BUSINESS RESEARCH

METHODS_I
 UNIT I

• Testing of hypothesis-Large Sample Test

 Parameter and statistic

• A population characteristics under study is called parameter, ie., a

constant obtained from all the observations of a population is called a
parameter.
• Population mean is a parameter. Similarly population median population
standard deviation, population proportion of some attribute etc are
parameters.
• Parameters are generally denoted by greek letters or capital letters e.g.
population mean is denoted by µ, population proportion is denoted by P.
 Parameter and statistic (Cont.)

• In order to estimate the parameter of a population a sample is drawn

from the population.
• The constant obtained from a sample is called a statistic.
• Thus sample mean 𝑥 , sample standard deviation S, sample proportion
of some attribute p are statistic. i.e. the function of sample
observation is called statistic.
 Parameter and statistic
The following are some of the parameters and their statistic.
Parameter Statistic
Mean µ 𝑥
S.D 𝜎 S
Proportion P p
 Null hypothesis

• A statistical hypothesis which is taken for the possible acceptance is called a

null hypothesis and it is denoted by H0. The neutral attitude of the decision
maker, before the sample observations are taken is the keynote of the null
hypothesis. e.g.

(1) Mean of the population is 60 H0 = µ = 60.

(2) Mean of both populations are equal H0 = µ1 = µ2
(3) The coin is unbiased H0 : P = 1 2
(4) The proportions of drinkers in both the cities are equal
H0 = P1 = P2
 Alternative hypothesis

A hypothesis complementary to the null hypothesis is called

alternative hypothesis and it is denoted by H1 . e.g.

(i) H1 : µ ≠ 60
(ii) H1 : µ1 ≠ µ2
(iii) H1 : µ1 > µ2
(iv) H1 : P1 ≠ P2 , are alternative hypothesis
 One-tailed or Two-tailed Test

• In Statistics hypothesis testing, we need to judge whether it is a one-

tailed or a two-tailed test.

• So that we can find the critical values in tables such as Standard

Normal z Distribution Table . And then, by comparing test statistic
value with the critical value or whether statistic value falls in the
critical region, we make a conclusion either to reject the null
hypothesis or to fail to reject the null hypothesis.
 One-tailed or Two-tailed test (Cont.)
• How can we tell whether it is a one-tailed or a two-tailed test?
• It depends on the original claim in the question. A one-tailed test
looks for an “increase” or “decrease” in the parameter whereas a
two-tailed test looks for a “change” (could be increase or decrease) in
the parameter.
• Therefore, if we see words such as “increased, greater, larger,
improved and so on”, or “decreased, less, smaller and so on” in the
original claim of a question (>, <are used in H1), a one-tail testis
applied.
• If words such as “change, the same, different/difference and so on”
are used in the claim of the question (≠is used in H1), a two-tailed
testis applied.
One-tailed or Two-tailed test (Cont.)
• In a one-tailed test, the critical region has just one part (the
green area below). It can be a left tailed test or a right-tailed
test.
• Left-tailed test: The critical region is in the extreme left
region (tail) under the curve .
• Right-tailed test: The critical region is in the extreme right
region (tail) under the curve.
One tailed test:
In two-tailed test, the
critical region has two
parts (the red areas
below) which are in the
two extreme gerions
(tails) under the curve
 Type I and Type II errors

In testing of a statistical hypothesis the following situations may arise

(i) The hypothesis may be true but it is rejected by the test.

(ii) The hypothesis may be false but it is accepted by the test.
(iii) The hypothesis may be true and it is accepted by the test.
(iv) The hypothesis may be false and is rejected by the test
(iii) and (iv) are correct decision while (i) and (ii) are errors
 Type I and Type II errors (Cont.)

• The error committed in rejecting a hypothesis which is true is called

Type I error and its probability is denoted by 𝛼. Type II error and its
probability is denoted by 𝛽.
 Level of significance

• In any test procedure both the types of error should be kept

minimum. But as they are interrelated it is not possibility of type-I
error is fixed and simultaneously. Hence in practice, the probability of
type-I error is fixed and the probability of type-II error is minimized.
The fixed value of type-I error is called level of significance and it is
denoted by 𝛼. Thus, level of significance is the probability of rejecting
a hypothesis which ought to be accepted.
 Level of significance

• The most commonly used level of significance are 5% and 1%. When a
decision is taken at 5% level of significance, it is meant that in 5 cases
out of 100, it is likely to reject a hypothesis which ought to be
accepted. In other words, our decision to reject H0 is 95% correct.
 Critical region

• In large sample tests the standard normal variete Z is used as a test

statistic. The total area under the standard normal curve is 1. The area
or the region of standard normal curve is divided into two regions by
predetermined level of significance. The area of the normal curve
corresponding to type-I error, i.e. the probability of rejecting a
hypothesis which is true is known as area of rejection or critical
region.
 Critical region

• If the computed value of Z falls in the critical region, the null

hypothesis may be rejected. The region of standard normal curve
other than critical region is called acceptance region when the
computed value of Z falls in this region the null hypothesis may be
accepted.
 Two-tailed and One-tailed test

In a standard normal curve the critical region may be given in two ways
(i) on both the tails of the curve
(ii) on one tail of the curve
i.e. either on the right tail of the curve or on the left tail of the curve. If
the given null hypothesis is tested using the critical region represented
by both the tails of the normal curve, it is called two tailed test and if
the null hypothesis is tested using the critical region represented by
only one tail of the normal curve, it is called one-tailed test.