CHAPTER THREE

HYPOTHESIS TESTING
 Hypothesis Testing

 Hypothesis testing, we start with an assumed value of a

population parameter: then we shall use sample evidence to
decide wither the assumed value is unreasonable and should be
rejected or whether it should be accepted.
 The assumptions we make about the values of population
parameters are called hypotheses.
 A procedure based on sample evidence and probability theory to
determine whether the hypothesis is a reasonable statement is
called hypothesis testing.
• In hypotheses testing we begin by making a tentative assumption
about a population parameter.
• This tentative assumption is called the null hypothesis, and is
denoted by Ho - it is the assumption we wish to test.
• Another hypothesis, called the alternative hypothesis, which is the
opposite of what is stated in the null hypothesis and denoted by Ha.
• The hypothesis testing procedure involves using data from a sample
to test the two competing statements indicated by Ho and Ha. Ho
and Ha are mutually exclusive and collectively exhaustive.
• In the process of hypothesis testing, the null hypothesis is
initially assumed to be true.
• The data are gathered and examined to determine whether the
evidence is strong enough away from the null hypothesis to
reject it when the researcher in testing an industry standard or
a widely accepted values, the standard or accepted value is
assumed to be true in the null hypothesis.
• Ha, Hi = research hypothesis a statement that in accepted if the
sample data provide enough evidence that the Ho is false.
 Example

1. The manager of a hotel has stated that the mean guest bill for a
weekend is Birr 400 or less. A member of the hotel’s accounting staff
has noticed that the total charges for guest bills have been increasing in
recent months. The accountant will use a sample of weekend guest
bills to test the manager’s claim.

• Required: State the null and alternative hypotheses

Solution
• Ho: μ  Birr 400
• Ha:   Birr 400
 Example

2. The manager at a drugstore claims that the company’s

employees are honest. However, there have been many
shortages from the cash register lately.
• Required: Specify the null and alternative hypothesis  
Solution:
• Ho: Employees are honest
• Ha:Employees are dishonest
 Type I and Type II Errors

There are four possible outcomes of any hypothesis test, two of which are
correct and two of which are incorrect.
The incorrect ones are called type I and Type II errors.
Type I Error
In hypothesis testing sample evidence is used to test the null hypothesis Ho.
A type I error is committed when a true null hypothesis is rejected.
In short, rejecting a true Ho is called Type I error.
Type I error is represented by Alpha (), or the level of significance.
The larger the area of the rejection region, the greater is the risk of
committing Type I error.
 Type II Error

• A Type II error is committed by failing to reject a false null

hypothesis.
• Accepting a null hypothesis when it is false is called a Type II
error. The probability of committing a Type II error is
represented by beta ().
• The smaller  is the larger will be , and the larger  in the smaller  will be.

Decision Ho True Ho False

Accepted Ho Correct decision Type II error
Rejected Ho Type I error Correct decision
 One – Tailed Vs Two – Tailed Tests

• These are three possible null hypotheses along with their

corresponding alternative hypotheses.
 Two – Tailed test

• A two – tailed test of a hypothesis will reject the null hypothesis

if the sample statistic is significantly higher than or lower than a
hypothesized population parameter.
• Thus, in a two – tailed test there are two rejection regions. A
two tailed is appropriate when the null hypothesis is equal to
some specified value (e.g. Ho:   ) and the alternative
hypothesis is different from (not equal to) some specified value
(e.g. Ha:  .
 One Tailed test

A one tailed test is one in which the alternative hypothesis is directional;

unlike a two – tailed test which does not specify direction.
• One – tailed test can be:
• A right – tailed / upper – tailed test.
• A left – tailed / lower – tailed test.
Aright – tailed test will reject the null hypothesis if the sample
statistic is significantly higher than the hypothesized population parameter. 
A left – tailed test will reject the null hypothesis if the sample statistic is
significantly lower than the hypothesized population parameter.
 STEPS IN HYPOTHESIS TESTING
1. Determine the null and alternative hypotheses.
E.g. Ho:   
Ha:   
 
2. Select the test statistic that will be used to decide whether or not to reject the null hypothesis
E.g. Z – distribution, t – distribution, F- dist, x2 – distribution
 
3. Select the level of significance to determine the critical values and develop the rejection rule that indicates the values of the test
statistic that will lead to the rejection of Ho.
E.g.  = 0.05 Z025 = 1.96  Reject Ho if /Sample Z/  1.96
 
4. Collect the sample data, and compute the value the test statistic. A test statistic is a random variable whose value is used to
determine whether we reject the null hypothesis.
E.g. Sample Z=2.0
 
5. Compare the value of the test statistic to the critical value(s) and make the decision (either reject Ho or accept HO /do not reject).
 HYPOTHESIS TEST ABOUT A POPULATION MEAN:
Population –Normal, Standard Deviation - Known

• In hypothesis testing if the population in normal and standard deviation is

known, we use Z-Value to test the hypothesis; regardless of the sample
size, n. It is also applicable when n  30 regardless of the pop
distribution.
Example
1. Matador-Addis Tires Share Company claims that its tires have a mean
life of 35,000 miles. A random sample of 36 of these tires is tested if the
sample mean in 33,000 miles. Assume that the population standard
deviation is 3000 miles and the lives of tires are approximately normally
distributed. Test the share company’s claim using a 5% level of
significance.
 Alternative Methods of Testing Hypotheses

