
x2 = 9
x - +3 or -3 are the turning points
d2 y dy dy
2 = 6x (second derivative, applying to the previous )
dx dx dx
At x = +3, second derivative = +18
x = +3 is a minimum
At x = -3, second derivative = -18
x = -3 is a maximum
Find the maximum and/or minimum turning points for the following curves

a) y = X2 - 10x + 16
b) y = 12 + 4x - X2
c) y= x3 - 3x2
d) y = 9 - 6x + X2
e) y = x3 - 27 x + 6
x3 7
f) y = - + 12x
2
3 2x
Rules for differentiation

We can set out our earlier 'rule' for differentiating an expression more formally. In all the
examples above we were differentiating an expression involving sums (plus signs) or differences
(minus signs). However there are other types of expression to which our rule could apply, such
as those involving multiplication (product) or division (quotient).
In all the following 'rules' we use the letters μ and v to stand for parts of the expression we arc
differentiating, with each of these parts involving the variable x in some way (i.e. μand v are
functions of x).
The derivative of a sum or difference

If y = u + v or y = u – v (where u and v are functions of x)
dy du dv dy du dv
= + or = -
dx dx dx dx dx dx
y = 2x4
Solution
dy
=8 x 3 - 8x
dx

The derivative of a product
dy dv du
=u +v
dx dx dx
du
y = (3x + 1)(3 x 2) (u = 3x + 1, =3
dx
dv
v = 3 x 2, = 6x)
dx
Solution
dy
= (3x + 1) . (6x) + (3 x 2 ¿ . (3)
dx
dy
= 18 x 2 + 6x+ 9 x 2
dx
dy
= 27 x 2 ¿ + 6x
dx
The derivative of a quotient
u
y= (where u and v are functions of x)
v
dy dv du
=u -v
dx dx dx
v2
3 x −2 du
y= [ ¿ 3 x−2 , =3
5 x +3 dx
dv
v=5 x−3 , =5 ¿
dx

Solution
dy ( 3 x−2 ) . ( 5 )−( 5 x +3 ) . ( 3 ) .(3)

=
dx ¿¿
dy 15 x – 10−15 x −9
=
dx ¿¿
dy −19
=
dx ¿¿
The derivative of a function of a function
If y = f(u) where u = f(x)
dy du du
= .
dx du dx
4 du
y = (3 x 2+ 2¿ ¿ 4 [ y=u , = 4u3
du
du
u=53 x 2−2 , =6 x ¿
dx
Solution
dy
= 4u3. 6x
dx
= 24x . u3
= 24x . (3 x 2+ 2¿ ¿3
Differentiate each of the following expressions using an appropriate rule

a) y = 7 x 2 + 3 x 2 b) y = 4x5 – 4x3 c) y = (2x + 3) (2x3) d) y = (3x + 4) (3x4)
(2 x+ 3) 4 x 2−4 x 3
e) y = f) y = g) y= (2 x 2 + 3¿2 h) y = (3x3 + 4)3
2 x2 2 x2 + 4

Applications of differentiation
Revenue cost and profit
Obviously turning points, involving maximum or minimum outcomes, arc likely to have
widespread applications ill economics or business. These applications make use of some
introductory ideas involving revenue, cost or profit.
Total Revenue (TR) = Price (Average revenue) x Quantity

TR
Average Revenue (AR) = Price =
Quantity
Total Cost (TC) = Total fixed cost (TFC) + Total variable cost (TVC)
TC
Average total cost (ATC) =
Quantity
Total Profit = total revenue – total cost
Suppose that statisticians employed by a large firm have estimated the demand
(average revenue) curve and average total cost curve for the firm as follows;
D = AR = 21 – x
x2
ATC = - 3x + 9
3
Where x = output in units
AR = Average revenue (£)
ATC = Average Total cost (£)
The firm can use differentiation to find, for example, the output which maximizes either total
revenue or total profit.
Maximum total revenue
Total Revenue = average revenue (price) x quantity (output)

TR = AR x x
TR = (21 – x) x x
TR = 21x - x 2
If we let y = TR
dy
Then = 0 for a turning point
dx
i.e 21 – 2x = 0
21 = 2x
10.5 = x
nd d2 y
2 derivative = = -2
d x2
So the turning point is a maximum since the 2nd derivative is negative.
An output of 10.5 units will maximize total revenue
Maximum total profit
Remember total profit (TP) = total revenue – total cost
Total Revenue (TR) = average revenue x quantity (output)
So TR = (21−x ¿ . 21 x−x 2
x2 x3
TC = ( 3 )
−3 x +9 . x¿ −3 x 2+ 9 x
3
TP = TR – TC

x3 2
TP = [21x - x ¿ -
2
3 [
3 x +9x ]
x3
TP = - + 2 x 2 + 12x
3
If we let y = TP
dy
Then = 0 for a turning point
dx
i.e - x 2+ 4 x +12=0
( - x + 6) (x + 2) = 0 factorizing)
i.e. x = 6 and x = -2 are the solutions
Taking the 2nd derivative
d2 y
= 2x + 4
d x2
When x = + 6, 2nd derivative is negative (-8)
So x = +6 is a maximum
When x = -2, 2nd derivative is positive (+8)
So x = -2 is a minimum
An output of six units will maximize total profit
The (maximum) Total Profit earned at an output of 6 unit is:
63
TP = - +2(6¿2 + 12(6)
3
i.e. TP = - 72 + 72 + 72
TP = £72
Price

