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Confidence Intervals

Types of Estimators

• Point Estimate

A single-valued estimate.

A single element chosen from a sampling distribution.

Conveys little information about the actual value of the

population parameter, about the accuracy of the estimate.

• Confidence Interval or Interval Estimate

An interval or range of values believed to include the

unknown population parameter.

Associated with the interval is a measure of the confidence

we have that the interval does indeed contain the parameter of

interest.

Confidence Interval or

Interval Estimate

numbers believed to include an unknown population parameter.

Associated with the interval is a measure of the confidence we have

that the interval does indeed contain the parameter of interest.

components:

A range or interval of values

An associated level of confidence

Confidence Interval for

When Is Known

If the population distribution is normal, the sampling

distribution of the mean is normal.

• If the sample is sufficiently large, regardless of the shape of

the population distribution, the sampling distribution is

normal (Central Limit Theorem).

0.4

P 196

. x 196

. 0.95

n

0.3

n

f(z)

0.2

or 0.1

0.0

x 196

-4 -3 -2 -1 0 1 2 3 4

P x 196

. . 0.95

n n

z

Confidence Interval for when

is Known (Continued)

Before sampling, there is a 0.95probability that the interval

1.96

n

will include the sample mean (and 5% that it will not).

x 1.96

n

will include the population mean (and 5% of them will not).

That is, x 1.96 is a 95% confidence interval for .

n

A 95% Interval around the Population

Mean

Sampling Distribution of the Mean

0.4

Approximately 95% of sample means

0.3

95%

can be expected to fall within the

interval 1.96 , 1.96 .

f(x)

0.2

n n

0.1

2.5% 2.5%

Conversely, about 2.5% can be

0.0

196

.

n

196

.

n

x

expected to be above 196

.

n

and

2.5% can be expected to be below

x

1.96 .

x n

2.5% fall below

the interval x

x So 5% can be expected to fall outside

x

x 2.5% fall above the interval 196

. , 196

. .

x

the interval n n

x

x

the interval

95% Intervals around the Sample

Mean

Sampling Distribution of the Mean

0.4

Approximately 95% of the intervals

x 1.96

around the sample mean can be

95%

0.3 n

expected to include the actual value of the

population mean, . (When the sample

f(x)

0.2

0.1

2.5% 2.5% mean falls within the 95% interval around

0.0 the population mean.)

x

196

. 196

.

n n

x x x

x mean can be expected not to include the

x actual value of the population mean.

* x

x (When the sample mean falls outside the

x

95% interval around the population

x

mean.)

x

x

x

x

*

The 95% Confidence Interval for

done from a normal population, or a large sample is used:

x 1.96

n

The quantity 1.96 is often called the margin of error or the

n

sampling error.

For example, if: n = 25 A 95% confidence interval:

= 20 20

x 1.96 122 1.96

x = 122 n 25

122 (1.96)(4 )

122 7.84

114.16,129.84

A (1-a )100% Confidence Interval for

We define za as the z value that cuts off a right-tail area of a under the standard

2

normal curve. (1-a) or (1-a)100% is called the confidence level. a is called the

2

level of significance.

S tand ard Norm al Distrib ution

P z > za a/2

0.4

(1 a ) 2

P z za a/2

0.3

2

f(z)

P za z za (1 a)

0.2

0.1 a a 2 2

2 2

0.0 (1- a)100% Confidence Interval:

-5 -4 -3 -2 -1 0 1 2 3 4 5

z a Z za x za

2 2

2 n

Critical Values of z and Levels of

Confidence

(1 a )

a za

Stand ard N o rm al Distrib utio n

0.4

2 2 (1 a )

0.3

0.99 0.005 2.576

f(z)

0.2

2 2

0.95 0.025 1.960 0.0

-5 -4 -3 -2 -1 0 1 2 3 4 5

z a za

0.90 0.050 1.645 2

Z

2

The Level of Confidence and the

Width of the Confidence Interval

When sampling from the same population, using a fixed sample size, the

higher the confidence level, the wider the confidence interval.

St an d ar d N or m al Di s tri b uti o n St an d ar d N or m al Di stri b uti o n

0.4 0.4

0.3 0.3

f(z)

f(z)

0.2 0.2

0.1 0.1

0.0 0.0

-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5

Z Z

x 128

. x 196

.

n n

The Sample Size and the Width of the

Confidence Interval

When sampling from the same population, using a fixed confidence

level, the larger the sample size, n, the narrower the confidence

interval.

