BUSINESS STATISTICS

MBA SUSTAINABILITY MANAGEMENT

HYPOTHESIS TESTING
• Ho – null hypothesis-The person is innocent
• H1 – alternative hypothesis- The person is guilty
• Convicting- Rejecting the null hypothesis
• Acquitting- Not rejecting the null hypothesis
• Type I error- Reject a true null hypothesis Innocent person is wrongly convicted
• Type II error-not rejecting a false null hypothesis Guilty person is acquitted
• Type I error- α – also called significance level
• Type II error - β
In Justice Holmes opinion the probability of type I error
should be 1/100 of the probability of type II error
 Hypothesis Testing
• Goal: Make statement(s) regarding unknown population parameter values
based on sample data
• Elements of a hypothesis test:
• Null hypothesis - Statement regarding the value(s) of unknown parameter(s). (will
always contain an equality)
• Alternative hypothesis - Statement contradictory to the null hypothesis (will always
contain an inequality)
• Test statistic - Quantity based on sample data and null hypothesis used to test between
null and alternative hypotheses
• Rejection region - Values of the test statistic for which we reject the null in favor of the
alternative hypothesis
Hypothesis Testing
Test Result – H0 True H0 False

True State
H0 True Correct Type I Error
Decision
H0 False Type II Error Correct
Decision

 = P(Type I Error )  = P(Type II Error )

• Goal: Keep ,  reasonably small
• As an example, suppose flour packaged by a manufacturer is sold by weight;
and a particular size of package is supposed to average 400 g. Suppose the
manufacturer wants to test to determine whether their packaging process is out
of control as determined by the weight of the flour packages. The null
hypothesis for this experiment is that the average weight of the flour packages
is 400 g (no problem). The alternative hypothesis is that the average is not 400 g
(process is out of control).
Ho: μ = 400 g
Ho: μ ≠ 400 g

As another example, suppose a company has held an 18% share of the market. However, because of an increased
marketing effort, company officials believe the company’s market share is now greater than 18%, and the officials
would like to prove it.
 Two-sided Alternative Hypothesis

One-sided Alternative Hypotheses

One-tailed tests are always directional, and the alternative hypothesis uses either the greater than or the less than sign. A
one-tailed test should only be used when the researcher knows for certain that the outcome of an experiment is going to
occur only in one direction or the researcher is only interested in one direction of the experiment as in the case of the
market share problem. In one-tailed problems, the researcher is trying to “prove” that something is older, younger, higher,
lower, more, less, greater, and so on.
 REJECTION AND NON_REJECTION REGION

TYPE I ERROR-REJECT TRUE Ho

TYPE II- NOT REJECTING FALSE Ho

CAN WE COMMIT BOTH ERRORS

AT THE SAME TIME???

Legally, if the courts make it harder to send innocent people to jail, then they have made it easier to let
guilty people go free. One way to reduce both errors is to increase the sample size. If a larger sample is
taken, it is more likely that the sample is representative of the population, which translates into a better
chance that a business researcher will make the correct choice.
Hypothesis Testing Steps
■ Step 1. Establish a null and alternative hypothesis.
■ Step 2. Determine the appropriate statistical test.
■ Step 3. Set the value of alpha, the Type I error rate.
■ Step 4. Establish the decision rule.
■ Step 5. Gather sample data.
■ Step 6. Analyze the data.
■ Step 7. Reach a statistical conclusion.
■ Step 8. Make a business decision
A survey of (Certified Public Accountant) CPAs across the United States found that the average net income for sole proprietor
CPAs is $74,914. Because this survey is now more than ten years old, an accounting researcher wants to test this figure by
taking a random sample of 112 sole proprietor accountants in the United States to determine whether the net income figure
changed. The researcher could use the eight steps of hypothesis testing to do so. Assume the population standard deviation
of net incomes for sole proprietor CPAs is $14,530.

TEST:
Step 2 is to determine the appropriate statistical test and sampling distribution. Because the population standard
deviation is known ($14,530) and the researcher is using the sample mean as the statistic, the z test

Step 3 is to specify the Type I error rate, or alpha, which is .05 in this problem

Step 4: is to state the decision rule. Because the test is two tailed and alpha is .05, there is alpha/2
or .025 area in each of the tails of the distribution.
BUSINESS IMPLICATION:
Step 8 is to make a managerial decision.

