APPLIED STATISTICS

ECN 416
Theory of Estimation and Test of
Hypothesis
 STATISTICAL INFERENCE

• Statistical inference is the procedure whereby

inference or generalization about a population
are made on the basis of the result obtained
from a random sample selected from that
population.
• Statistical inference involves Estimation and
Test of Hypothesis.
 Sample Statistics

• A sample statistics is a summary measure

computed from sample observations
describing some characteristics of the sample
e.g. x, p, s2, r etc.
 Population Parameter
• This is a summary measure computed from
the population observation or values
describing some characteristics of the
population under study. E.g., µ, π, σ, R
corresponding to sample statistics
 Sampling Distribution of a Statistic

• The distribution of all possible values that can

be assumed by some statistics computed from
all possible sample of the same size randomly
selected from the same population is called
the sampling distribution of the statistics.
• Sampling distribution can be constructed
empirically when sampling from a finite
population or when sampling without
replacement.
Construction of Sampling Distributions

• From a finite population of size N, Select all

possible samples of size n, compute the
statistics of interest from each sample.
• Then tabulate the various observed values of
the statistics. The resulting distribution is
called the sampling distribution of that
statistic.
Construction of Sampling Distributions

• In every sampling distribution, interest is

centered on the mean, the variance, and the
standard deviation.
• The standard deviation of the sampling
distribution of a particular statistics is called
the standard error of the statistic. E.g., the
standard error of the sample mean is the
standard deviation of the sampling distribution
of the sample mean.
 Sampling Distribution of the Mean

• If we take repeated random samples from a

population and measure the mean of each
sample, we find that most of these sample
means, x s, differ from each other. The
probability distribution of these sample means is
called the sampling distribution of the mean.
• The sampling distribution of the mean itself has a
mean, given by the symbol µx , and a standard
deviation or standard error, σ x
 Sampling Distribution of the Mean
Contd.
Two important theorems relate the sampling distribution of the
mean to the parent population.
1. If we take repeated random samples of size n from a population
µx = µ

and σ x = σ / √ n
when sampling with replacement
 
or σ x = (σ / √ n) √ {(N - n) / (N - 1)}
when sampling without replacement.
 Sampling Distribution of the Mean
Contd.
2. As the samples’ size is increased (i.e., as n →
∞), the sampling distribution of the mean
approaches the normal distribution regardless of
the shape of the parent population. The
approximation is sufficiently good for n ≥ 30.
This is the Central-Limit Theorem.
 Some Theoretical Sampling Distributions

Below are listed some common theoretical sampling

distributions:
• Binomial Distribution
• Poisson Distribution
• Normal Distribution
• Uniform Distribution
• Chi-Square Distribution
• Student’s t Distribution
• The F Distribution
 ESTIMATION

• Estimation is the process of calculating from

sample data of some statistic that is offered as
an approximation to the corresponding
parameter of the population from which the
sample is selected.
 Estimator

• An estimator is the rule or procedure that is

used in estimating the population parameter.
Estimators are usually expresses by formulae.
• Example, x = ∑ xi / n is an estimator of µ
Also, p = x / n is an estimator of π
Similarly, s2 = [1/(n-1)] ∑(x – x)2 is an
estimator of σ2
 Estimate
• An estimate is a specific value obtained using
a particular estimator. E.g., x = 25 implies that
25 is an estimate of µ.
 Estimate
• A parameter may be estimated using more than one
estimator. Each estimator yields a different estimate.

