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JOMO KENYATTA UNIVERSITY

OF
AGRICULTURE & TECHNOLOGY

SCHOOL OF OPEN, DISTANCE AND eLEARNING


©JKUAT-SODeL

P.O. Box 62000, 00200


Nairobi, Kenya
E-mail: elearning@jkuat.ac.ke

HCBA 3102 Statistics for Business Sciences

JJ II LAST REVISION ON June 24, 2013


J I
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HCBA 3102 STATISTICS FOR BUSINESS
This presentation is intended to covered within one week.
The notes, examples and exercises should be supple-
mented with a good textbook. Most of the exercises have
solutions/answers appearing elsewhere and accessible by
clicking the green Exercise tag. To move back to the same
page click the same tag appearing at the end of the solu-
©JKUAT-SODeL

tion/answer.

Errors and omissions in these notes are entirely the re-


sponsibility of the author who should only be contacted
through elearning@jkuat.ac.ke. In such a case, kindly en-
sure that you specify the module, the lesson number
JJ II and the page before stating the error.
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Contents
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5 Tests of Hypothesis 1 5
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . 5
5.2 Parametric Tests . . . . . . . . . . . . . . . . . . 9
5.2.1 Z Test for Two Means . . . . . . . . . . . 22
5.2.2 The t-Test . . . . . . . . . . . . . . . . . . 27
JJ II • Comparing Two independent Pop-
J I ulation Means . . . . . . . . . . . 32
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• Dependent samples . . . . . . . . 33
Solutions to Exercises . . . . . . . . . . . . . . . . 45
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JJ II
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LESSON 5
Tests of Hypothesis 1

Learning outcomes
Upon completion of this lessonyou should be able to;
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1. Define hypothesis testing


2. State two types of errors in hypothesis testing
3. Carry out necessary computations for t-tests
4. Use SPSS to carry out tests involving comparison of means
of two groups

5.1. Introduction
JJ II
A statistical hypothesis is an assertion or conjecture about
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a parameter (or parameters) of a population. It can be viewed
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HCBA 3102 STATISTICS FOR BUSINESS
as precise testable statement about the value of a population
parameter developed for the purpose of testing. Hypothesis
testing is a procedure, based on sample evidence and probabil-
ity theory, used to determine whether the hypothesis is a reason-
able statement and should not be rejected, or is unreasonable
and should be rejected.
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• Null Hypothesis H0 : A statement about the value of a


population parameter. Typically a null hypothesis is the
opposite of the real hypothesis of interest. It might state,
for example, that a parameter equals 0 in the population,
or that the values of two subgroup parameters are equal
in the population.

JJ II • Alternative Hypothesis H1 : A statement that is accepted if


J I the sample data provide evidence that the null hypothesis
J DocDoc I is false.
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• Level of Significance (α): The probability of rejecting the
null hypothesis when it is actually true.
• Type I Error : Rejecting the null hypothesis when it is
actually true.
• Type II Error: Accepting the null hypothesis when it is
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actually false.

H0 is True H0 is false
Accept H0 Correct Type II error
Reject H0 Type I error Correct

• Power of a test (1 − β): The probability of rejecting a


false null hypothesis. See the following table on associated
JJ II
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probabilities.

H0 is True H0 is false
Accept H0 1−α β
Reject H0 α 1−β
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• Test statistic: A value, determined from sample informa-


tion, used to determine whether or not to reject the null
hypothesis.
• Critical value: The dividing point between the region where
the null hypothesis is rejected and the region where it is
not rejected.
• A p-value: A measure of how much evidence you have
JJ II
against the null hypothesis. The smaller the p-value, the
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more evidence you have. One usually combines the p-value
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with the significance level to make decision on a given test
of hypothesis. In such a case, if the p-value is less than
some threshold (usually .05, sometimes a bit larger like 0.1
or a bit smaller like .01) then you reject the null hypothesis.

