Slides by:

Andrew Stephenson
Georgia Gwinnett College
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Chapter 11
11.2
Introduction to Hypothesis Testing
• Concepts of Hypothesis Testing
• Testing the Population Mean When the
Population
• Standard Deviation Is Known
• Calculating the Probability of a Type II Error
• The Road Ahead

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Statistical Inference
11.3
Hypothesis testing is the second form of statistical
inference. It also has greater applicability.

To understand the concepts we’ll start with an

example of nonstatistical hypothesis testing.

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Nonstatistical Hypothesis Testing
11.4
A criminal trial is an example of hypothesis testing
without the statistics.

In a trial a jury must decide between two hypotheses.

The null hypothesis is
H0: The defendant is innocent

The alternative hypothesis or research hypothesis is

H1: The defendant is guilty

The jury does not know which hypothesis is true. They

must make a decision on the basis of evidence
presented.

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Nonstatistical Hypothesis Testing
11.5
In the language of statistics convicting the
defendant is called

rejecting the null hypothesis in favor of the

alternative hypothesis.

That is, the jury is saying that there is enough

evidence to conclude that the defendant is guilty
(i.e., there is enough evidence to support the
alternative hypothesis).

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Nonstatistical Hypothesis Testing
11.6
If the jury acquits it is stating that

there is not enough evidence to support the

alternative hypothesis.

Notice that the jury is not saying that the defendant

is innocent, only that there is not enough evidence
to support the alternative hypothesis. That is why we
never say that we accept the null hypothesis.

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Nonstatistical Hypothesis Testing
11.7
There are two possible errors.

A Type I error occurs when we reject a true null

hypothesis. That is, a Type I error occurs when the jury
convicts an innocent person.

A Type II error occurs when we don’t reject a false

null hypothesis. That occurs when a guilty defendant
is acquitted.

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Nonstatistical Hypothesis Testing
11.8
The probability of a Type I error is denoted as α
(Greek letter alpha). The probability of a type II error
is β (Greek letter beta).

The two probabilities are inversely related.

Decreasing one increases the other.

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 Nonstatistical Hypothesis Testing
11.9
In our judicial system Type I errors are regarded as
more serious. We try to avoid convicting innocent
people. We are more willing to acquit guilty people.

We arrange to make α small by requiring the

prosecution to prove its case and instructing the jury
to find the defendant guilty only if there is “evidence
beyond a reasonable doubt.”

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Nonstatistical Hypothesis Testing
11.10
The critical concepts are theses:
1. There are two hypotheses, the null and the alternative
hypotheses.
2. The procedure begins with the assumption that the null
hypothesis is true.
3. The goal is to determine whether there is enough
evidence to infer that the alternative hypothesis is
true.
4. There are two possible decisions:
Conclude that there is enough evidence to support
the alternative hypothesis.
Conclude that there is not enough evidence to
support the alternative hypothesis.

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Nonstatistical Hypothesis Testing
11.11
5. Two possible errors can be made.
Type I error: Reject a true null hypothesis
Type II error: Do not reject a false null hypothesis.

P(Type I error) = α
P(Type II error) = β

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Concepts of Hypothesis Testing (1)
There are two hypotheses. One is called the null hypothesis 11.12
and the other the alternative or research hypothesis. The
usual notation is:

pronounced
H “nought”

H0: — the ‘null’ hypothesis

H1: — the ‘alternative’ or ‘research’ hypothesis

The null hypothesis (H0) will always state that the parameter
equals the value specified in the alternative hypothesis (H1)

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Concepts of Hypothesis Testing
11.13
Consider Example 10.1 (mean demand for
computers during assembly lead time) again. Rather
than estimate the mean demand, our operations
manager wants to know whether the mean is
different from 350 units. We can rephrase this request
into a test of the hypothesis:

H0:µ = 350

Thus, our research hypothesis becomes:

H1:µ ≠ 350 This is what we are interested
in determining…

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Concepts of Hypothesis Testing (2)
11.14
The testing procedure begins with the assumption
that the null hypothesis is true.

Thus, until we have further statistical evidence, we

will assume:

H0: μ = 350 (assumed to be TRUE)

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Concepts of Hypothesis Testing (3)
11.15
The goal of the process is to determine whether there
is enough evidence to infer that the alternative
hypothesis is true.

That is, is there sufficient statistical information to

determine if this statement is true?