• For example, sample mean and sample median can be

used as estimators of the population mean µ.
Similarly,
s2 = 1 / n-1 [∑(x – x)2] and
σᴧ 2 = 1 / n [∑(x – x)2]
can both be used as estimators of the population variance
σ2
 Types of Estimation

The theory of estimation is divided into two

groups:

• Point Estimation
• Interval Estimation
 Point Estimation

• This is the computation of a single numerical value

used to estimate the corresponding population
parameter. In point estimation we find a statistic
which may be used to replace an unknown
parameter of the population for all practical
purposes.
• If we say x = 20, then 20 is the point estimate of
µ.
• If we say s2 = 4, then 4 is the point estimate of σ2.
 Some Methods of Point Estimation

• Method of Moment
• Maximum Likelihood Method
• Method of Least Squares
 Method of Moment

• Sample moments are estimates of the

population moments. In general, m/r is an
estimate of µ/r, r = 1, 2, 3, ….., n. where µ/r is
equal to the population moment about the origin
and m/r is the sample moment about the origin.
Specifically, m/1 = µ/1 = µ.
Similarly, m/2 = µ/2
σ2 = µ/2 - (µ/1)2 = m/2 - (m/1)2
 Method of Moment contd.
• The population mean µ is estimated using the first
moment about the mean computed from the
sample observations.
m(1) = x = ( ∑ xi) / n
 
• The population variance σ2 is estimated using the
second moment about the mean computed from
the sample observations.
m(2) = ∑( xi - x)2 / n = σᴧ 2
 Method of Moment contd.
• Observe that m(2) = σᴧ 2 is a biased estimator
of σ 2

• while s2 = ∑( xi - x)2 / n – 1 is an unbiased

estimator of σ 2
 Example 1
The hourly wages of a random sample of ten
workers selected from a factory are given in
Naira as follows;
98, 119, 120, 85, 160, 117, 108, 95, 176, 132.

Obtain a point estimate of

• The population mean
• The population variance
 Solution

x = N121
σᴧ 2 = 7358 / 10

s2 = 7358 / 9
 Example 2
In an opinion pool, ten voters were pooled at
random and the following results were obtained:
1, 0, 1, 1, 0, 1, 1, 0, 1, 1,
where 1 indicates that the voters favour a
particular candidate and 0 indicates that he does
not favour the candidate.
Obtain a point estimate of the proportion of
voters in favour of the candidate.
 Solution

x = 7, n = 10,
p = x / n = 7 / 10 = 0.7
 Interval Estimation

• This consists of 2 numerical values computed

from sample observations defining an interval
which we assert with some degree of
confidence that it includes the population
parameters being estimated.
 Procedure for Interval Estimation
• Some degree of confidence desired of the
estimate is stated in advance. This is often
expressed in terms of the probability that the
interval estimate will cover or include the
population parameter. This probability is
called the confidence level.
• Select a random sample
Procedure for Interval Estimation Contd.
• On the basis of the observed sample observations 2 values are
computed these are the end point of the intervals, they are
called the Confidence Limits. Let L1 and L2 denote the lower and
upper limits of an interval computed from the sample
observations and let Ө denote the population parameter being
estimated. If we can assert with probability 1-α that the interval
[L1, L2] include the true population parameter Ө then the
interval is said to be a 100(1-α) % confidence interval for Ө.
• Thus P [L1 ≤ Ө ≤ L2] = 1-α , where 1-α is the desired
confidence level, L1 and L2 are te confidence limits and are
independent of Ө.
 Confidence Interval for the Mean µ

• The 100(1-α) % confidence interval for the

population mean is given as
• µ : x ± Z (1 - α/2) σ x : if σ2 is known
• µ: x ± t α/2 s x : if σ2 is unknown
• sx = s / √n
 Confidence Interval for the Mean µ
Contd.
• For 90% confidence interval, we have
100(1- α) % = 90%
α = 0.10
α/2 = 0.05
Z (1 - α/2) = Z (1 - 0.05) = Z 0.95 = 1.64
 Confidence Interval for the Mean µ
Contd.
• For 95% confidence interval, we have
100(1- α) % = 95%
α = 0.05
α/2 = 0.025
Z 1 - α/2 = Z (1 - 0.025) = Z 0.795 = 1.96
 Confidence Interval for the Mean µ
Contd.
Please note that Confidence Intervals can also
be computed for the following:
• Population Proportion π
• Difference between two means, µ1 - µ2
• Difference between two Proportions, π1 - π2
• Population variance σ2
• Division of two Population Variances, σ12 / σ22
 Example 3

• Given that n = 144, σ2 = 9, x = 25.