5.2. Parametric Tests


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Hypothesis tests can be two-tailed when looking for a change,


such as testing
H0 : µ = 5

against
H1 : µ 6= 5,

or one- tailed when looking for an increase (or decrease) such as


JJ II
testing
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H0 : µ = 5
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against
H1 : µ > 5.

The procedure to use when carrying out a hypothesis test is:


• Determine H0 , H1 and the significance level.
– Decide whether a one- or two-tailed test is appropri-
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ate.
– Calculate the test statistic assuming H0 is true.
– Compare the test statistic with the critical value(s)
for the critical region.
– Accept or reject H0 as appropriate.
– State conclusion in terms of the original problem.
When testing for the population mean from a large sample and
JJ II the population standard deviation is known, the test statistic is
J I given by
x̄ − µ
J DocDoc I Z= √
σ/ n
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where σ is a known population standard deviation.
Example . Brandways company indicate on the label that
their loaves weigh 400g. A sample of 40 loaves is selected hourly
from their processing line and the contents weighed. Last hour
a sample of 40 loaves had a mean weight of 403g with a stan-
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dard deviation of 8g. Test at .05 significance level whether their


process is out of control?
Solution:
Step 1 : State the null and the alternative hypotheses:

H0 : µ = 400 versus H1 : µ 6= 400

JJ II
Step 2 : State the decision rule: State the decision rule: We
J I
need to find the value of Z that will only be exceeded 5% of
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the time since we have set our alpha level at .05. Since we
have a two sided hypothesis, we use α/2 = 0.025 when reading
the table. From the Z-table tables we find that the associated
Z-score would be -1.96 or 1.96. Then

H0 rejected if Z < −1.96 or Z > 1.96


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H0 rejected if Z < −1.96 or Z > 1.96

Step 3 : Compute the value of the test statistic: We use

403 − 400
Z= √ = 2.371
8/ 40
JJ II
Step 4 : Decide on H0 : H0 is rejected because 2.371 is greater
J I
than the critical value of 1.96. 
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NOTE: By rejecting the null hypothesis, we mean that the pro-
vided sample contained enough evidence to indicate that
the process is faulty. The truth may be different from this
position.

Example . A randomly sample of 9 subjects is taken from a


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population with a mean IQ of 100 and standard deviation of 15.


The 9 people under went an intensive training and then the IQ
test was administered. The sample mean IQ was 113 and the
sample standard deviation was found to 10. Test whether the
training had any significant effect (increase) in IQ score?
Solution: Note that the level of significance is not specified. The
standard value is 0.05 but we may use 0.01 or 0.1 depending on
JJ II the accuracy required. In this example we use α = 0.01.
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Step 1 : State the null and the alternative hypotheses:

H0 : µ = 100 versus H1 : µ ≥ 100

Step 2 : State the decision rule: We need to find the value of Z


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that will only be exceeded 1% of the time since we have set our
alpha level at 0.01. Since we have a one sided hypothesis, we
use α = 0.01 when reading the table. From the Z-table tables
we find that the associated Z-score would be 2.33. Then

H0 rejected if Z > 2.33

JJ II
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Step 3 : Compute the value of the test statistic:

113 − 100
Zc = √ = 2.6
15/ 9

We have used 15 instead of 10 in the place of population standard


deviation. Since this problem involves comparing a single group’s
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mean with the population mean and the standard deviation for
the population is known, the proper statistical test to use is the
Z-test otherwise it becomes a T-test.
Step 4 : Decide on H0 : We reject H0 because 2.6 > 2.33 and
conclude that the data provides enough evidence to indicate
that such a training increases the IQ. Recommend it for the
whole population.
JJ II

