IME602Slides 03

IME602: PROBABILITY &
STAITICS (Part 03)

Raghu Nandan Sengupta
Department of Management Sciences (DoMS)
Indian Institute of Technology Kanpur, INDIA
IME602: Probability & Statistics R.N.Sengupta,DoMS.,IIT Kanpur,INDIA 1

(Part # 03)
Statistical Inference:
Hypothesis Testing (# 01)
A manufacturer of a particular type of electrical
motor has come up with a better hp rating motor
then its existing competitors and wants to market
that. As is the norm for any manufacturing product,
a certain warranty life is to be specified by the
manufacturer and the company under our
consideration specifies a warranty life of 1 year
instead of 8 months given for such rating products.
Now you as an engineer are quite skeptical on
hearing that the warranty time is 1 years and want
to test the validity of this statement which the
manufacturer is making.
(Part # 03)
The food and beverage company which manufactures jelly and jams
sells them in bottles of 100 gms, 250 gms and ½ kg sizes and you are
the marketing general manager of that firm. In order to meet the
growing market demand for these products your company has
installed a new high productive automatic jelly/jam filling machine, but
there has been complains afterwards that on an average the weight of
the 100 gms bottles for the jams are never exactly the same as they
have been found to be either more or less than 100 gms. So in order
to answer this complain and monitor the productivity of the new
machine the company has entrusted you the responsibility to solve
the problem and hence you would like to test whether the weights on
an average for the bottles coming out are about 100 gms (with some
errors) or is there a significant difference in the weights of the bottles,
which may be a major concern for the company and hence may
necessitate the implementation of some corrective action in order to
first identify and then rectify the problem.

(Part # 03)
The traffic flow at the main market road in
the city of Amritsar is highest in the each
day in the morning from 1000 to 1200
hours, and you as the commissioner of
police of Amritsar, want to see whether it is
really needed to have the road closed to
motor cars and commercial vehicles for that
part of the day in order avoid any accidents,
which has been reported at a rate of 3 per
week with a certain distribution.
(Part # 03)
In the city of Guwahati a new internet
service provider (ISP) has just opened its
service and is providing high speed internet
services and claims the speed of its
services are 500 Mbps. You are the resident
of that city are interested to get a new
internet connection but would like to verify
this fact and then take a decision whether to
take the connection from this new ISP or
continue with the old ISP.
(Part # 03)
Hypothesis Testing

(Part # 03)
Hypothesis Testing

(Part # 03)
Statistical Inference: Hypothesis
Testing (for the mean)
H0:  = 0 vs HA:  = A (A < 0), 2
known

(Part # 03)
H0:  = 0 vs HA:  = A (A > 0), 2 known

(Part # 03)
H0:  = 0 vs HA:  = A (A  0), 2 known

(Part # 03)
H0:  = 0 vs HA:  = A (A < 0), 2 unknown

(Part # 03)
H0:  = 0 vs HA:  = A (A > 0), 2 unknown

(Part # 03)
Example # 052
H0:  = 0 vs HA:  = A (A > 0), 2 unknown
A manufacturer of bars of steel claims that the
average breaking strength of his product is
more than 52. The breaking strength of each
bar in a sample of 15 is: 51.3, 52.1, 50.3, 50.2,
51.9, 50.0, 52.5, 50.7, 49.3, 49.3, 48.3, 48.1,
48.2, 47.8 and 47.5. Given this information we
are to examine if the manufacturers claim is
supported by these data. Consider =5% or
loc=(1-  )=95%

(Part # 03)
Example # 052 (contd…)
H0:  = 0=52 vs HA:  = A (A > 0=52), 2 unknown
We reject H0 if is true

(Part # 03)
H0:  = 0 vs HA:  = A (A  0), 2 unknown

(Part # 03)
Testing (for the variance)
H0:  = 0 vs HA:  = A (A < 0),  known
So the rule is reject H0 if

s*2n<(202n,1-)/n

(Part # 03)
H0:  = 0 vs HA:  = A (A > 0),  known

s*2n>(202n,)/n

(Part # 03)
H0:  = 0 vs HA:  = A (A  0),  known

s*2n<(202n,1-/2)/n
OR
s*2n>(202n,/2)/n

(Part # 03)
H0:  = 0 vs HA:  = A (A < 0),  unknown

S2n<{202n-1,1-}/(n-1)