We can, of course, easily find the price at which the above outputs must be sold. Remember
price = average revenue.
Price = AR = 21 - x
when x = 10.5 (maximum total revenue), price = 21 - 10.5 = £10.5
when x = 6 (maximum total profit), price = 21 - 6 = £15
Minimum cost
The firm in our previous example has estimated that its average total cost (ATC) is given by
the expression.
x2
ATC = - 3x + 9
3
Where ATC = average total cost (£)
x = output in units
We may now wish to find the 'technical optimum' output, i.e. that level of output for which ATC
is a minimum. Again we can use our rules of differentiation to solve such a problem.
Let y = ATC
dy
= 0 for a turning point
dy
3
x−3=0
2
3
x−3
2
x=4.5
To check that this turning point is a minimum, we find the 2nd derivative.

d2 y
= + 23
d x2
The sign of the 2nd derivative is positive, so the turning point is a minimum.
An output of 4.5 units will minimise average total cost, i.e. be a technically efficient output.
Marginal Analysis
In some of the solutions to problems involving revenue, cost and profit we needed to
differentiate (find the gradient to) the total revenue, total cost and total profit curves respectively.
When we did this we were in fact finding the expressions for marginal revenue, marginal cost
and marginal profit respectively.
We can usefully illustrate this idea in terms of marginal revenue (MR). Remember hat
marginal revenue is the addition to total revenue (TR) from selling the last unit of output. We
can therefore say that MR is, in the limit, the rate of change of total revenue with regard to
output. In other words MR is the slope of the tangent to any particular point on the total
revenue curve. We have already noted that the slope of that tangent is zero (i.e, MR = 0)
when total revenue is a maximum. If we differentiate (find the gradient to) the total revenue,
total cost and total profit curves respectively, then we will find marginal revenue, marginal
cost and marginal profit curves.
 If total revenue (TR) = y
dy
Then marginal revenue (MR) =
dx
 If total cost (TC) = y

dy
Then marginal cost (MC) =
dx
 If total profit (TP) = y

dy
Then marginal cost (MC) =
dx
SELF CHECK QUESTIONS
1) Total Revenue = y=20 x−2 x 2
a) Find an expression for marginal revenue.

b) Plot the total revenue and marginal revenue curves on a graph ¿)
1 3
2) Total Cost = y= x - 3 x 2+ 9 x
3
a) Find an expression for marginal cost
b) Plot the total cost and marginal cost curves on a graph (x = 0 to x =6)
Price elasticity of demand

Price elasticity of demand (PED) is a measure of the responsiveness of demand for a
product to a change in its own price. It is an extremely important concept for business since its
value will impact directly on the pricing strategy of the firm.
PED = % change in quantity demanded of x
% change in price of x
Here we use P for the original price and Q for the original quantity, and 6 for any change in that
price or quantity. We can now say that:
∆Q
.100
Q
PED = ∆P
.100
P

INDEX NUMBERS
Definition
An index number is a measure of relative change in a variable or group of variables in regard to

time, geographical location, and other characteristics such as income.
Types of index numbers
There are 3 major types of index numbers and these include;
(i) Price index numbers;-
These measure the changes in commodity prices.

(ii) Quantity index numbers;-
These measure the changes in the volume of goods produced, consumed and
distributed.
(iii) Value index numbers
These measures the changes in the total value of goods produced and sold i.e.
Price x Quantity
Classification of index numbers
Index numbers are classified into two major classes, i.e.;

(a) Unweighted indices
(b) Weighted indices
All the above 3 types of index numbers are reflected in the 2 classes (a) and (b) above;
a) Un weighted index numbers
Definition
Unweighted index numbers are those that do not consider the relative importance of the
commodity for which they are computed.
Types of unweighted of index numbers
There are 3 types of unweighted index number

i) Simple index numbers or relatives
ii) Simple aggregate index numbers
iii) Simple average index relatives.
These are discussed below;
This is a ratio of the value of one variable of a single commodity (i.e. price, quantity or value) in
a given year to its value in another period known as the base year / period.
Simple index numbers can be;
- Price relatives
- Quantity relatives
- Value relatives
Where;
 Price relatives are index numbers expressed as a ration of the price of a single
commodity in a given period to its price in another period called the base period
i.e
pn
Price relative = ( )
p0
……………………………………as a ratio
pn
Price relative = ( )
p0
x 100……………………………as a percentage
 Quantity / volume relatives are index numbers expressed as a ratio of the