J I
J DocDoc I NOTE: The sample should be drawn from a population from
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HCBA 3102 STATISTICS FOR BUSINESS
which the Standard Deviation (or Variance) is known. Also, the
measured variable should have a Normal Distribution.
Note that if the distribution of the variable in the popula-
tion is non-normal (or unknown), the Z-test can still be used
for approximate results, provided the sample size is sufficiently
large. Sample sizes of at least 30 have been considered suffi-
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ciently large; reality is (of course) much more complicated, but


this rule of thumb is still in use in many textbooks.
Example . Scores on a certain test of mathematical aptitude
have mean µ = 50 and standard deviation σ = 10. An amateur
researcher believes that the students in his area are brighter
than average, and wants to test his theory. The researcher has
JJ II obtained a random sample of 45 scores for students in his area.
J I The mean score for this sample is 52. Does the researcher have
J DocDoc I evidence to support his belief?
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Solution: The null hypothesis is that there is no difference, and


that the students in his area are no different than those in the
general population; thus,

H0 : µ = 50 versus H1 : µ > 50
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The sample size is fairly large (greater than 30), and the stan-
dard deviation is known, so a Z-test is appropriate. We reject
the null hypothesis at 0.05 significance level if Zc > 1.64

x̄ − µ0 52 − 50
Z= √ = √ = 1.3416
σ/ n 10/ 45
JJ II Since Zc = 1.3416 < 1.64, we fail to reject the null hypothesis
J I and conclude that the evidence does not support the researcher’s
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belief. 

Example . Jane is in charge of Quality Control at a bottling


facility. Currently, she is checking the operation of a machine
that is supposed to deliver 355 mL of liquid into an aluminum
can. If the machine delivers too little, then the local Regulatory
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Agency may fine the company. If the machine delivers too much,
then the company may lose money. For these reasons, Jane
is looking for any evidence that the amount delivered by the
machine is different from 355 mL.
During her investigation, she obtains a random sample of 10
cans, and measures the following volumes:

JJ II 355.8, 355.0, 355.5, 353.7, 355.5,


J I 355.3, 353.8, 355.6, 355.0, 355.4
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The machine’s specifications claim that the amount of liquid
delivered varies according to a normal distribution, with mean
µ = 355 mL and variance= 0.64 mL.
Do the data suggest that the machine is operating correctly?
Solution: The null hypothesis is that the machine is operating
according to its specifications; thus
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H0 : µ = 355 versus H1 : µ 6= 355

Since the standard deviation is known, Z-test is appropriate. We


reject the null hypothesis at 0.05 significance level if Zc > −1.96
or Zc > 1.96. Use a calculator to find that x̄ = 355.06.

JJ II x̄ − µ0 355.06 − 355
Z= √ = √ = 2.3717
σ/ n 0.08/ 10
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Since Zc > 1.96, we reject the null hypothesis and conclude
that the sample provides enough evidence that the machine is
not working correctly.

©JKUAT-SODeL

JJ II
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Common hypothesis tests involving normal distributions
Test Hypothesis Test Statistic
A value xis from H0 : µ = µ0 Z = X−µ σ
0

X ∼ N (µ0 , σ 2 ) where σ 2 is N (0, 1)
known
A value x is from X−np
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H0 : µ = np Z= √
npq
X ∼ Bin(n, p) where n is
large and np, nq > 5
A sample of size n with H0 : µ = µ0 Z= x̄−µ
√0
σ n
mean x̄ is from
X ∼ N (µ0 , σ 2 ) where σ 2 is
known
A large sample of size H0 : µ = µ0 Z = x̄−µ √0
JJ II σ̂ n
n > 30 with mean x̄ is from
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X ∼ N (µ0 , σ 2 ) where σ 2 is
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5.2.1. Z Test for Two Means
The Null Hypothesis should be an assumption about the dif-
ference in the population means for two populations. The data
should consist of two samples of quantitative data (one from
each population). The samples must be obtained independently
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from each other.