(Part # 03)
H0:  = 0 vs HA:  = A (A > 0),  unknown

S2n>{202n-1, }/(n-1)

(Part # 03)
H0:  = 0 vs HA:  = A (A  0),  unknown

s2n<{202n-1,1-/2}/(n-1)
OR
s2n>{202n-1,/2}/(n-1)

(Part # 03)
 Difference of 1 and 2, provided 1 and
2 are known
2 are unknown, but equal
2 are unknown, but unequal

(Part # 03)
Ratio of (21 /22) provided 1 and 2, are
known
H0:  = 0 vs HA:  = A (A < 0)
(s*2m/s*2n)<Fm,n,1-

(Part # 03)
known
H0:  = 0 vs HA:  = A (A > 0)
(s*2m/s*2n)>Fm,n,

(Part # 03)
known
H0:  = 0 vs HA:  = A (A  0)
(s*2m/s*2n)<Fm,n, 1-/2
Or
(s*2m/s*2n)>Fm,n,/2

(Part # 03)
unknown
H0:  = 0 vs HA:  = A (A < 0)
(s2m/s2n)<F(m-1),(n-1),1-

(Part # 03)
Example # 053
Two experimenters, Shruti Mittal and Parva Goyal,
take repeated measurements of the length of a
copper wire. On the basis of the data obtained by
them, which are given below, test whether Shruti's
measurement is more accurate (think what accuracy
means here) than Parva's. Consider =0.05.
Shruti’s measurement (in mm): 12.47, 12.44, 11.90,
12.13, 12.77, 11.86, 11.96, 12.25, 12.78, 12.29
Parva;s measurement (in mm): 12.06, 12.34, 12.23,
12.46, 12.46, 12.39, 11.98, 12.22

(Part # 03)
Given the data let us denote X and Y as the random
variables which denote the distribution of measurement
made by Shruti and Parva, such that X~N(μ X,σ2X) and
Y~N(μY,σ2Y).
From the data we have
• nX=n_X=10
• Xmean,n_X=12.2850
• sX=0.333042, i.e., s2X=0.110917
• nY=n_Y=8
• Ymean,n_Y_=12.2675, i.e., s2Y=0.031964
• sY=0.178786
• F9,7,1-0.05=(1/F7,9,0.05)=(1/3.29)=0.3040
(Part # 03)
H0:  = 0 vs HA:  = A (A < 0)
(s2m/s2n)<F(m-1),(n-1),1-
• (s2X/s2Y)=(0.110917/0.031964)=3.470019
• F9,7,1-0.05=(1/F7,9,0.05)=(1/3.29)=0.3040
• Now as s2X/s2Y= 3.470019≤ F9,7,1-0.05=0.3040, is
NOT true, hence we cannot reject the null
hypothesis, which means that there is significantly
no difference in Shrutis measurements/readings
with respect to Parva s measurements/readings.
(Part # 03)
unknown
H0:  = 0 vs HA:  = A (A > 0)
(s2m/s2n)>F(m-1),(n-1), 

(Part # 03)
unknown
H0:  = 0 vs HA:  = A (A  0)
(s2m/s2n)>F(m-1),(n-1), 1-/2
Or
(s2m/s2n)>F(m-1),(n-1), /2

(Part # 03)
Weighted Moving Averages
In general a weighted k-point moving
average can be written as
m
Tt   a jYt  j
j  m
Note:
 The total of the weights is equal to 1
 Weights are symmetric, i.e., aj = a-j

(Part # 03)
Weighted Moving Averages
Steps are:
1) 4MA(1)=(Y1+Y2+Y3+Y4)/4
2) 4MA(2)=(Y2+Y3+Y4+Y5)/4
3) 4MA(3)=(Y3+Y4+Y5+Y6)/4
4) 4MA(4)=(Y4+Y5+Y6+Y7)/4
5) 4X4MA=(Y1+2*Y2+3*Y3+4*Y4+3*Y5+2*Y6+Y7)/16
6) 5X4X4MA = a-2*4X4MA(1) + a-1*4X4MA(2) +
a0*4X4MA(3) + a1*4X4MA(4) + a2*4X4MA(5)
where a-2 = -3/4, a-1 = 3/4, a0 = 1, a1 = 3/4, a2 = -3/4