Obtain
95% confidence interval for µ
99% confidence interval for µ
 Solution
100(1- α) % = 95% = 0.95
Z 1 - α/2 = Z (1 - 0.025) = Z 0.795 = 1.96
µ : 25 ± (1.96) ( 3 / √144)
25 ± (1.96) ( 0.25)
25 ± 0.49
24.51 ≤ µ ≤ 25.49
 Solution Contd.

100(1- α) % = 99% = 0.99

Z 1 - α/2 = Z 0.995 = 2.58
µ : 25 ± (2.58) ( 3 / √144)
25 ± (2.58) ( 0.25)
25 ± 0.645
24.352 ≤ µ ≤ 25.648
 Example 4
• In a time-motion study, a sample of 18 reading in
minutes of an element was taken and the result
is as follows:
0.12, 0,14, 0,16, 0.12, 0.12, 0.17, 0.15, 0.14,
0.12, 0.11, 0.12, 0.12, 0.12, 0.15, 0.17, 0.13,
0.14, 0.14

• Within what limit would you expect the actual

average time for this element?
 Solution
n = 18
x = ( ∑ xi) / n = 0.136
s2 = ∑( xi - x)2 / n – 1 = 0.0185
t α/2 (n-1) df = t α/2 (17) = t 0.025 (17) df = 2.13
µ : 0.136 ± (2.13) ( 0.0185 / √18)
0.136 ± (2.13) ( 0.00436)
0.136 ± 0.0092
0.1268 ≤ µ ≤ 0.1452
 Estimation of a Sample Size

• In some situation it may be required to obtain

an initial estimate of the sample size required
in planning an experiment or sample survey
given rough estimate f he population variance
or its sample estimate, some level of
confidence and some limits within which the
estimate of the mean is expected to lie.
Estimation of a Sample Size Contd.
• Thus,
e = |x - µ|
Where e is the error in the estimate.

Using the fact that the confidence limit is given

as:
| x - µ | ≤ Z 1 - α/2 σ / √n
Estimation of a Sample Size Contd.
Then we conclude that
e ≤ Z 1 - α/2 σ / √n
» n = (Z σ / e)2
• If σ is unknown
e ≤ t s / √n
» n = (t s / e)2
 Example 5

It is known that the population standard

deviation in waiting time for L.P.G gas cylinder in
Total Nigeria is 15 days.
How large a sample should be chosen to be 95%
confident, the waiting time is within 7 days of
true average.
 Solution

The required sample size is

n = [ (σ Z) / e ]2 = [ (15x1.96) / 7 ] 2
= 17.64
 Example 6

• Mr. X wants to determine on the basis of

sample study the mean time required to
complete a certain job so that he may be 95%
confident that the mean may remain within ±
2 days of the true mean. As per the available
records the population variance is 64 days.

• How large should the sample be for his study?

 Solution.

Here σ = √64 = 8. Also Z is N(0.1).

It is given that
P [ | x - µ | < 2] = 0.95 (i)
But P [ ( x - µ) < 1.96 (σ / √n) ] = 0.95 (ii)
From (i) and (ii), we get
(1.96 x σ) / √n = 2
Hence, n = [ 1.96 x 8 / 2 ]2 = (7.84)2 = 61.42
 Qualities of a Good Estimator

A good estimator is one which is as close to the

true value of the parameter as possible.
A good estimator must possess the following
characteristics:
• Unbiasedness
• Consistency
• Efficiency
• Sufficiency
 Assignment

Define and explain each of the above stated

quality characteristics of a good estimator.