quantity of a single commodity in a given period to its price in another period

(base year).
pn
Quantity relative = ( )
p0
……………………………………as a ratio
pn
Quantity relative = ( )
p0
x 100……………………………as a percentage
 Value relatives are index numbers expressed as the ratio of the value of a single
commodity (i.e. Price x quantity) in a given period to the price in another period
(base year).
Pn .Q
Value relative =
( n
Pn .Qo )
x 100
b) Composite (or weighted) index numbers
Definition
Composite index numbers that take into consideration the relative importance of the
commodities for which they are being computed.
These index numbers are obtained by combining the information from a set of economic
commodities known as components of a like kind. Examples of composite index
numbers include;
a) An index number of housing costs: This considers components such as Rent,

electricity, repairs and maintenance, insurance, water bills and many other
components incurred by households.
b) The official retail price index (or National consumer price index):- This considers
accommodation and so on.

c) The official index of the output of the production industries:- This considers
components as industrial groups such as metal, coal and coke, printing,
publishing and so on.
Weighting of components
As mentioned in the definitions, composite index numbers normally cannot be

calculated unless each component is weighted. A weighting factor therefore is an
indicator of the importance of the component with respect to the type of index being
calculated.
Some examples of weighting factors used in practice include;
i) A price index: - This normally has its components weighted either by quantity
or expenditure.
ii) A quantity (or volume) index:- This has its components weighted either by
price or expenditure.
iii) A productivity (output per man) index:- This has each component (a distinct
product) weighted by the number of men involved in its manufacture.
Types of composite index numbers
Given a set of economic commodities, their values (for two separate time points) and a
set of weights, there are two alternative methods available for obtaining a composite
index number.
a) Weighted average of relatives;
b) Weighted aggregates.

WEGHTED AGGREGATE INDEX NUMBERS
Suppose we have information on both the prices and quantities consumed of tea, coffee,
and chocolate by an individual in a typical week for each of the three years.
We can see from table below, that this individual consumes greater quantities of tea than
either of the other two drinks. To get a true picture of the change in the combined or
aggregate price of three drinks over the period we should take these respective quantities
into account. We would then be treating these quantities as the weights for our
(weighted) aggregate price index.
Note however that the quantities used as weights change over the time period. We must
therefore make a decision as to whether to use the base year quantities as weights or the
current year quantities as weights. This clearly matters since tea is 50 per cent (10/20 x
100) of the total quantity of all three drinks consumed in the base year (year 0) but only
46.6 per cent (14/30 x 100) of the total quantity of all three drinks consumed in the
current year (year 2).
We must therefore decide at the outset whether to use base year quantities (or prices) as
weights, as in the Laspeyres index, or current year quantities (or prices) as weights, as
in the Paasche index.
Table showing prices (pence per 10 grams) and quantities (multiples of 10 grams)
of drinks purchased by an individual in a typical week.
Drinks Year 0 Year1 Year2
Price quantity Price quantity Price quantity

Tea 6 10 8 12 10 14
Coffee 12 6 14 6 15 8
Chocolate 18 4 18 7 20 8
1. The Laspeyres (base – weighted) price index
To derive a representative price index we need to control the quantities

purchased. Otherwise the observed change in value (price x quantity) could
reflect in part a change in price and in part in quantity. We therefore consider a
typical basket of items purchased by the consumer in which the quantity of items
of each kind is fixed. In the laspeyres price index we regard the base year
quantities as fixed.
⅀ Pn Q o
Laspeyres price index = ⅀ P Q x 100
o o
Where ⅀ Pn Qo= value of base year basket of items in year n.
⅀ Po Qo = value of base year basket of items in base year ( year 0)
Solution
Drinks Year 0 Year 1 Year 2
Po Qo PoQo P1 Q o PoQo P2 Qo P2Qo
Tea 6 10 60 8 10 80 10 10 100
Coffee 12 6 72 14 6 84 15 6 90
Chocolate 18 4 72 18 4 72 20 4 80
⅀ Pn Qo = 204 ⅀ P1 Q o=236 ⅀ P1 Q o=270

Year ⅀ Pn Q o Laspeyres price index

⅀ PoQo
0 204 100
=100
204
236
1 =1.16 116
204
270
=1.32
2 204 132
As we can see table below using base per year quantities as representing our typical basket of
items, the combined price of the three drinks has risen by 32 per cent over the period.
Typically the laspeyres price index tends to overstate the true increase in the cost of living. This
is because using the base year quantities as weights rules out any possibility of substitution by
consumers. We might expect, in practice, consumers to buy rather less of any item that has
experienced relatively rapid increases in prices. Had current year quantities been used instead,
then the weighting given to items experiencing relatively rapid price increases is likely to have
admitted diminished.
2. The Paasche (current – weighted ) price index
The Paasche price index uses the current year quantities as representing our typical
basket of items. It compares what a basket of items costs now (in the current year) as
compared to what the same basket of items would have cost in the base year.
⅀ Pn Q n
Paasche price index = ⅀ PoQn
x 100
Where ⅀ Pn Qn= value of the basket of items in year n at year n prices.