S a m p lin g D is trib utio n o f th e M e an S a m p lin g D is trib utio n o f th e M e an

0 .4 0 .9

0 .8

0 .3 0 .7

0 .6

0 .5

f(x)

f(x)

0 .2

0 .4

0 .3

0 .1

0 .2

0 .1

0 .0 0 .0

x x

Point Estimates and Confidence Intervals for a

Mean – σ Known EXAMPLE

The American Management Association wishes to

have information on the mean income of

middle managers in the retail industry. A

random sample of 256 managers reveals a

sample mean of $45,420. The standard

deviation of this population is $2,050. The

association would like answers to the following

questions:

In this case, we do not know. We do know the

z z - value for a particular confidence level sample mean is $45,420. Hence, our best

σ the population standard deviation estimate of the unknown population value is

the corresponding sample statistic.

n the number of observatio ns in the sample

2. What is a reasonable range of values for the

1. The width of the interval is population mean? (Use 95% confidence level)

determined by the level of

confidence and the size of

the standard error of the

The confidence limit are $45,169 and $45,671

mean.

2. The standard error is affected The ±$251 is referred to as the margin of error

by two values: 3. What do these results mean?

- Standard deviation

If we select many samples of 256 managers,

- Number of observations and for each sample we compute the mean

in the sample and then construct a 95 percent confidence

interval, we could expect about 95 percent of

these confidence intervals to contain the

population mean.

Confidence Interval or Interval Estimate for

When Is Unknown - The t Distribution

with the sample standard deviation, s. If the population is

normal, the resulting statistic: t X

s

n

has a t distribution with (n - 1) degrees of freedom.

• The t is a family of bell-shaped and symmetric Standard normal

distributions, one for each number of degree of

freedom. t, df = 20

• The expected value of t is 0.

• The t is flatter and has fatter tails than does the

t, df = 10

standard normal.

• The t distribution approaches a standard normal

as the number of degrees of freedom increases

Confidence Intervals for when is

Unknown- The t Distribution

(assuming a normally distributed population):

s

x t a

2n

where ta is the value of the t distribution with n-1 degrees of

2 a

freedom that cuts off a tail area of 2 to its right.

The t Distribution

df t0.100 t0.050 t0.025 t0.010 t0.005

--- ----- ----- ------ ------ ------

1 3.078 6.314 12.706 31.821 63.657 t D is trib utio n: d f = 1 0

2 1.886 2.920 4.303 6.965 9.925

3 1.638 2.353 3.182 4.541 5.841 0 .4

4 1.533 2.132 2.776 3.747 4.604

5 1.476 2.015 2.571 3.365 4.032

6 1.440 1.943 2.447 3.143 3.707 0 .3

7 1.415 1.895 2.365 2.998 3.499 Area = 0.10 Area = 0.10

8 1.397 1.860 2.306 2.896 3.355

}

f(t)

9 1.383 1.833 2.262 2.821 3.250 0 .2

11 1.363 1.796 2.201 2.718 3.106

0 .1

12 1.356 1.782 2.179 2.681 3.055

13 1.350 1.771 2.160 2.650 3.012

14 1.345 1.761 2.145 2.624 2.977 0 .0

15 1.341 1.753 2.131 2.602 2.947 -1.372 1.372

-2.228 0 2.228

16 1.337 1.746 2.120 2.583 2.921

}

}

17 1.333 1.740 2.110 2.567 2.898 t

18 1.330 1.734 2.101 2.552 2.878

19 1.328 1.729 2.093 2.539 2.861 Area = 0.025 Area = 0.025

20 1.325 1.725 2.086 2.528 2.845

21 1.323 1.721 2.080 2.518 2.831

22 1.321 1.717 2.074 2.508 2.819

23

24

1.319

1.318

1.714

1.711

2.069

2.064

2.500

2.492

2.807

2.797

Whenever is not known (and the population is

25 1.316 1.708 2.060 2.485 2.787

26 1.315 1.706 2.056 2.479 2.779

assumed normal), the correct distribution to use is

27 1.314 1.703 2.052 2.473 2.771

28 1.313 1.701 2.048 2.467 2.763

the t distribution with n-1 degrees of freedom.

29 1.311 1.699 2.045 2.462 2.756

30 1.310 1.697 2.042 2.457 2.750

Note, however, that for large degrees of freedom,

40 1.303 1.684 2.021 2.423 2.704

60 1.296 1.671 2.000 2.390 2.660

the t distribution is approximated well by the Z

120 1.289 1.658 1.980 2.358 2.617

1.282 1.645 1.960 2.326 2.576

distribution.

Example

certain stock. A random sample of 15 days yields an average

(annualized) return of x 10.37% and a standard deviation of s = 3.5%.

Assuming a normal population of returns, give a 95% confidence

interval for the average return on this stock.

df t0.100 t0.050 t0.025 t0.010 t0.005

--- ----- ----- ------ ------ ------ The critical value of t for df = (n -1) = (15 -1)

1 3.078 6.314 12.706 31.821 63.657

. . . . . . =14 and a right-tail area of 0.025 is:

. . . . . .

13

. .

1.350

.

1.771

.

2.160

.