The samples must be drawn from populations which have
known Standard Deviations (or Variances). Also, the measured
variable in each population (generically denoted x1 and x2 ) should
have a Normal Distribution.
Procedure: The null Hypothesis:

JJ II
J I H0 : µ1 − µ2 = d and H0 : µ1 − µ2 6= d
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in which d is the supposed difference in the expected values
under the null hypothesis. The Alternate Hypothesis could be,

H1 : µ1 − µ2 6= d
H1 : µ1 − µ2 < d
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H1 : µ1 − µ2 > d

The Test Statistic:

(x̄1 − x̄2 ) − d
Z= q 2
σ1 σ2
n1
+ n22

JJ II Usually, the null hypothesis is that the population means are


J I
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equal i.e d = 0; in this case, the formula reduces to

x̄1 − x̄2
Z=q 2
σ1 σ2
n1
+ n22

If the Variances (and thus the Standard Deviations) of the two


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populations are assumed equal, the pooled variance could be


used and in this case, we get..

x̄1 − x̄2
Z= q
σ n11 + n12

Example . Universities and colleges in the United States of


JJ II America are categorized by the highest degree offered. Type IIA
J I institutions offer a Master’s Degree, and type IIB institutions
J DocDoc I offer a Baccalaureate degree. A professor, looking for a new
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position, wonders if the salary difference between type IIA and
IIB institutions is really significant.
He finds that a random sample of 200 IIA institutions has
a mean salary (for full professors) of $54,218, with standard
deviation $8,450. A random sample of 200 IIB institutions has
a mean salary (for full professors) of $46,550, with standard
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deviation $9,500 (assume that the sample standard deviations


are in fact the population standard deviations).
Do these data indicate a significantly higher salary at IIA
institutions?
Solution
The null hypothesis is that there is no difference; thus

JJ II
H0 : µA = µB
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(where µA is the true mean full professor salary at IIA institu-
tions, and µB is the mean at IIB institutions) . He is looking for
evidence that IIA institutions have a higher mean salary; thus
the alternate hypothesis is

H1 : µA > µB
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Since the hypotheses concern means from independent samples,


a two sample test is indicated. The samples are large, and the
standard deviations are known (we assumed), so a two sample
z-test is appropriate.

µA − µB 54218 − 46550
Z=q 2 2
=q = 8.5292
σA σB 84502 95002
JJ II nA
+ nB 200
+ 200
J I
This value is far much larger than 4, the most extreme value
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in the standard normal, we reject the null hypothesis an con-
clude that IIA schools have a significantly higher salary than
IIB schools.

5.2.2. The t-Test


The t- test is the most powerful parametric test for calculating
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the significance of means when the sample is small and when


the population variance is unknown. The test is based on a
t-distribution which has the following properties;
• It is continuous, bell-shaped, and symmetrical about zero
like the z-distribution.
• There is a family of t-distributions sharing a mean of zero
JJ II but having different standard deviations.
J I • The t-distribution is more spread out and flatter at the
J DocDoc I center than the z-distribution, but approaches the z-distribution
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as the sample size gets larger.
A t-test is necessary for small samples because their distributions
are not normal. If the sample is large (n >= 30) then statistical
theory says that the sample mean is normally distributed and a
z test for a single mean can be used. This is a result of a famous
statistical theorem, the Central limit theorem.
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A t-test, however, can still be applied to larger samples and


as the sample size n grows larger and larger, the results of a
t-test and z-test become closer and closer. In the limit, with
infinite degrees of freedom, the results of t and z tests become
identical.
In order to perform a t-test, one first has to calculate the
degrees of freedom. This quantity takes into account the
JJ II
sample size and the number of parameters that are being esti-
J I
mated. Here, the population parameter, µ is being estimated
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by the sample statistic x̄, the mean of the sample data. For a
t-test the degrees of freedom of the single mean is n − 1. This is
because only one population parameter (the population mean)
is being estimated by a sample statistic (the sample mean).
degrees of freedom (df) = n − 1
The test statistic for the one sample case is given by;
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x̄ − µ
t= √ ∼ tn−1
σ̂ n

where
( x)2
X P 
2 1 2
σ̂ = x − .
n−1 n
For a two-tail test using the t-distribution, you will reject the
JJ II null hypothesis when the value of the test statistic is greater
J I than tn−1,α/2 or if it is less than −tn−1,α/2 depending on the di-
J DocDoc I rection of the tail.
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Example . The current rate for producing 5 amp fuses at


an ABC company is 250 per hour. A new machine has been
purchased and installed that, according to the supplier, will in-
crease the production rate. A sample of 10 randomly selected
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hours from last month revealed the mean hourly production on


the new machine was 256, with a sample standard deviation of 6
per hour. At the 0.05 significance level can ABC conclude that
the new machine is faster?
Solution The hypothesis is