⅀ Po Qn = value of the basket of items in year n at year 0 prices.
Calculate the Paasche (Current weighted) price index
Solution
Drinks Year 0 Year 1 Year 2
Po Qo P oQ o P1 Q1 P1Q 1 P0Q1 P2 Q2 P2Q2 P0Q2
Tea 6 10 60 8 12 96 72 10 14 140 84
Coffee 12 6 72 14 6 84 72 15 8 120 96
Chocolate 18 4 72 18 7 126 126 20 8 160 144
⅀ Pn Qo = 204 ⅀ P1 Q 1 ⅀ P0 Q 1 ⅀ P2 Q 2 ⅀ P 0 Q 2
=306 =270 =420 =324
Year ⅀ Pn Q n Paasche price index

⅀ PoQn
0 204 100
=100
204
1 306 113
=1.16
204
2 420 130
=1.32
204
As we can see from table above, using current year quantities as representing out typical basket
of items, the combined price of the three drinks has risen by 30 per cent over the period. This is
below the 32 per cent recorded for the Laspeyres price index.
Note that, strictly speaking, the Paasche price index involves changes in both prices and
quantities, since the quantities are also allowed to change year – by – year. Therefore it cannot
be regarded as a pure price index.

The laspeyers (base – weighted) quantity index
The idea of a Laspeyres or base – weighted index is used here to measure changes in quantity or
volume, rather than changes in prices. This time the weights are the base year prices rather than
the base – year quantities as before.
⅀ Po Q n
Laspeyres quantity index = ⅀ P Q x 100
o o
Where;
⅀ Po Qn= value of year n basket of items at prices in base year (year 0)
⅀ Po Qo = value of base year basket of items at prices in base year (year 0)
NETWORK ANALYSIS
Definition

Network analysis refers to a family of related techniques developed to aid

management to plan and control projects.
Network analysis is used to evaluate projects that are large and complex; where
restrictions in terms of time and resources exist.
Importance of network analysis
i) At the planning stage, network analysis helps managers to plan on how to get started
on the project by indentifying the activities of the project.
ii) It helps in showing the inter-relationship of various jobs or tasks which

make-up the overall project and identifying the time durations for each.
iii) It clearly indentifies the critical parts of the project.
iv) Provides planning and control of information on time, cost and resource
aspects of a project.
v) Network analysis helps in determining the total completion time to the

project if everything goes as to the plan.
Key terms
i) Project Planning: Project is the task of breaking down a project into its constituent
activities and deciding on their time relationships. Project planning helps
management to establish objectives and to be able to pinpoint courses of action.
ii) Activity: This is a task or job of work which takes time and resources e.g. verifying
the debtors in the sales day book. An activity is represented by an arrow where the
head indicates the end point and the tail represents the start point of a task.

iii) Event: This is a point in time and indicates the start or finish of an activity, or
activities e.g. Debtors verified. An event is represented by a circle or node as shown
below;
All activities must start and end with an event.
iv) Dummy activities: This is an activity that does not consume time or resources. It is
used merely to show clearly, logical dependencies between activities so as not to
violate the rules for drawing networks. It is represented on a network by dotted arrow
thus;
Rules for drawing networks
i) A complete network should have only one point of entry - a start event and
only one point of exit i.e. a finish event.
ii) Every activity must have one preceding or 'tail' event and one succeeding or 'head'
event. Several activities may use the same tail event and heat event.
iii) No activity can start until its tail event is reached.
iv) An event is not complete until all activities leading into it are complete.
v) Loops .i.e. a series of activities which lead back to the same event, are not
allowed since networks are a progression of activities always moving
onwards in time.
vi) All activities must be tied into the network.
Other guiding conventions

vii) Networks proceed from left to right.

viii) Networks are not drawn to scale i.e. the length of the arrow does not
represent time elapsed.
Example
Consider a network shown below the values 1,2, .............,6 represent events
while letters A,B ....F, represent activities.
Activity Event Preceding
activity
A 2
B 4 A
C 3 A
D 5 A
E 6 B
F 6 C,D
Required;
(a) Construct a network showing the relationship between activities and events.
(b) Interpret the network relationships depicted by the network diagram.
(c) Outline the possible paths within the network
Solution
a)
(b) From the illustration

 Events B,C and D cannot begin until A has completed.
 Activity F cannot begin until D and C are completed.
 There is only one start and end events i.e. event (1) and event (6).
Note:
Activities C and D have the same start and end events except tor the extra events 3 and its
associated dummy activity X.
c) Possible paths within the network
These include
Path 1: ABE
Path 2:- ADF
Path 3:- ACXF (Where X is a dummy activity)
The table below shows activities required to complete a certain project and their
respective preceding activities.
Activity Preceding Activity
A -
B,C A
D B
E C
F D, E
Required;
(a) Construct a network for the above project showing the possible paths that can
be taken during the project.
(b) Outline the possible paths within the network.
(c) Interpret the network relationships depicted in the paths
Solution