H1:µ ≠ 350

This is what we are interested

in determining…

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Concepts of Hypothesis Testing (4)
11.16
There are two possible decisions that can be made:

Conclude that there is enough evidence to support

the alternative hypothesis
(also stated as: rejecting the null hypothesis in favor
of the alternative)

Conclude that there is not enough evidence to

support the alternative hypothesis
(also stated as: not rejecting the null hypothesis in
favor of the alternative)
NOTE: we do not say that we accept the null
hypothesis…

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Concepts of Hypothesis Testing
Once the null and alternative hypotheses are stated,
11.17
the next step is to randomly sample the population
and calculate a test statistic (in this example, the
sample mean).

If the test statistic’s value is inconsistent with the null

hypothesis we reject the null hypothesis and infer
that the alternative hypothesis is true.

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Concepts of Hypothesis Testing
11.18
For example, if we’re trying to decide whether the
mean is not equal to 350, a large value of (say,
600) would provide enough evidence.

If is close to 350 (say, 355) we could not say that

this provides a great deal of evidence to infer that
the population mean is different than 350.

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Concepts of Hypothesis Testing (5)
11.19
Two possible errors can be made in any test:
A Type I error occurs when we reject a true null
hypothesis and
A Type II error occurs when we don’t reject a false
null hypothesis.

There are probabilities associated with each type of

error:
P(Type I error) = α
P(Type II error ) = β
α is called the significance level.

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Types of Errors
11.20
A Type I error occurs when we reject a true null
hypothesis (i.e. Reject H0 when it is TRUE)

H0 T F

Reject I

Reject II

A Type II error occurs when we don’t reject a false

null hypothesis (i.e. Do NOT reject H0 when it is FALSE)

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Example 11.1
11.21
The manager of a department store is thinking about
establishing a new billing system for the store's credit
customers.

She determines that the new system will be cost-

effective only if the mean monthly account is more
than $170. A random sample of 400 monthly
accounts is drawn, for which the sample mean is
$178.

The manager knows that the accounts are

approximately normally distributed with a standard
deviation of $65. Can the manager conclude from
this that the new system will be cost-effective?

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Example 11.1 IDENTIFY
11.22

The system will be cost effective if the mean account balance for all
customers is greater than $170.

We express this belief as our research hypothesis, that is:

H1: µ > 170 (this is what we want to determine)

Thus, our null hypothesis becomes:

H0: µ = 170 (this specifies a single value for the parameter of interest)

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Example 11.1 IDENTIFY
11.23

What we want to show:

H0: µ = 170 (we’ll assume this is true)
H1: µ > 170

We know:
n = 400,
= 178, and
σ = 65

What to do next?!

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Example 11.1 COMPUTE
11.24

To test our hypotheses, we can use two different

approaches:

The rejection region approach (typically used when

computing statistics manually), and

The p-value approach (which is generally used with

a computer and statistical software).

We will explore both in turn…

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Example 11.1 Rejection region COMPUTE
11.25

It seems reasonable to reject the null hypothesis in

favor of the alternative if the value of the sample
mean is large relative to 170, that is if > .

α = P(Type I error)

= P( reject H0 given that H0 is true)

α = P( > )

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Example 11.1 COMPUTE
11.26

All that’s left to do is calculate and compare it to

170.

we can calculate this based on any level of

significance (α) we want…

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Example 11.1 COMPUTE
11.27

At a 5% significance level (i.e. α =0.05), we get

Solving we compute = 175.34

Since our sample mean (178) is greater than the
critical value we calculated (175.34), we reject the null
hypothesis in favor of H1, i.e. that: µ > 170 and that it
is cost effective to install the new billing system
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Example 11.1 The Big Picture
11.28

H0: = 170
H1: > 170 =175.34
=178

Reject H0 in favor of
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Standardized Test Statistic
11.29
An easier method is to use the standardized test
statistic:

and compare its result to : (rejection region: z > )

Since z = 2.46 > 1.645 (z.05), we reject H0 in favor of H1…

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Example 11.1 The Big Picture Again
11.30

.05

Z
0
H0: = 170
H1: > 170
Z.05=1.645
z = 2.46

Reject H0 in favor of
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 p-Value of a Test
11.31
The p-value of a test is the probability of observing a
test statistic at least as extreme as the one computed
given that the null hypothesis is true.