• Two other methods of testing hypotheses are:

I. The critical value method and
II. The probability (p-value) method.
• All three methods of testing lead to the same conclusion with
regard to rejection or not reject the null hypothesis.
1. Critical Value Method
• One alternative method of testing hypotheses is the critical
value method.
• The critical value method determines the critical mean value
required for z to be in the rejection region and uses it to test the
hypothesis.
Critical Value Method cont…
 A sample mean value of less than 34,020 miles but
greater than 35,980 miles must be attained in order to
reject the population mean. Because the sample mean for
this problem is 33,000 miles, we reject 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.
 The probability (p-value) Method

• A third way to make decisions in hypothesis testing

problems is by using the probability (p-value)
method.
• In this method, in stead of comparing the computed
statistic (z value) with a table value to determine
whether the value falls into the rejection region,
• we determine a probability for the computed value
and compare that probability to the level of
significance (alpha).
 In order to reject the null hypothesis with the probability
method, the probability of the computed value must be less
than α for a one tailed test or less than α/2 for a two tailed test.

Example
• A Teachers’ union is on strike for higher wages. The union claims that the
mean salary for teachers is at most Birr 8,400 per year. The legislator does
not want to reject the union’s claim, however, unless the evidence is very
strong against if. Assume that salaries follow a normal distribution and the
population standard deviation is known to be Birr 3000. A random sample of
64 teachers is obtained, and the sample mean is Birr, 9,400. Test if the state
legislator accepts the unions’ claim or not at 1% significance level.
 By using P-value
ɑ = 0.01
P(Z > 2.67)= 0.5-
0.4962 = 0.0038
Reject Ho because prb.
Of computed value is
lass than ɑ
0.0038 <0.01
• Interval Estimation, use of the t-distribution is
appropriate when  is unknown, the sample size is
small (n30), and population is normally distributed.
When we use the t-distribution, it replaces Z as test
statistic.

X  S
t SX 
SX n
 Example
1. A contractor assumes that construction workers are
idle for 75 minutes or less per day. A random
sample of 25 construction workers was taken and
the mean idle time was found to be 84 minutes per
day with a sample standard deviation of 20 minutes.
Assume that the population is approximately
normally distributed; use a 5% level of significance
to test the contractor’s assumption.
Solution
 HYPOTHESIS TESTING ABOUT A POPULATION
PROPORTION (P)
• A proportion is a value between 0 and 1 that expresses the part
of the whole that possesses a given characteristic.
• Similar to that of hypothesis testing about a population mean,
hypothesis testing about a population proportion has three terms.
 Cont…
• Hypothesis testing about a population proportion is based on the
difference between the sample proportion and the hypothesized
value P.

p p
Z
 p
 Example

1. A magazine claims that 25% of its readers are college students.

A random sample of 200 readers is taken. It is found that 42 of
these readers are college students. Use a 10% level of
significance and test the magazine’s claim.
Solution
HYPOTHESIS TESTING INVOLVING TWO POPULATIONS

I. Hypothesis Testing About the Difference between Two

Means
II. Hypothesis Testing About the Difference between Two
proportion
 Hypothesis Testing About the Difference between Two Means

• According to the central limit theorem, the difference in two sample

means in normally distributed for large sample sizes (n1, n2  30) and if the
parent populations are normally distributed regardless of the sample size
the difference in two sample means is normally distributed. 
I. Large sample case 
• As is true is hypothesis testing about a population mean or population
proportion, hypothesis testing about the difference between two means
has three forms. That is, the null hypothesis can take three forms along
with the corresponding alternative hypothesis.
• For large sample sizes the sampling distribution of the
difference between two sample means is normally distributed
with a Z – test statistic.
Z
X 1 
 X 2   1   2 
 12  22

n1 n2
 Example

1. Is there any difference between the average salary of a legal

secretary and a medical secretary? In an effort to answer that
question a researcher takes a random sample of 33 legal
secretaries across a region, resulting in a sample average annual
salary of Birr 20,000 with a standard deviation of Birr 1,550. The
researcher then takes a random sample of 35 medical secretaries a
class the region, which yields an average annual salary of Birr
18,500 with a standard deviation of Birr 2,100. Use =0.01 to
test this question
 Solution

Z
X 1 
 X 2   1   2  Z X
1X2 
 Z 20, 00018,500
20,000  18,500   0   3.36
2 2 1,550 2 2,100 2
S 1 S 2

 33 35
n1 n 2
•Reject Ho; because /sample Z/ = 3.36  2.57. There is a difference in the average annual salary of
legal and medical secretary.
 2. Small Sample Case
• t – Distribution: used when population normal 1, and 2
unknown, and n1, and/or n2  30. The unknown population
standard deviations are approximated by sample standard
deviations as:
 Example
• A marketing research firm wishes to know if the mean number
of his of TV viewing per week is the same for teenage boys
and teenage girls using a 5% level of significance. The
unknown population variances are assumed to be equal. The
following data were obtained is an attempt to test the equality
of 1 and 2.
Hypothesis testing about the Difference between two population
proportions (P1-P2)
 Example
• In a sample of 400 products produced by machine I, 200
were defective, and in a sample of 400 products
produced by machine II, 170 were defective. Using  =
0.05, test the hypothesis that the rate of defect is the
same for both machine 1 and machine 2.
End of Chapter
Three