Introduction to Estimation

Statistical Inference
➢ Statistical inference is the process by which we acquire
information and draw conclusions about populations
from samples.
Statistics

Data Information

Population

Sample

Inference

Statistic
Parameter
➢ In order to do inference, we require the skills and knowledge of
descriptive statistics, probability distributions, and sampling
distributions.
Estimation
Estimation
➢ The objective of estimation is to determine the
approximate value of a population parameter on the
basis of a sample statistic.

➢ There are two types of estimators:

➢ Point Estimator

➢ Interval Estimator
Point Estimator
➢ A point estimator draws inferences about a population
by estimating the value of an unknown parameter
using a single value or point.
Qualities of Estimators
➢ Qualities desirable in estimators include unbiasedness,
consistency, and relative efficiency:
➢ An unbiased estimator of a population parameter is an
estimator whose expected value is equal to that
parameter.
➢ An unbiased estimator is said to be consistent if the
difference between the estimator and the parameter
grows smaller as the sample size grows larger.
➢ If there are two unbiased estimators of a parameter, the
one whose variance is smaller is said to be relatively
efficient.
Unbiased Estimators
➢ An unbiased estimator of a population parameter is an
estimator whose expected value is equal to that
parameter.

➢ E.g., the sample mean X is an unbiased estimator of the

population mean µ , since:
E(X) = µ
Unbiased Estimators
➢ An unbiased estimator of a population parameter is an
estimator whose expected value is equal to that
parameter.

➢ E.g., the sample median is an unbiased estimator of the

population mean µ since:
E(Sample median) = µ
Consistency
➢ An unbiased estimator is said to be consistent if the
difference between the estimator and the parameter
grows smaller as the sample size grows larger.

➢ E.g., X is a consistent estimator of µ because:

➢ V(X) is σ2/n

➢ That is, as n grows larger, the variance of X grows

smaller.
Consistency
➢ An unbiased estimator is said to be consistent if the
difference between the estimator and the parameter
grows smaller as the sample size grows larger.

➢ E.g., sample median is a consistent estimator of µ

because:

➢ V(Sample median) is 1.57σ2/n

➢ That is, as n grows larger, the variance of the sample

median grows smaller.
Relative Efficiency
➢ If there are two unbiased estimators of a parameter,
the one whose variance is smaller is said to be
relatively efficient.

➢ E.g., both the sample median and sample mean are

unbiased estimators of the population mean, however,
the sample median has a greater variance than the
sample mean, so we choose since it is relatively
efficient when compared to the sample median.

➢ Thus, the sample mean is the “best” estimator of a

population mean µ.
 Confidence Interval for the Population Mean
when σ is Known
• Confidence Interval—provides a range of values that, with a
certain level of confidence, contains the population parameter of
interest.
✓Also referred to as an interval estimate.
✓Construct a confidence interval as:
Point estimate ± Margin of error.
✓Margin of error accounts for the variability of the estimator
and the desired confidence level of the interval.

LO 8.1
 Confidence Interval for the Population Mean
when σ is Known
• Consider a standard normal random variable Z.
• Now we have
P  1.96  Z  1.96   0.95

LO 8.2
 Confidence Interval for the Population Mean
when σ is Known

LO 8.2
Confidence Interval for the Population Mean
when σ is Known
Confidence Interval for the Population Mean
when σ is Known
Confidence Interval for the Population Mean
when σ is Known
Confidence Interval for the Population Mean
when σ is Known

 x  z 2  n , x  z 2  n
 

x  z 2  n
 Confidence Interval for the Population Mean
when σ is Known

 x  z 2  n , x  z 2  n
 

LO 8.2
Example 10.1
➢ The Doll Computer Company makes its own computers
and delivers them directly to customers who order
them via the Internet.

➢ To achieve its objective of speed, Doll makes each of its

five most popular computers and transports them to
warehouses from which it generally takes 1 day to
deliver a computer to the customer.

➢ This strategy requires high levels of inventory that add

considerably to the cost.
Example 10.1
➢ To lower these costs the operations manager wants to use an
inventory model. He notes demand during lead time is normally
distributed and he needs to know the mean to compute the
optimum inventory level.

➢ He observes 25 lead time periods and records the demand

during each period (Data File: Xm10-01)

➢ The manager would like a 95% confidence interval estimate of

the mean demand during lead time. Assume that the manager
knows that the standard deviation is 75 computers.
Example 10.1
235 374 309 499 253
421 361 514 462 369
394 439 348 344 330
261 374 302 466 535
386 316 296 332 334
Example 10.1
➢ “We want to estimate the mean demand over lead
time with 95% confidence in order to set inventory
levels.”

➢ Thus the parameter to be estimated is the population

mean: µ

➢ And so our confidence interval estimator will be:

Example 10.1
➢ In order to use our confidence interval estimator, we need the
following pieces of data:

370.16 Calculated from the data…

1.96

75
Given
n 25

➢ Therefore:

➢ The lower and upper confidence limits are 340.76 and 399.56.
Example 10.1

A B C
1 z-Estimate: Mean
2
3 Demand
4 Mean 370.16
5 Standard Deviation 80.78
6 Observations 25
7 SIGMA 75
8 LCL 340.76
9 UCL 399.56
Example 10.1
➢ The estimation for the mean demand during lead time
lies between 340.76 and 399.56 — we can use this as
input in developing an inventory policy.

➢ That is, we estimated that the mean demand during lead

time falls between 340.76 and 399.56, and this type of
estimator is correct 95% of the time. That also means
that 5% of the time the estimator will be incorrect.

➢ Incidentally, the media often refer to the 95% figure as

“19 times out of 20,” which emphasizes the long-run
aspect of the confidence level.
Interval Width
➢ A wide interval provides little information.

➢ For example, suppose we estimate with 95% confidence that

an accountant’s average starting salary is between $15,000
and $100,000.

➢ Contrast this with: a 95% confidence interval estimate of

starting salaries between $42,000 and $45,000.

➢ The second estimate is much narrower, providing accounting

students more precise information about starting salaries.
Interval Width
The width of the confidence interval estimate is a function
of the confidence level, the population standard deviation,
and the sample size…
Interval Width
The width of the confidence interval estimate is a function
of the confidence level, the population standard deviation,
and the sample size…

A larger confidence level

produces a w i d e r
confidence interval.
Interval Width
➢ The width of the confidence interval estimate is a function
of the confidence level, the population standard deviation,
and the sample size.

➢ Larger values of σ
produce w i d e r
confidence intervals.
Interval Width
The width of the confidence interval estimate is a function
of the confidence level, the population standard deviation,
and the sample size…

Increasing the sample size decreases the width of the

confidence interval while the confidence level can remain
unchanged.
Note: This also increases the cost of obtaining additional
data
Selecting the Sample Size
➢ Sampling error is the difference between an estimator
and a parameter.

➢ We can also define this difference as the error of

estimation.

➢ In this chapter, this can be expressed as the difference

between x and µ.
Selecting the Sample Size
➢ The bound on the error of estimation is

B = Z / 2 
n

➢ With a little algebra we find the sample size to estimate

a mean.
2
 z / 2 
n   
 B 
Selecting the Sample Size
➢ To illustrate suppose that in Example 10.1 before
gathering the data the manager had decided that he
needed to estimate the mean demand during lead time
to within 16 units, which is the bound on the error of
estimation.

➢ We also have 1 – α = .95 and σ = 75. We calculate

2 2
 z / 2   (1.96)(75) 
n        84.41
 B   16 
Selecting the Sample Size