Managerially, this statistical finding may mean that CPAs will be more expensive to hire either as
full-time employees or as consultants. It may mean that consulting services have gone up in price.
For new accountants, it may mean the potential for greater earning power.
CLASS HEIGHTS
• Hypothesis Ho: mean=165cm
H1: mean ≠ 165 cm

Sample of 5 students

X bar= 168
Alpha=0.05
Z alpha=1.96
Class height standard deviation = 5 cm

168-165/(5/sqrt(5) = 1.34

Find p value corresponding to 1.34

P-Values in Hypothesis Testing
 INTERPRETING P VALUE

We find that the probability of randomly obtaining a z value this great or greater by chance is .5000 - .4793 = .0207. The p-
value is .0207. Using this information, the researcher would reject the null hypothesis for alpha = .05 or .10 or any value
more than .0207. The researcher would not reject the null hypothesis for any alpha value less than or equal to .0207 (in
particular, = .01, .001, etc.).
Using the Critical Value Method to Test Hypotheses
Another method of testing hypotheses is the critical value method. In the CPA income example, the
null hypothesis was rejected because the computed value of z was in the rejection zone. What mean
income would it take to cause the observed z value to be in the rejection zone? The critical value
method determines the critical mean value required for z to be in the rejection region and uses it to
test the hypotheses.

With the critical value method, most of the computational work is done ahead of time.
In this problem, before the sample means are computed, the analyst knows that a
sample mean value of greater than $77,605 or less than $72,223 must be attained to
reject the hypothesized population mean. Because the sample mean for this problem
was $78,695, which is greater than $77,605, the analyst rejects the null hypothesis.
This method is particularly attractive in industrial settings where standards can be set
ahead of time and then quality control technicians can gather data and compare actual
measurements of products to specifications.
In an attempt to determine why customer service is important to managers in the United Kingdom, researchers
surveyed managing directors of manufacturing plants in Scotland. One of the reasons proposed was that customer
service is a means of retaining customers. On a scale from 1 to 5, with 1 being low and 5 being high, the survey
respondents rated this reason more highly than any of the others, with a mean
response of 4.30. Suppose U.S. researchers believe American manufacturing managers
would not rate this reason as highly and conduct a hypothesis test to prove their theory.
Alpha is set at .05. Data are gathered and the following results are obtained. Use these
data and the eight steps of hypothesis testing to determine whether U.S. managers rate
this reason significantly lower than the 4.30 mean ascertained in the United Kingdom.
Assume from previous studies that the population standard deviation is 0.574.
 4. State the decision rule. Because this test is a one-
STEP

tailed test, the critical z value is found by looking up

.5000 - .0500 = .4500
z.05 = -1.645
An observed test statistic must be less
than -1.645 to reject the null hypothesis.

ACTION:
STEP 7. State the statistical conclusion. Because the observed test statistic is not less than the critical

value and is not in the rejection region, the statistical conclusion is that the null hypothesis cannot be
rejected.

8. Make a managerial decision. The test does not result in enough evidence to conclude that U.S.
STEP

managers think it is less important to use customer service as a means of retaining customers than
do UK managers. Customer service is an important tool for retaining customers in both countries
according to managers.
USING CRITICAL VALUE METHOD
 TESTING HYPOTHESIS ABOUT A POPULATION
USING t statistic
• The U.S. Farmers’ Production Company builds large harvesters. For a harvester to be properly
balanced when operating, a 25-pound plate is installed on its side. The machine that produces
these plates is set to yield plates that average 25 pounds. The distribution of plates produced from
the machine is normal. However, the shop supervisor is worried that the machine is out of
adjustment and is producing plates that do not average 25 pounds. To test this concern, he
randomly selects 20 of the plates produced the day before and weighs them.

Alpha =0.05 alpha/2=0.025

Because the observed t value is +1.04, the null hypothesis is
not rejected. Not enough evidence is found in this sample to
reject the hypothesis that the population mean is 25 pounds.
Suppose an agribusiness researcher believes the average size of farms in US has now increased from
the 1997 mean figure of 471 acres. To test this notion, she randomly sampled 23 farms across the
United States and ascertained the size of each farm from county records. The data she gathered follow.
Use a 5% level of significance to test her hypothesis. Assume that number of acres per farm is normally
distributed in the population.
TESTING HYPOTHESIS ABOUT VARIANCE
• As an example, a manufacturing firm has been working diligently to implement a just-in-time inventory system for
its production line. The final product requires the installation of a pneumatic tube at a particular station on the
assembly line.With the justin- time inventory system, the company’s goal is to minimize the number of pneumatic
tubes that are piled up at the station waiting to be installed. Ideally, the tubes would arrive just as the operator
needs them. However, because of the supplier and the variables involved in getting the tubes to the line, most of
the time there will be some buildup of tube inventory. The company expects that, on the average, about 20
pneumatic tubes will be at the station. However, the production superintendent does not want the variance of this
inventory to be greater than 4. On a given day, the number of pneumatic tubes piled up at the workstation is
determined eight different times and the following number of tubes are recorded.

Suppose alpha is .05. Because the sample size is 8, the degrees

of freedom for the critical
table chi-square value are 8 – 1 = 7.