(Part # 03)
Assignment (Moving Averages)
The data given is the number (in X105) of world wide
international airline passengers for the years 1949-
1956
Using this data to find out
1) 3MA
2) 5MA
3) 7MA
4) 2X4MA
5) 2X6MA
6) 3X3MA
7) 5X4X4MA
(Part # 03)
Assignment (Moving Averages)
Month wise number of passenger for the year
(1949-1956)
Mth Pass Mth Pass Mth Pass Mth Pass
Jan 112 Jan 145 Jan 196 Jan 242
Feb 118 Feb 150 Feb 196 Feb 233
Mar 132 Mar 178 Mar 236 Mar 267
Apr 129 Apr 163
Apr 235 Apr 269
May 121 May 172
May 229 May 270
Jun 135 Jun 178
Jun 243 Jun 315
Jul 148 Jul 199
Aug 148 Aug 199 Jul 264 Jul 364
Sep 136 Sep 184 Aug 272 Aug 347
Oct 119 Oct 162 Sep 237 Sep 312
Nov 104 Nov 146 Oct 211 Oct 274
Dec 118 Dec 166 Nov 180 Nov 237
Jan 115 Jan 171 Dec 201 Dec 278
Feb 126 Feb 180 Jan 204 Jan 284
Mar 141 Mar 193 Feb 188 Feb 277
Apr 135 Apr 181
Mar 235 Mar 317
May 125 May 183
Apr 227 Apr 313
Jun 149 Jun 218
May 234 May 318
Jul 170 Jul 230
Aug 170 Aug 242 Jun 264 Jun 374
Sep 158 Sep 209 Jul 302 Jul 413
Oct 133 Oct 191 Aug 293 Aug 405
Nov 114 Nov 172 Sep 259 Sep 355
Dec 140 Dec 194 Oct 229 Oct 306
Nov 203 Nov 271
Dec 229 Dec 306

(Part # 03)
Exponential Smoothing Methods
1) Single Exponential Smoothing (one
parameter, adaptive parameter)
2) Holts linear method (suitable for trends)
3) Holt-Winters method (suitable for trends
and seasonality)
4) Pegels classification

(Part # 03)
Single Exponential Smoothing
The general equation is:
Ft+1 = Ft + (Yt – Ft) = Yt + (1 - )Ft,
Note:
 Error term: Et = Yt - Ft
 Forecast value: Ft
 Actual value: Yt
 Weight:   (0,1)
  is such that sum of square of errors is minimized

(Part # 03)
Month Y(t) F(t, 0.1) F(t.0.5) F(t,0.9)
Jan 200.0
Feb 135.0 200.0 200.0 200.0
Mar 195.0 193.5 167.5 141.5
Apr 197.5 193.7 181.3 189.7
May 310.0 194.0 189.4 196.7
Jun 175.0 205.6 249.7 298.7
Jul 155.0 202.6 212.3 187.4
Aug 130.0 197.8 183.7 158.2
Sep 220.0 191.0 156.8 132.8
Oct 277.5 193.9 188.4 211.3
Nov 235.0 202.3 233.0 270.9
Dec ------- 205.6 234.0 238.6

(Part # 03)
350
300
250
200
Values
150
100
50
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
Qty([Y(t)] F(t,0.1) F(t,0.5) F(t,0.9)

(Part # 03)
Adaptive Exponential Smoothing
Ft+1 = tYt + (1 - t)Ft
Note:
 Error term: Et = Yt – Ft
 Smoothed Error: At = Et + (1 - )At-1
 Absolute Smoothed Error: Mt = |Et| + (1 - )Mt-1
 Weight: t+1 = |At/Mt|
  and  are such that sum of square of errors is
minimized
(Part # 03)
Starting values:
 F2 = Y 1
 2 =  = 0.2
 A 1 = M1 = 0