H0 : µ = 250 versus H1 : µ > 250


JJ II
Since sample is small and the standard deviation is unknown,
J I
t-test is appropriate. We reject the null hypothesis at 0.05 sig-
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nificance level if t9 > 1.833 (FROM t-Tables).

x̄ − µ0 256 − 250
tc = √ = √ = 3.16
σ/ n 6/ 10

Since tc > 3.16, we reject the null hypothesis and conclude


that the sample provides enough evidence the new machine is
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faster.

Exercise 1.  A college professor wants to compare her stu-


dents’ scores with the national average. She chooses an simple
random sample of 20 students, who score an average of 54.2 on
a standardized test. Their scores have a standard deviation of
4.5. The national average on the test is a 60. She wants to
JJ II know if her students scored significantly lower than the national
J I average.
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• Comparing Two independent Population Means
A small two sample t-test is used to test the difference between
two population means µ1 and µ2 when the sample size for at
least one population is less than 30. To conduct this test, three
assumptions are required:
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• The populations must be normally or approximately nor-


mally distributed.
• The populations must be independent.
• The population variances must be equal.
The standardized test statistic is:

(x̄1 − x̄2 ) − (µ1 − µ2 )


t= r   ∼ tn1 +n2 −2
JJ II 2 1 1
σ̂p n1 + n2
J I
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where
(n1 − 1)σ̂12 + (n2 − 1)σ̂22
σ̂p2 =
n1 + n2 − 2
• Dependent samples
Example . Dependent samples are samples that are paired
or related in some fashion. The idea of using the same subject
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and taking repeated measurements. For example, if you wished


to buy a car you would look at the same car at two (or more)
different dealerships and compare the prices. Use the following
test when the samples are dependent:

d¯ − µd
t= √ ∼ tn−1
σ̂d / n
JJ II
J I
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where di = xi −yi is the difference between pairs, d¯ is the average
of the differences
¯2
pP
(di − d)
σ̂d =
n−1
is the estimated standard deviation of the differences.
An independent testing agency is interested in the cost for rent-
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ing a single bedroomed house Nairobi estates. A random sam-


ple of 6 towns is obtained and the following rental information
obtained. At the .05 significance level can the testing agency
conclude that there is a difference in the rental charged between
2006 and 2007?

JJ II
J I
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Estate Rent06 (Ksh’00’) Rent07 (Ksh’00’)
Githurai 55 59
Kahawa 64 65
Ngomongo 23 32
Roysub 45 58
Ruiru 38 48
©JKUAT-SODeL

Kawangware 57 50
Solution

JJ II
J I
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Estate Rent 2006 Rent 2007 Difference(d)
(Ksh’00’) (Ksh’00’)
Githurai 55 59 4
Kahawa 64 65 1
Ngomongo 23 32 9
Roysub 45 58 13
©JKUAT-SODeL

Ruiru 38 48 10
Kawangware 57 50 -7
TOTAL 282 312 30
AVERAGE 47 52 5
d = 416, d¯ = 5
P P 2
d = 30,
s  
1 302
JJ II σ̂d = 416 − = 7.294
6−1 6
J I
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The hypothesis is

H0 : µd = 0 vs H1 : µd > 0

The test statistics is

5−0
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d̄−µd
t= √ = √ = 1.68
σ̂d / n 7.294/ 6

but t5,0.05 = 2.015,. Since tc < t5,0.05 , we fail to reject the null
hypothesis and conclude that the data do not provide enough
evidence that rent has increased significantly.

Exercise 2.  A sample of 8 students were given a diagnostic


JJ II test before studying a particular module and then again after
J I completing the module. The following data gives their scores
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before and after the training.