(a)
(b) Possible paths

Path 1:- ABCDF
Path 2: ACEF
(c) Interpretation
i) Activities Band C cannot begin until A has finished.
ii) Activity F cannot begin until 0 and E are completed.
iii) There is one start event (1) and stop event (6).
TIME ANALYSIS
This is the process of assessing the duration of a project. Analysis of project duration is done by
inserting activity duration times in a fully drawn network.
This helps in analysis any time lags or critical time that may be encountered during
the project life span.
Basic time analysis of a network involves calculating the critical path.
Definitions

(i) Critical path
The critical path of a network gives the shortest time in which the project can be ompleted. It is
the chain of activities with the longest duration times.
There may be more than one critical path in a network and it is possible for a critical path to go
through a dummy.
Example
Consider the network diagram in example 1 above;

Assume the network has been drawn to completion and activity duration times estimated in days
as shown below;
Required;
(a) Compute the duration time for each path in the network.
(b) What is the critical path and project duration?

Solution
a) Duration time for each path;
Path 1:- ABE = 2+1+3 = 6 days
Path 2:- ADF = 2 + 6 + 4 = 12 days
Path 3:- ACXF = 2+1+0+4 = 7 days
b) Critical paths Vs Project duration
Path ADF has the longest duration time compared to other paths; and therefore
qualifies to be the critical paths.
Note
A dummy consumes no time in term of duration period i.e. days = 0, for a dummy.
(ii) Earliest Start time (EST) and Latest start time (LST)
The critical path can also be established by calculating the "Earliest start time (EST)"
and the "Latest start time (LST)" for each event and comparing them.
The critical path is then obtained from the chain of activities where the ESTs and
LSTs are the same
The EST and the LST' are more systematic computerized methods of identifying a critical path.
The notation for making events is shown below;
Earliest time
Event No.
Latest time
Definitions;

Earliest start time (EST):
This is the earliest possible time at which a succeeding activity can start. The EST assesses the
total project time.
Procedure for computing EST (forward pass)

 The EST of a head event is obtained by adding onto the EST of the tail event
the linking activity duration starting from event 0, time 0 and working
forward through the network.
 Where two or more routes arrive at an event, the longest route is taken.
 The EST in the finish event is the project duration and is the shortest time in
which the whole project can be completed.
b) Latest start time (LST);
This is the latest possible time at which a proceeding activity can finish without
increasing the project duration. .
The LST helps in isolating the critical path.
Procedure for computing EST (Backward pass)
 Starting at the finish event, insert the LST and work backwards through the
network deducting each activity duration from the previously calculated LST.
 Where the tails of activities join the lowest number is taken.

Example
The table below shows activities required to complete a certain project and their respective

preceding activities.
Activity Days Preceding

activity
A 1
B 2 A
C 3 A
D 4 B
E 1 C
F 2 D,E
Required;
a) Construct a network for the above project showing the possible paths that can be taken
during the project.
b) Indicate the EST within the network.
c) Indicate the LST within the network.
d) Determine the critical path.
Solution
(a) Network diagram.
(b) Earliest start time

within the network
(Forward Pass)

2
B D
3
2 4
0 A 1 4 F 5
0 1 7 2 9
1
3
4
Perfect duration
Activity D and E arrive at event 4 and the longest route time i.e. ABD (7days) must
be taken instead of the shortest route time i.e. ACE (5days).
Reason:- The reason for the above treatment is that activity F depends on
completion of activity D and E. However, E is completed by day 5 and 0 is not
completed until day 7.
(c) Latest start time (Backward Pass) within the network.
Tails of activities B and C join event 1 where the LST for C is day 3 while that for B is day 1,
hence the lowest LST is taken.
Reason: - If event 1 occurred at day 3 then activities Band D could not be completed
by day 7 as required and consequently the project would be delayed.
Observations

From the above example, path ABDF has EST and LST which are identical (see solution). This
is the "Critical path" which is the chain with the longest duration.
An activity is critical when EST = LST of the tail event, and EST = LST of the head event and the
EST of the head event minus the EST of the tail event equals the activity duration.
The critical path is indicated on the network by two small transverse lines across the arrows on
the critical path
i.e
Point to note
The activities along the critical path are vital activities and must be completed by their EST and
LST to prevent delays in the completion of the project.
(iii) Float
Non-critical activities (C and E, in example 4) have "spare time" and this is known as "float."
Activities C and E 'could take up additional 2 days in total without delaying the
project duration.
If it is required to reduce the overall project duration, then the time of one or more of the
activities on the critical path must be reduced perhaps by using more labour, better equipment or
some other method of reducing job times.
Definition
Float is defined as the spare time available on non-critical activities.
Types of float

There are 3 types of float; i.e.