(Part # 03)
Month Y(t) F(t) E(t) A(t) M(t)  
Jan 200.0 0.0 0.0 0.2
Feb 135.0 200.0 -65.0 -13.0 13.0 0.2
Mar 195.0 187.0 8.0 -8.8 12.0 1.0
Apr 197.5 188.6 8.9 -5.3 11.4 0.7
May 310.0 190.4 119.6 19.7 33.0 0.5
Jun 175.0 214.3 -39.3 7.9 34.3 0.6
Jul 155.0 206.4 -51.4 -4.0 37.7 0.2
Aug 130.0 196.2 -66.2 -16.4 43.4 0.1
Sep 220.0 182.9 37.1 -5.7 42.1 0.4
Oct 277.5 190.3 87.2 12.9 51.1 0.1
Nov 235.0 207.8 27.2 15.7 46.4 0.3
Dec 213.2 0.3

(Part # 03)
350
300
250
200
Values
150
100
50
0
Y(t) F(t) Month

(Part # 03)
350.00
300.00
250.00
200.00
150.00
Values
100.00
50.00
0.00
-50.00
-100.00
Time
A(t) M(t) E(t) F(t) Y(t)

(Part # 03)
Extension of Exponential Smoothing
Ft+1 = 1Yt + 2Ft + 3Ft-1
Note:
 Error term: Et = Yt – Ft
 Weights: i  (0,1)  i = 1, 2 and 3
 1 + 2 + 3 = 1
 is are such that sum of square of errors is minimized
(Part # 03)
450
400
350
300
250
Values
200
150
100
50
0
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
Y(t) F(t) Month

(Part # 03)
Forecasting Solved Example # 01
The IIT Home Tutor Solutions Pvt. Ltd. helps
customers to find private tuitions and coaching centers
in Kanpur city as well as online tutors. This supply
business is competitive, and the ability to deliver
talented as well as well-educated tutors promptly is a
big factor in getting new customers and maintaining
old ones. The manager of the company wants to be
certain that enough tutors are available at hand to
meet demand promptly. Therefore, the manager wants
to be able to forecast the demand for requirement of
tutors during the next month. From the records of
previous orders, management has accumulated the
following data for the past 10 months:
(Part # 03)
(contd…)
Jan Feb Mar Apr
May
120 90 100 75
110
Jun Jul Aug Sep
Oct
50 75 130 110
90

(Part # 03)
(contd…)
Compute the monthly demand forecast for
1) February through November using the naive method
2) April through November using a 3-month moving
average
3) June through November using a 5-month moving
average
4) April through November using a 3-month weighted
moving average. Use weights of 0.50, 0.33, and
0.17, with the heavier weights on the more recent
months

(Part # 03)
(contd…)
1) The naïve method uses demand for
the current month as forecast for the
next month, i.e.,, Yt=Dt=Ft+1, where Dt
denotes demand for time period t. So
for Feb we would have FFeb=DJan=120
and in the same way we can write
FNov=DOct=90. The other values may
be calculated accordingly
(Part # 03)
(contd…)
2) For the simple 3 month moving
average we use the following formulae
which is Ft+1=(Dt+Dt-1+Dt-2)/3. Thus we
can start to forecast from April ONLY
and the value is given as
FApr=(DMar+DFeb+DJan)/3=(100+90+120)/
3=103.3. The other values may be
calculated accordingly

(Part # 03)
(contd…)
3) For the simple 5 month moving average
we use the following formulae which is
Ft+1=(Dt+Dt-1+Dt-2+Dt-3+Dt-4)/5. Thus we
can start to forecast from June ONLY
and the value is given as
FJun=(DMay+DApr+DMar+DFeb+DJan)/5=(110+
75+100+90+120)/5=99.0. The other
values may be calculated accordingly

(Part # 03)
(contd…)
4) For the weighted 3 month moving
average we use the following formulae
which is Ft+1=(t*Dt+t-1*Dt-1+t-2*Dt-2)/3.
Thus we can start to forecast from April
ONLY and the value is given as
FApr=(t*Dt+t-1*Dt-1+t-2*Dt-2)/3=(0.50*100
+0.33*90+0.17*120)/3=101.0. The other
values may be calculated accordingly