2.650

.

3.012

t0.025 2.145

14 1.345 1.761 2.145 2.624 2.977 The corresponding confidence interval or

15 1.341 1.753 2.131 2.602 2.947

s

.

.

.

.

.

.

.

.

.

.

.

. interval estimate is: x t 0 . 025

. . . . . . n

35

.

10.37 2.145

15

10.37 1.94

8.43,12.31

Confidence Interval for the Mean – Example

using the t-distribution

EXAMPLE

A tire manufacturer wishes to investigate the tread life of its tires. A

sample of 10 tires driven 50,000 miles revealed a sample mean of

0.32 inch of tread remaining with a standard deviation of 0.09

inch.

Construct a 95 percent confidence interval for the population mean.

Would it be reasonable for the manufacturer to conclude that after

50,000 miles the population mean amount of tread remaining is

0.30 inches?

Large Sample Confidence Intervals for

the Population Mean

--- ----- ----- ------ ------ ------ Whenever is not known (and the population is

1 3.078 6.314 12.706 31.821 63.657

. . . . . . assumed normal), the correct distribution to use is

. . . . . .

. . . . . . the t distribution with n-1 degrees of freedom.

120 1.289 1.658 1.980 2.358 2.617

1.282 1.645 1.960 2.326 2.576 Note, however, that for large degrees of freedom,

the t distribution is approximated well by the Z

distribution.

Large Sample Confidence Intervals for

the Population Mean

A large - sample (1 - a )100% confidence interval for :

s

x za

2 n

checking accounts at banks in a given region. A random sample of

100 accounts gives x-bar = $357.60 and s = $140.00. Give a 95%

confidence interval for , the average amount in any checking account

at a bank in the given region.

s 140.00

x z0.025 357.60 1.96 357.60 27.44 33016,385

. .04

n 100

Large-Sample Confidence Intervals

for the Population Proportion, p

sample size is large, pˆ has an approximately normal distributi on, with E( pˆ ) = p and

pq

V( pˆ ) = , where q = (1- p). When the population proportion is unknown, use the

n

estimated value, pˆ , to estimate the standard deviation of pˆ .

For estimating p, a sample is considered large enough when both n p an n q are greater

than 5.

Large-Sample Confidence Intervals

for the Population Proportion, p

pˆ qˆ

pˆ z

α n

2

where the sample proportion, p̂, is equal to the number of successes in the sample, x,

divided by the number of trials (the sample size), n, and q̂ = 1 - p̂.

Large-Sample Confidence Interval for the

Population Proportion, p

A marketing research firm wants to estimate the share that foreign companies

have in the American market for certain products. A random sample of 100

consumers is obtained, and it is found that 34 people in the sample are users

of foreign-made products; the rest are users of domestic products. Give a

95% confidence interval for the share of foreign products in this market.

pq ( 0.34 )( 0.66)

p za 0.34 1.96

2

n 100

0.34 (1.96)( 0.04737 )

0.34 0.0928

0.2472 ,0.4328

Thus, the firm may be 95% confident that foreign manufacturers control

anywhere from 24.72% to 43.28% of the market.

Sample-Size Determination

be answered:

• How close do you want your sample estimate to be to the unknown

parameter? (What is the desired bound, B?)

• What do you want the desired confidence level (1-a) to be so that the

distance between your estimate and the parameter is less than or equal to B?

• What is your estimate of the variance (or standard deviation) of the

population in question?

For example: A (1- a ) Confidence Interval for : x z a

n

}

2

Bound, B

Sample Size and Standard Error

The sample size determines the bound of a statistic, since the standard

error of a statistic shrinks as the sample size increases:

Sample size = 2n

Standard error

of statistic

Sample size = n

Standard error

of statistic

Minimum Sample Size: Mean and

Proportion

Minimum required sample size in estimating the population

mean, :

za2 2

n 2 2

B

Bound of estimate:

B = za

2 n

proportion, p

za2 pq

n 2 2

B

Sample-Size Determination:

Example

A marketing research firm wants to conduct a survey to estimate the average

amount spent on entertainment by each person visiting a popular resort. The

people who plan the survey would like to determine the average amount spent by

all people visiting the resort to within $120, with 95% confidence. From past

operation of the resort, an estimate of the population standard deviation is

σ = $400. What is the minimum required sample size?

za

2 2

n 2

2

B

2 2

(1.96) ( 400)

2

120

42.684 43

Sample-Size for Proportion:

Example

The manufacturers of a sports car want to estimate the proportion of people in a

given income bracket who are interested in the model. The company wants to

know the population proportion, p, to within 0.01 with 99% confidence. Current

company records indicate that the proportion p may be around 0.25. What is the

minimum required sample size for this survey?

za2 pq

n 2

B2

2.5762 (0.25)(0.75)

. 2

010

124.42 125

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