CHAPTER II

STATISTICAL ESTIMATION
 Definition of Terms
• Point Estimate
 A single number computed from a sample and used to
estimate a population parameter.
 Conveys little information about the actual value of the
population parameter
• Interval Estimate
 An interval or range of values believed to include the unknown
population parameter.
• Confidence Interval
 An interval estimate which is associated with degree of
confidence of containing the population parameter is
called Confidence Interval.
• Sampling error/Margin Error
 The difference between a sample statistic and its
corresponding population parameter.
 POINT ESTIMATION
Some of the most important point estimators are
given below:


 Example: To set the price of a product, one strategy is
competition-oriented in which you fix the price of
your product at the average level charged by other
producers. Suppose you want to market a 200-gram
soap that you produce. The current wholesale prices
charged by a random sample of 10 soap producers (in
birr) are:
31 24 32 28 45 40 30 26 28 36

A. What is an estimate of the mean wholesale price charged

by all soap producers?
B. Find an estimate of the standard deviation in the
wholesale prices of all the producers?
a) The mean wholesale price or the population
mean () is estimated by the sample mean,
given by

Thus, the wholesale price per unit of your

product at 32 Birr.
 
b) The standard deviation in the wholesale
prices of all producers () and is estimated
by the sample standard deviation.
 31 -1 1
24 -8 64
32 0 0
28 -4 16
45 13 169
40 8 64
30 -2 4
26 -6 36
28 -4 16
36 4 16
   

Thus, the wholesale prices fluctuate below and above their mean by about
6.55 Birr, which is an estimate of the standard deviation in the wholesale
prices of all producers.
Example: Suppose you are interested to know
the proportion of fishes that are inedible as a
result of chemical pollution of a certain lake.
In a random sample of 400 fishes caught from
this lake, 55 were found out to be inedible.
Out of all fishes in this lake, what is an
estimate of the proportion of inedible fishes?
 Confidence Interval /Interval
Estimation/
• A confidence interval or interval estimate is a range or
interval of 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.
• A confidence interval or interval estimate has
two 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).
 A (1-a )100% Confidence Interval for m

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

 the standard
2
normal curve. is called the confidence coefficient. is called the error probability,
and 100% is called the confidence level.

=
(1   )
=
)=


2
(1-a )100% Confidence Interval:
2

-5 -4 -3 -2 -1 0 1 2 3 4 5
 z Z z
2
2
Most common critical Values of z and Levels of
Confidence

0.99 0.005 2.57

0.98 0.01 2.33
0.95 0.025 1.96
0.90 0.05 1.65
0.80 0.10 1.28
Example: In a certain small city, to estimate the
mean monthly expenditure for food, a random
sample of 25 households was randomly selected
yielding a mean of 200 birr. From experience, it is
known that such expenditures are normally
distributed with a standard deviation of 50 Birr.
A. What is the point estimate of the mean
monthly expenditures for food of all
households in the city?
B. Find a 95 percent confidence interval for the
mean monthly expenditures for food of all
households in the city.
 Example: Time magazine reports information on the time
required for caffeine from products such as coffee and
soft drinks to leave the body after consumption. Assume
that the 99% confidence interval estimate of the
population mean time for adults is 5.6 hrs to 6.4 hrs.
A. What is the point estimate of the mean time for caffeine to
leave the body after consumption?
B. If the population standard deviation is 2 hrs, how large a
sample was used to provide the interval estimate?
Example : An accountant wants to estimate the average amount of
money deposited in savings accounts for students of in FBE
campus. 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 savings account at a bank in the campus.
s 140.00
x  z 0.025  357.60  1.96  357.60  27.44   33016,385
. .04
n 100
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.
Sta n d ard Nor m al Distrib uti o n Sta n d ard Nor m al Distrib 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

80% Confidence Interval: 95% Confidence Interval:

 
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 aam
S m pplin
lingg D
Distrib
istrib utio
utio nn of
of th
thee M
Mee aann S aam
S m pplin
lingg D
Distrib
istributio
utio nn of
of the
the M
Mee aann

00.4
.4 00.9
.9

00.8
.8

00.3
.3 00.7
.7

00.6
.6

00.5
.5

f(x)
f(x)

00.2
.2

f(x)
f(x)

0 .4
0 .4
00.3
.3
00.1
.1
00.2
.2

00.1
.1

00.0
.0
00.0
.0

xx xx

95% Confidence Interval: n = 20 95% Confidence Interval: n = 40

 Confidence Interval for ;
When  is unknown & Small Sample: - t Distribution

• If the population standard deviation, , is not known,

replace with the sample standard deviation, s. If the
population is normal, the resulting statistic:

• A t distribution has degrees of freedom

• The t is a family of bell-shaped and symmetric
distribution.
• The expected value of t is 0.
• The t distribution approaches a standard normal as the
number of degrees of freedom increases.
 Confidence Intervals for  when  is
Unknown- The t Distribution
Standard normal

t, df = 20
t, df = 10




A (1-)100% confidence interval for is given as

• Where is the value of the t distribution with n-1 degrees of

freedom that cuts off a tail area of to its right.
Critical value for t distribution

Example: for n = 20 and  = 0.025,

find t (n–1)
Solution:
From the t-distribution table,
(19) = 2.093

Example : If n = 26,  = 0.005

then t(n – 1)
= (25) = 2.787
(from the table of t-distribution)


Example: Suppose that a car rental firm in
Addis wants to estimate the average number
of miles traveled by each of its cars rented.
A random sample of 10 cars rented reveals
that the sample mean travel distance per day
is 85.5 miles, with a sample standard
deviation of 19.3 miles. Compute a 95%
confidence interval to estimate
Example: A sample of 20 cab fares for a
single trip in Addis shows a sample mean of
Br 250 and a sample standard deviation of
Br. 40. Develop a 90% confidence interval
estimate of the mean cab fares in the city.
Assume the population of cab fares has a
normal distribution.
Example: One measure of a company’s financial health is its
debt-to equity ratio. This quantity is defined to be the ration of the
company’s corporate debt to the company’s equity. If this ratio is too
high, it is one indication of financial instability. For obvious reasons,
banks often monitor the financial health of companies to which they
have extended commercial loans.
Suppose that, in order to reduce risk, a large bank has decided to
initiate a policy limiting the mean debt-to- equity ratio for its
portfolio of commercial loans to 1.5. In order to estimate the mean
debt-to-equity ratio of its loan portfolio, the bank randomly selects a
sample of 15 of its commercial loan accounts. Audits of these
companies result in the following debt-to-equity ratios:
1.31 1.05 1.45 1.21 1.19
1.78 1.37 1.41 1.22 1.11
1.48 1.33 1.29 1.32
The 1.65
bank wishes to calculate a 95% confidence interval for a loan
portfolio’s mean debt-to-equity ratio, .
• First compute the mean and sample standard deviations of
the sample observations;

With 95 % confidence the mean debt-to-equity

ratio for firms portfolio of commercial loan
accounts is between 1.237 and 1.449.
The bank is in compliance with its new policy the
portfolio’s mean ratio is less than 1.5
 Large-Sample Confidence Intervals
for the Population Proportion, p
A large sample (1-) confidence interval for the population proportion, P is
given by

When the sample proportion, , is equal to the ratio of successes in the sample,
x, and the sample size.

Example: Recently, a study of 87 randomly selected companies with

telemarketing operation was completed. The study revealed that 37% of the
sampled companies had used telemarketing to assist them in order processing.
Using this information estimate the population proportion of telemarketing
companies who use their telemarketing operation to assist them in order
processing taking a 95% confidence level.
 ??

)
=

I. Compute =and work up from the table.

== 0.05

II. Construct the confidence interval

0.2875 0.4925
 Sample-Size Determination
Before determining the necessary sample size, three questions
must be answered:

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

unknown parameter? (What is the desired bound, (Error)?)
• What do you want the desired confidence level (1-) to be so
that the distance between your estimate and the parameter is
less than or equal to population parameter?
• What is your estimate of the variance (or standard deviation)
of the population in question?


For example: A (1-  ) Confidence Interval for : x  z 
n

}
2

Bound, Error
 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
𝑀𝑖𝑛𝑖𝑚𝑢𝑚𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑠𝑎𝑚𝑝𝑙𝑒𝑠𝑖𝑧𝑒𝑖𝑛𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑖𝑛𝑔 𝑡h𝑒𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛𝑚𝑒𝑎𝑛𝑖𝑠𝑔𝑖𝑣𝑒𝑛 𝑎𝑠

𝑧 2 𝛼 𝛿2
2
𝑛=
𝐸2
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 = $400. What is the minimum required sample size?
 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?
Example: The owner of a chain of hotels wants to determine
the mean number of rooms occupied per day (so that he can
have an estimate of the average daily revenue obtained by
renting rooms). From past records, the standard deviation of the
daily occupancy is known to be 9 rooms.
a) How large a sample of days should be taken so that the true
mean number of rooms occupied per day will not differ from
the sample mean by more than 3 rooms at the 95 percent
confidence level?
b) At the 99 percent confidence level, what is the maximum
error committed in estimating the true mean by the sample
mean if a random sample of 64 days is taken?
Solution: -
Given  = 9 rooms
E = 3 rooms,
(1 - ) 100 % = 95 %   = 0.05
 Z / 2 = Z 0.025 = 1.96

Therefore, a sample of size at least 35 days

is required.
n = 64, (1 - ) 100% = 99%   = 0.01
 Z / 2 = Z0.005 = 2.58
E=