 Total float;- This is the amount of time a path of activities could be delayed without
affecting the overall project duration.
Total float is given by the formula below;
Total float = maximum available time - activity duration time.

= latest time of end event - earliest time of start event - activity duration time.
 Free float;- This is the amount of time an activity can be delayed without
affecting the commencement of a subsequent activity at its EST, but may affect the float
of a previous activity.
Free float is given by the formula below;
Free float = Duration between the earliest times of both events - activity duration time
= Earliest head time - earliest tail time - activity duration time
 Independent float;- This is the amount of time an activity can be delayed when all
preceding activities are completed as late as possible and all succeeding activities
completed as early as possible. The independent float therefore does not affect the float
of either preceding or subsequent activities.
Independent float is given by the formula below;
Independent float= minimum available time - activity duration time

= Earliest time of end event - latest time of start event - activity duration time
Example
Consider a network diagram shown below;

C
D E
Compute;
i) Total float
ii) Free float
iii) Independent float
Solution
i) Total Float = LST of end event - EST of start event Activity duration time
= 50 - 10 - 10 = 30 days
ii) Free float = Earliest head time - Earliest tail event - Activity duration time
= 40 - 10 - 10 = 20 days
(iii) Independent float = EST of end event - LST of start event - Activity duration
= 40 -20-10 = 10 days
COST ANALYSIS
Cost analysis in network analysis is of importance as it helps one to be able to calculate the cost
of various project durations.
The normal duration of a project incurs a certain cost and by more labour, working overtime,
more equipment e.t.c. the duration could be reduced but an expense of higher costs.
Some ways of reducing the project duration are cheaper than others and therefore cost analysis

in network is necessary in identifying the cheapest way of reducing the overall duration.
Early completion in most project analysis would attract a bonus while late completion would
attract a fine under cost analysis.
Therefore it is important to analyze costs to establish whether it is worthwhile
paying extra to reduce the project time so as to save penalty.
The following are key terms used in cost analysis;
(i) Normal cost;- This is the cost associated with a normal time estimate for an
activity. It's a time estimate for a situation where resources (i.e. men,
machines, etc) are used in the most efficient manner.
(ii) Crash cost; - This is the cost associated with the minOimum possible time for
an activity. They are usually higher than the normal cost because of extra
wages, overtime premiums, and extra facility among others.
(iii) Crash time; - This is the minimum possible time that an activity is
planned to take. It comes up because of application of extra resources e.g.
more labour or machinery.
(iv) Cost slope; - This is the average cost of shortening an activity by one time
unit (day, week, month etc). The cost slope is generally assumed to be
linear and calculated from;
Cost slope = Crash cost- Normal cost

Normal time + Crash time
v) Least cost scheduling or 'crashing';- This is a process which seeks to

indentify the least cost method of reducing the overall project time period

by time period.
Breakeven point
Break even occurs when the firm's total cost is equal to the firm's total Revenue.
At this point, the firm is deemed to be making no profit or loss i.e. profit / loss = o.
The quantity required to be produced by the firm to break even is obtained by
equating the Cost function to the revenue function.
Example
The revenue function of ABC Ltd is given by R = 400 Q - 4Q'2 and the cost curve is
given by C = Q 2 + 10Q + 30; where Q is the number of units sold.
Required;
i) Compute the firm's marginal revenue and marginal cost functions.
ii) Determine the quantity at that should be sold in order to maximize profits
iii) At what price should each unit be sold to maximize profits?
iv) Compute the amount of profit that will be maximized.
v) What is the firm's break even quantity?

APPENDIX (QUESTIONS)
QUESTION 1
a) Given the general quadratic equation f(x)=ax2 + bx +c = 0, use the quadratic solution
−b ± √ b2−4 ac
x= to find all values of x for which f(x) =0
2a
(i) 2x2 – 6x -1 = 0 5mks

(ii) 5x2 + 12x + 6 = 0 5mks
b) Solve the simultaneous equation 5mks
10x + y = 50
5x-2y=100
c) Using the values of x obtained in question 1 a) above, sketch the following quadratic graph for
y=2x2 – 6x -1 and also the graph y=2x-10 10mks
QUESTION 2
a) Define the term differentiation asapplied inquantitative techniques. (5marks)

b) Differentiate the following functions using appropriate differentiation techniques.