(Part # 03)
IIT Kanpur Furniture Ltd. makes customized
furniture. Orders are received via online
request and subsequently demand is fulfilled.
Formed and operated by IIT Kanpur students,
the company has had steady growth since it
started. Due to volatility of demand, they need
a good forecast of demand for their furniture
so that they will know how much raw material
to purchase and stock. They have compiled
demand data for the last 12 months as
reported below
(Part # 03)
(contd…)
Jan Feb Mar
37 40 41
Apr May Jun
37 45 50
Jul Aug Sep
43 47 56
Oct Nov Dec
52 55 54

(Part # 03)
(contd…)
1) Use exponential smoothing with smoothing parameter
α = 0.3 to compute the demand forecast for January
(Period 13).
2) Use exponential smoothing with smoothing parameter
α = 0.5 to compute the demand forecast for January
(Period 13).
3) Suresh M. Rao believes that there is an upward trend
in the demand. Use trend-adjusted exponential
smoothing with smoothing parameter α = 0.5 and
trend parameter β = 0.3 to compute the demand
forecast for January (Period 13).
4) Compute the mean squared error for each of the
methods used
(Part # 03)
(contd…)
1) The formulae to be used is Ft+1=Ft+*(Dt-Ft),
here we consider Dt=Yt for our convenience.
To determine the forecast of Jan we need to
know for Dec and to know about Dec we need
to know about Nov and so on. Thus
 F2=F1+*(D1-F1)=37+0.3*(37-37)=37.0
 F3=F2+*(D2-F2)=37+0.3*(40-37)=37.9
 ……
 F13=F12+*(D12-F12)=50.85+0.3*(54-
50.85)=51.79
(Part # 03)
(contd…)
2) The formulae to be used is Ft+1=Ft+*(Dt-Ft),
here we consider Dt=Yt for our convenience.
To determine the forecast of Jan we need to
know for Dec and to know about Dec we need
to know about Nov and so on. Thus
 F2=F1+*(D1-F1)=37+0.5*(37-37)=37.0
 F3=F2+*(D2-F2)=37+0.5*(40-37)=38.5
 ……
 F13=F12+*(D12-F12)=53.21+0.5*(54-
53.21)=53.61
(Part # 03)
(contd…)
3) The formulae to be used
when using trend is
 At={*Dt+(1-)*(At-1+Tt-1)}
 Tt={*(At-At-1)+(1-)*Tt-1}
 Using the above two we find
Ft+1=(At+Tt)
(Part # 03)
(contd…)
3) For period t=2 we first consider A0=37 and
T0=0. Using which we have the following
 A1={*D1+(1-)*(A0+T0)}=0.5*37+{(1-
0.5)*(37+0)}=37
 T1={*(A1-A0)+(1-)*T0}=0.3*((37-37)+(1-
0.3)*0=0
 F2=A1+T1=37+0=37

(Part # 03)
(contd…)
3) For period t=3 we first consider
 A2={*D2+ (1-
)*(A1+T1)}={0.5*40+(1-
0.5)*(37+0)}=38.5
 T2={*(A2-A1)+(1-)*T1}={0.3*(38.5-
37)+(1-0.3)*0}=0.45
 F3=A2+T2= 38.5 +0.45=38.95

(Part # 03)
(contd…)

(Part # 03)
(contd…)
4) To compute the mean square error
we need to first compute Et=Dt-Ft,
where Et is the error of time period t
and then find MSE=(E21+E22+…+E2n-
1+E 2
n)/n

(Part # 03)
(contd…)

(Part # 03)
Holts Linear method
The general equations are:
1) Lt = Yt + (1-)(Lt-1 + bt-1)
2) bt = (Lt – Lt-1) + (1 - )bt-1
3) Ft+m = Lt + btm
Note:
 Error: Yt - Ft
 Smoothing value: Lt
 Weight:   (0,1)
 Smoothing constant:   (0, 1)
 Trend/Estimate of the slope of the time series: bt
 Number of periods ahead to be forecasted: m
  and  are such that sum of square of errors is minimized
(Part # 03)
Starting values:
 L1 = Y1
 b1 = Y2 - Y1
  = 0.501
  = 0.072
 m=1