Score 1: Before 19 21 17 21 23 18 14
Score 2: After 26 29 23 23 19 29 19

Test at 0.1 and 0.05 levels of significant if the teaching leads to


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improvements in students.
Example . Consider the following data as captured in SPSS
file.

JJ II
J I
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©JKUAT-SODeL Table 5.1: SPSS Data file

JJ II
J I
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Suppose we wish to test whether performance in Maths de-
pends on Gender, Since gender has only two categories, the
test is simply a comparison of two group means. To determine
whether the differences are by chance, the appropriate test is
independent samples t-test with the hypothesis;
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H0 : There is no significant difference between the two groups in M


versus
H1 : There is significant difference between the two groups in Mat

The first table SPSS gives is for descriptives; From table 5.2, it
is apparent that the mean score for Males is higher than that of
Females. However, this is not conclusive as the test is not about
JJ II
the sampe data but the population from which the data was
J I
taken. The standard error of the mean is a ratio s.e(x̄) = √Sn
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(s is the standard deviation) is a measure of accuracy of the
estimates.

Table 5.2: T-Test results 1


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The second table that SPSS gives contains the inferential


results. Before you report the t-values and the corresponding
p-values check Levene’s test for equality of variances which the
guides in determining which row to use in reporting the results.

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©JKUAT-SODeL Table 5.3: T-Test results 2

Since F = 0.251, p = 0.624 > 0.05(5, the Levene’s test tells


us that the variance within males data is similar to the variance
within female scores. This tells us to use the first row (Equal
variances assumed). Since t14 = −4.51, p < 0.001, we reject
the null hypothesis and conclude that there is significant differ-
ence in the means scores of the two groups. The males has a
JJ II significantly higher mean score (x̄m = 79.14 against x̄f = 60.11)
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HCBA 3102 STATISTICS FOR BUSINESS
Exercise 3.  Carry out a t-test to determine whether per-
formance score in English depends on Home region (Urban vs
Rural)
Exercise 4.  Carry out a t-test based on the mean perfor-
mance score in Maths is greater than 65
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Suggested materials for further reading


1. Wonnacott, T.H. and Wonnacott, R.J. (1990). Introduc-
tory Statistics for Business and Economics, 2nd Edition,
John Wiley and Sons Inc.
2. Fruend, J.E. and Williams, F.J. (1979). Modern Business
Statistics. Pitman Publishing Limited, London.
JJ II 3. Gupta, S.C. and Kapoor, V.K. (1995). Fundamentals of
J I Mathematical Statistics. Sultan Chand and Sons, New
J DocDoc I Delhi.
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HCBA 3102 STATISTICS FOR BUSINESS
4. Johnston, J. (1972). Econometric Methods, 2nd Edition,
McGraw-Hill Kogakusha, Ltd, Tokyo.
©JKUAT-SODeL

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Solutions to Exercises
Exercise 1. We will assume that the scores (X) of the students
in the professor’s class are approximately normally distributed
with unknown parameters µ and σ.
State the hypotheses
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H0 : µ = 60 vs H1 : µ < 60

Next we identify the test to be used. Since we have a small


sample size and do not know the standard deviation of the pop-
ulation, we will use a one-sample t-test.
The formula for the t-statistic T for a one-sample test is as
follows:
JJ II x̄ − µ0 54.2 − 60
t= √ = √ = −5.76
J I σ̂/ n 4.5/ 20
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where x is the sample mean and σ̂ is the estimated population
standard deviation. Lastly, interpret the results in the context
of the problem. Since |tc | = 5.76 > t(0.05, 19) = 1.729 we
reject the null hypothesis at α = 0.05 and conclude that there is
enough evidence that the students did score significantly lower
than the national average. Exercise 1
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Exercise 3. Hint: Similar test as the one done in the example.
Exercise 3
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Exercise 4. Hint: Use One-sample t-test with test value 65.
Confirm that the null hypothesis H0 : µ = 65 is accepted.
Exercise 4
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