Quantitative Methods

Student Notes

Note
This document contains the important points discussed in the pre-recorded courseware. It will help in revising the
important concepts related to Quantitative Methods course.

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 Quantitative Methods

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Student Notes 6.2: Approaches to Hypothesis Testing

Approaches to Hypothesis Testing: Three Approaches
The Critical Value Approach: This is more intuitive.
The p-value Approach: All software packages generate the p-value.
And all you need to do is compare the p-value with the significance level.
Using Confidence Intervals: This approach we will not use much.
If the hypothesized value of is contained within the interval, you do not reject the
null hypothesis
The Critical Value Approach:
The test statistic is a value used in making a decision about the null hypothesis, and
is found by converting the sample statistic to a score with the assumption that the null
hypothesis is true.
A critical value is the number on the borderline separating sample statistics that are
likely to occur from those that are unlikely to occur.
Regions of Rejection and Non rejection:
The sampling distribution of the test statistic is divided into two regions, a region of
rejection (sometimes called the critical region) and a region of non-rejection.
If the test statistic falls into the region of non-rejection, you do not reject the null
hypothesis.
If the test statistic falls into the rejection region (critical region), you reject the null
hypothesis.

Right tail test: region of rejection is to the

right of the critical value.
Left tail test: region of rejection is to the
left of the critical value.
Two tail test: region of rejection is between critical
value
s.
Example: Recall Ozone sells 12 liter bottles of mineral water. The CFO is focusing
on cost reduction. CFO believes that excess water is being dispensed. If that is the
case, he wants to shut down production for a major overhaul of the machinery. 36
bottles were sampled and the mean volume of water was found to be 12.17. The
population standard deviation is believed to be 0.6 liters.
Distance in ’s:
The CFO will stop production if μ > 12. So the alternative hypothesis is Ha: μ > 12.
The hypothesis are : H0: μ ≤ 12 vs Ha: μ > 12
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 Quantitative Methods

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Sample Mean = 12.17

How many σ’s is the observed mean from the hypothesised μ?
12.17−12
Answer is = 1.7, since 𝑋̅ ~ N(12, 0.1) α = .05
0.1

Question: Is this a too far or near enough? z

0 reject H0. 1.645 1.7
If cut off is 1.645 then H0 is rejected. If If cut off is 1.96 then we do not
The cut off is usually implied by providing the significance level α.
The cut off is then computed by referring the tables of the sampling distribution
The Critical Value Approach I
1. The hypotheses: H0: μ ≤ 12 Vs Ha: μ > 12
X = 12.17,  = 0.6, α = 5%
2. Data: n = 36, ̅
3. Right-Tail Test (or Upper Tail Test)
4. Sampling Distribution: ̅
X~ N(12,0. 1), so
̅ −μ
X ̅ −12
X
= 0.6/√36 ~ N(0, 1)
σ⁄√n

12.17 −12
5. Test Statistic: = 1.7
0.6/√36

6. P(z > critical value )= α. Using standard normal table we get critical Value =
1.645
Critical Region: z ≥ 1.645
7. Since Test Statistic = 1.7 > 1.645 = Critical Value, Test Statistic falls in critical
region, we reject H0.
There is sufficient statistical evidence to infer that the process is not meeting the target
of 12
The Critical Value Approach II: Same problem
1. The hypotheses: H0: μ ≤ 12 Vs Ha: μ > 12
̅ = 12.17,  = 0.6, α = 5%
2. Data: n = 36, X
3. Right-Tail Test (or Upper Tail Test)
4. Sampling Distribution: 𝑋̅ = 𝑁(𝜇, 𝜎𝑋̅ ) = 𝑁(12, 0.1) α = .05

5. Sample Mean:12.17
6. Critical Value = 12.1645, from non μ= 12 12.1645 z
Standard table. Critical Region: z ≥ 12.1645
7. Since Sample Mean falls in Critical region, reject H0.

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 Quantitative Methods

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There is sufficient evidence to infer that the process is not meeting the target of 12
liters.
The p-value approach:
The p-value is the probability of getting a test statistic equal to or more extreme than
the sample result, given that the null hypothesis, is true. The p-value is also known as
the observed level of significance.
Type of Test and P-Value
Right tail test: P-value = area to the left of the test statistic= P(z< test statistic)
Left tail test: P-value = area to the right of the test statistic= P(z> test statistic)
Two tail test: If test statistic is negative then P-value = 2 P(z< test statistic).
If test statistic is positive then P-value = 2 P(z> test statistic).
Decision rules for rejecting null hypothesis in the p-value approach
• If the p-value is greater than α, then do not reject the null hypothesis.
• If the p-value is less than or equal to α, then reject the null hypothesis.
Example: Recall Ozone sells 12 liter bottles of mineral water. The CFO is focusing
on cost reduction. CFO believes that excess water is being dispensed. If that is the
case, he wants to shut down production for a major overhaul of the machinery. 36
bottles were sampled and the mean volume of water was found to be 12.17. The
population standard deviation is believed to be 0.6 liters.
1. The hypotheses: H0: μ ≤ 12 Vs Ha: μ > 12
2. Data: n = 36, 𝑋̅ = 12.17,  = 0.6, α = 5%
p-value
3. Right-Tail Test (or Upper Tail Test)
= 0.0446
𝑋̅ −𝜇 𝑋̅ −12
4. Sampling Distribution: Since n ≥ 30, = 0.6/√36 ~ N(0, 1)
𝜎 ⁄ √𝑛

12.17 −12
5. Test Statistic: = 1.7 1 z
0.6/√36 0
6. p –value: P(Z > 1.7) = 0.0446
7. Since p-value = 0.0446 < α = .05, we reject H0.
There is sufficient statistical evidence to infer that the process is not meeting goal of
12 l or less.
Ozone Example: Two Tail Test
1. The hypotheses: H0: μ = 12 Vs Ha: μ ≠ 12
2. Data: n = 36, 𝑋̅ = 12.2,  = 0.6, α = 5%
3. Two-Tail Test

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 Quantitative Methods

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4. Sampling Distribution: Since n ≥ 30, 1/2

𝑋̅ −𝜇 𝑋̅ −12 p -value
= 0.6/√36 ~ N(0, 1)
𝜎⁄√𝑛
= .0228
12.2−12
5. Test Statistic: = 2.0 α/2 = 025
0.6/√36

6. p –value: 2*P(Z > 2.00) = 2*0.0228 = 0.0456

7. Since p-value = 0.0456 ≤ α 0.05, we reject H0. 2.00
z
0
There is sufficient statistical evidence to infer that the process is not meeting the goal
of 12.
Learning Outcome:
Three approaches to testing hypothesis: The Critical Value Approach, The p-value
approach, Example of how to compute the p-value.
Questions to consider:
Q1. What are approaches of hypothesis testing?
Q2. What is the critical value approach to hypothesis testing?
Q3. What is the p-value approach to hypothesis testing?

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