(5marks @)
2 2 4
i) y=3x +4x+1 ii) y= (3x +2)
4
iii) y= (3x +3) (3x+2) iv) y= (3x3+2)
(4x2+3)
QUESTION 3
Uganda government through ministry of Energy and mineral Development carried out the
mineral deposit survey in the areas of Mubenda and Hoima. 2016 and 50 areas were sampled
out. The quantities in tones of mineral deposits were recorded and portrayed the following
results.
The quantities in metric tons of mineral deposits were surveyed in Mubende and Hoima 2016
25 35 20 25 20 40 25 30 40 30
35 40 30 24 35 45 20 35 45 35
30 32 40 25 40 35 25 30 44 40
25 25 45 40 40 25 20 35 25 25
20 40 35 35 44 30 34 45 27 30
Required
i) Form the frequency distribution table using class of your choice 10 marks
i) construct histogram 5marks
ii) frequency polygon 3marks
iii) ogive 2marks
iv) Briefly describe the nature and characteristics of the mineral deposits in Mubende
and Hoima basing on your data 5marks
QUESTION 4
Ministry of education planning division carried out a survey on the potential age of teachers
leaving teaching for greener pastures between 2012 and 2015. There were 80 observations
that were carried out in the district of Kotido
THE SURVEY OF TEACHER LEAVING FOR GREENER PASTURES BETWEEN 2012
TO 2015 KOTIDO DISTRICT
Age 25-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70
group
freq 25 50 35 20 15 5 5 2
REQIURED:
Compute and clearly interpret the following measures of central tendencies and dispersion:

i. Mean 10 marks
ii. Mode 3marks
iii. Median 3marks
iv. Upper quartile 3marks
v. Lower quartile 3marks
vi. Interquartile range 3marks
QUESTION 5
a) Planning and forecasting are tools managers continuously engage in organizational
planning.Clearly compare and contrast the term planning and forecasting (5 marks)
b) Describe with appropriate examples at least five quantitative techniques and five
qualitative techniques managers use for forecasting. (10 marks)
c) Describe theassociated advantages and disadvantages of Quantitative techniques
(10marks)
QUESTION6
a) Explain the term Time series. What is the common pattern s in time series? Illustrate with
examples. (5 marks)
b) Unique stationers have the following sales data collected in the last 10 months as follows.
month 1 2 3 4 5 6 7 8 9 10
Sales 35 40 40 35 25 20 30 25 45 40
in 000
i) Using appropriate forecasting technique either linear regression or 3 month moving

average, compute sales figures for period 11 the eleventh month. (15 Marks)
ii) Explain the role of forecasting as a tool for decision making and planning(5 Marks)
QUESTION7
Roofing Uganda limited are the leading manfucturers of quality iron sheets in Uganda.
They produce different types of products, namely: iron sheets, nails and cylinder pipes of all
sizes.
The have two resources which are scarce and have to be optimized. This is time (hrs) and raw
materials (tones)

Roofing has defines its objective function as follows:

Maximize = 2x+y
Subject to: x+y≤10
x-y≤ 2
x≥4
y≤5
Where x and y are greater or equal to zero
Required;
i. Briefly state components of the linear programming problem ( 5marks )
ii. Find the feasible solution of the above linear programming problem (10marks)
iii. Find the optimal solution of the above linear programming problem (10marks)
QUESTION 8
Ministry of finance, planning and economic development is considering developing a framework
to control price movement and fluctuations especially for domestic goods.
Recently a survey was carried out on a certain number of baskets of domestic goods as follows
item Year 2015 Year 2016 Year 2015 Year 2016
Prices shs Prices shs Quantities kg Quantities kg
bread 1500 2500 25 30
sugar 2500 4200 30 60
matoke 5000 7500 50 70
salt 600 800 100 200
posho 2200 3500 100 200
Taking 2015 as the base year prices and quantities,

Required
i. Compute the Laspeys index number for the period. (5marks)
ii. Compute the Pasches index number for the period. (5marks)
iii. Compute the Fisher ideal index number for the period. (5 marks)
iv. Compare and contrast the different approaches and defend the one choice you prefer as
the best representative index and considered most appropriate and most commonly used.
(10
marks)

Question 9
a) By using quantitative techniques, a Planner can try to make sense out of numbers, which in turn
should help in making sensible business decisions, explain how Quantitative techniques can be
used in business decision making today. (10 marks)
b) Sure millers Ltd, millers of Super flour have been experiencing a decline in profits over period of
time. This said to have been caused by loss of market share because of competition withKase
millers. The company has hired you as a research expert. Describe the methods you would use
to collect data necessary for decision making on whether to continue with production of Super
Flour or not, clearly bringing out their advantages and disadvantages. (15 marks)
Question 10
(i) What is sampling? (2 marks)

(ii) Why is sampling necessary in statistical analysis? (8 marks)
(iii) Discuss the different sampling techniques, giving two example under each (15 marks)
Question 11
a) STATE the properties of the mean, median and the mode as the measures of central tendency
(6 marks)
b) The following data- relate to the earnings of employees in a company
Earnings in thousands Mid-point Number of employees
40 but less 50 45 2
50 but less 60 55 15
40 but less 70 65 21
40 but less 80 75 30