(Part # 03)
Month Y(t) L(t) b(t) F(t)
Jan 143.0 143.0 9.0
Feb 152.0 143.0 8.4 152.0
Mar 161.0 147.9 8.1 151.4
Apr 139.0 139.4 6.9 156.0
May 137.0 134.7 6.1 146.3
Jun 174.0 151.4 6.8 140.8
Jul 142.0 143.3 5.8 158.2
Aug 141.0 139.3 5.1 149.0
Sep 162.0 148.1 5.3 144.3
Oct 180.0 161.4 5.9 153.5
Nov 164.0 159.8 5.4 167.3
Dec 171.0 162.7 5.2 165.1
Jan 206.0 181.8 6.2 167.9
Feb 193.0 184.3 5.9 188.0
Mar 207.0 192.7 6.1 190.3
Apr 218.0 202.3 6.4 198.8
May 229.0 212.5 6.6 208.7
Jun 225.0 215.5 6.4 219.2
Jul 204.0 206.5 5.3 221.8
Aug 227.0 214.2 5.4 211.8
Sep 223.0 215.9 5.2 219.6
Oct 242.0 226.4 5.6 221.0
Nov 239.0 229.9 5.4 231.9
Dec 266.0 245.3 6.1 235.3

(Part # 03)
HOLT'S LINEAR MODEL
300
250
200
Values
150
100
50
Y(t) F(t) Month

(Part # 03)
Holt-Winters Method
The general equations are:
1) Lt = Yt/St-s + (1-)(Lt-1 + bt-1)
2) bt = (Lt – Lt-1) + (1 - )bt-1
3) St = Yt/Lt + (1 -  )St-s for t > s
4) Ft+m = (Lt + btm)St-s+m
5) Si = Yi/Ls where Ls = (Y1+…+Ys)/s for i  s
Note:
 Trend: bt
 Seasonal component: St
 Length of seasonality: s
 ,  and  are chosen such that sum of square of errors is minimized

(Part # 03)
Holt-Winters Method
Starting values:
 L1 = Y1
 b1 = Y2 - Y1
  = 0.822
  = 0.055
 =0
 m=1

(Part # 03)
To check for normality of data
We need to check for the normality of X is and Y
1) List the observation number in the column # 1,call it i.
2) List the data in column # 2.
3) Sort the data from the smallest to the largest and place in
column # 3.
4) For each ith of the n observations, calculate the
corresponding tail area of the standard normal distribution
(Z) as follows, A = (i – 0.375)/(n + 0.25). Put the values in
column # 4.
5) Use NORMSINV(A) function in MS-EXCEL to produce a
column of normal scores. Put these values in column # 5.
6) Make a copy of the sorted data (be sure to use paste
special and paste only the values) in column # 6.
7) Make a scatter plot of the data in columns # 5 and # 6.
(Part # 03)
To check for normality of data
Checking normality of data
450
400
350
300
250
Data
200
150
100
50
0
-2.5 -1.6 -1.2 -1.0 -0.8 -0.6 -0.5 -0.3 -0.2 -0.1 0.1 0.2 0.3 0.5 0.6 0.8 1.0 1.2 1.6 3.0
Normal Score

(Part # 03)

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IME602: PROBABILITY &

STAITICS (Part 03)

IME602: Probability & Statistics R.N.Sengupta,DoMS.,IIT Kanpur,INDIA 1

IME602: Probability & Statistics R.N.Sengupta,DoMS.,IIT Kanpur,INDIA 3

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So the rule is reject H0 if

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So the rule is reject H0 if

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So the rule is reject H0 if

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So the rule is reject H0 if

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So the rule is reject H0 if

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So the rule is reject H0 if

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Ft+1 = Ft + (Yt – Ft) = Yt + (1 - )Ft,

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Y(t) F(t) Month

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IME602: Probability & Statistics R.N.Sengupta,DoMS.,IIT Kanpur,INDIA 44

The general equation is:

Ft+1 = 1Yt + 2Ft + 3Ft-1

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