40 but less 90 85 20
40 but less 100 95 9
40 but less110 105 3
Total
Determine
i) The mean (3 marks)

ii) The mode (3marks)
iii) The median (3marks)
iv) The standard deviation and variance (5marks)
v) Person’s coefficient of skewness (5marks)
Question 12
a) In a certain company, the Human Resource Manager anticipates that approximately 5% of his
employees will resign in the New Year. In a department containing 50 employees, find the
probability that during the year
a. No employee resigns (5marks)
b. More than 3 employees resign (5marks)
b) The rent value of a house in Kololo is approximately normally distributed with mean of $350 and
a standard deviation of $60. In a random sample of 500 houses in Kololo how many houses
would you expect to have rent values of:
i) Less than $250 (5marks)

ii) Between $300 and $400 (5marks)

iii) Peasants were fair or not. (5marks)
Question 13
Kiana consultants have collected the following data on the income levels of the peasants in Nakapiripiriti
district.
Incomes (shillings in thousands)
31 33 26 44 31 43 32 4431 28 42 41
22 20 20 48 38 25 38 34 30 34 36 39
41 49 29 27 46 24 37 26 47 32 22 31
37 36 40 41
Required:
Form a frequency distribution using classes of your choice and hence construct a histogram to present
the data given. (25 marks)
Question 14
a) Explain the difference between mutually exclusive events and independent events
(4marks)
b) The quality control manager of Firestone; a company manufacturing tyres, expects to have
only 4% of his tyres as defectives. In a sample of 30 tyres, what is the probability that;
i) None is defective? (3marks)
ii) More than 3 tyres are defective (3marks)
i) Between 10 and 12 tyres inclusive are defective (5 marks)

ii) Explain the characteristics of a normal distribution curve (4 marks)

iii) Explain the rational for sampling in Business. (6 marks)
Question 15
i. Differentiate between measures of Central Tendency and Measures of Dispersion or Variability

and explain why it is often necessary to have both. (5 marks)
ii. The Age of patients diagnosed with cancer between January and February in 2014 have been
summarized as shown below:
Agegroup 20-30 30-40 40-50 50-60 60-70 70-80 80-90
Frequency 10 12 23 35 30 18 17
Required:
Compute and interpret the following measures of central tendency and dispersion.
 The mean Age (5 marks)

 The modal Age (5 marks)
 The median Age (5 marks)
 Standard deviation (5 marks)

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QUANTITATIVE METHODS: (BBA 1101)

BBA 1101: QUANTITATIVE TECHNIQUES

BACHELOR OF BUSINESS ADMINISTRATION

BACHELOR OF SCIENCE IN ACCOUNTING AND

STUDY MATERIAL FOR TEAM UNIVERSITY Page 1

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Expected Learning Outcomes

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Unit 3: Probability Theory

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b) The mean (average) deviation

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e) Simplex method –formulation

STUDY MATERIAL FOR TEAM UNIVERSITY Page 8

Statistical Terms and concepts.

STUDY MATERIAL FOR TEAM UNIVERSITY Page 9

Qualitative Random Variables.

Qualitative Random Variables.

These yieldnumericalvariables. Forexample, responses to such questions as, “How many

STUDY MATERIAL FOR TEAM UNIVERSITY Page 10

Discrete Quantitative Random Variables.

Continuous quantitative Random variables.

STUDY MATERIAL FOR TEAM UNIVERSITY Page 11

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a. The units of measurement must be definite and specific.

The collection of Primary data.

STUDY MATERIAL FOR TEAM UNIVERSITY Page 13

i. Structured observation vs. Unstructured observation,

STUDY MATERIAL FOR TEAM UNIVERSITY Page 14

i. It eliminates subjective bias.

The disadvantages of Observation method.

i. It is an expensive and time consuming method.

The interview method.

STUDY MATERIAL FOR TEAM UNIVERSITY Page 15

i. Direct personal investigations

Direct Personal Investigations.

Indirect Oral Investigations.

STUDY MATERIAL FOR TEAM UNIVERSITY Page 16

These are interviewscharacterized by a flexibility of approach in questioning. These interviews

STUDY MATERIAL FOR TEAM UNIVERSITY Page 17

The Advantages of the personal interview method.

i. More information can be obtained and in a greater depth.

i. It is an expensive method especially when a large and widely spread geographical

STUDY MATERIAL FOR TEAM UNIVERSITY Page 18

vii. Interviewing at times may introduce systematic problems.

The Basic Requirements for Carrying Out a Successful Interview.

Interviewing is an art governed by certain scientific principles:

i. Interviewers should be carefully selected,trained and briefed.

This is a method of collecting data by contacting respondents on telephone. It is not a very

The advantages of Telephone Interviews.

i. It is faster than any other methods I n obtaining the required data.

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The limitation of telephone interviews

The questionnaire method.

The advantages of theQuestionnaire Method.

The disadvantages of questionnaire method.

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The Basic Considerations when Designing a Questionnaire.

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The collection of Secondary Data.

i. Various publications of the central, state and local government.