In the case of our department store example, what is the

probability of observing a sample mean at least as
extreme as the one already observed (i.e. = 178),
given that the null hypothesis (H0: µ = 170) is true?

p-value

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 P-Value of a Test
11.32
p-value = P(Z > 2.46)

p-value =.0069

z =2.46

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Interpreting the p-value
The smaller the p-value, the more statistical
11.33
evidence exists to support the alternative hypothesis.
If the p-value is less than 1%, there is overwhelming
evidence that supports the alternative hypothesis.
If the p-value is between 1% and 5%, there is a strong
evidence that supports the alternative hypothesis.
If the p-value is between 5% and 10% there is a weak
evidence that supports the alternative hypothesis.
If the p-value exceeds 10%, there is no evidence that
supports the alternative hypothesis.
We observe a p-value of .0069, hence there is
overwhelming evidence to support H1: μ > 170.

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Interpreting the p-value
11.34
Overwhelming Evidence
(Highly Significant)
Strong Evidence
(Significant)

Weak Evidence
(Not Significant)

No Evidence
(Not Significant)

0 .01 .05 .10

p=.0069
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Interpreting the p-value
11.35
Compare the p-value with the selected value of the
significance level:

If the p-value is less than α, we judge the p-value to be

small enough to reject the null hypothesis.

If the p-value is greater than α, we do not reject the null

hypothesis.

Since p-value = .0069 < α = .05, we reject H0 in favor

of H1

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Example 11.1 COMPUTE
11.36

Instructions
1. Type or import the data into one column. (Open Xm11-01.) In any empty
cell, calculate the sample mean (=AVERAGE(A1:A401).)
2. Open the Test Statistics Workbook and click the z-Test_Mean tab. In Cell B3,
type or copy the value of the sample mean. In cells B4–B7, type the value of
σ(65), the value of n (400), the value of μ under the null hypothesis (170),
and the value of α(.05), respectively.
The spreadsheet reports the value of the test statistic, . The p-value of the test is
.0069. Excel reports this probability as

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Example 11.1 COMPUTE
11.37

Instructions
1. Type or import the data into one column. (Open Xm11-01.)
2. Click XLSTAT and One-sample t-test and z-test.
3. In the Data: dialog box type the input range (A1:A401). Click Column labels if the first
row contains the name of the variable (as in this example). Check z-test. Do not check
Student’s t-test.
4. Click the Options tab and choose Mean 1 > Theoretical mean in the Alternative
hypothesis box. Type the Theoretical mean (170) and the value of α(in percent) in
the Significance level: box (5). In the Variance for z-test: box check User defined:
Variance: and type the value of σ2(4225). Click OK and then Continue. If there are
blanks in the column (usually used to represent missing data) click Missing data and
click Remove the observations.
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Conclusions of a Test of Hypothesis INTERPRET
11.38
If we reject the null hypothesis, we conclude that
there is enough evidence to infer that the alternative
hypothesis is true.

If we do not reject the null hypothesis, we conclude

that there is not enough statistical evidence to infer
that the alternative hypothesis is true.

Remember: The alternative hypothesis is the more

important one. It represents what we are
investigating.

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Chapter-Opening Example SSA Envelope Plan
11.39
Federal Express (FedEx) sends invoices to customers
requesting payment within 30 days.

The bill lists an address and customers are expected to

use their own envelopes to return their payments.

Currently the mean and standard deviation of the

amount of time taken to pay bills are 24 days and 6
days, respectively.

The chief financial officer (CFO) believes that including

a stamped self-addressed (SSA) envelope would
decrease the amount of time.

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Chapter-Opening Example SSA Envelope Plan
11.40
She calculates that the improved cash flow from a 2-day
decrease in the payment period would pay for the costs of
the envelopes and stamps.

Any further decrease in the payment period would

generate a profit.

To test her belief she randomly selects 220 customers and

includes a stamped self-addressed envelope with their
invoices.

The numbers of days until payment is received were

recorded. Can the CFO conclude that the plan will be
profitable?

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SSA Envelope Plan IDENTIFY
11.41
The objective of the study is to draw a conclusion
about the mean payment period. Thus, the parameter
to be tested is the population mean.

We want to know whether there is enough statistical

evidence to show that the population mean is less than
22 days. Thus, the alternative hypothesis is

H1: μ < 22

The null hypothesis is

H0: μ = 22

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SSA Envelope Plan IDENTIFY
11.42

The test statistic is x 

z
/ n
We wish to reject the null hypothesis in favor of the
alternative only if the sample mean and hence the
value of the test statistic is small enough.

As a result we locate the rejection region in the left tail

of the sampling distribution.

We set the significance level at 10%.

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 COMPUTE
SSA Envelope Plan
11.43

Rejection region: z   z    z.10  1.28

From the data in Xm11-00 we compute

x 
 x i

4 , 759
 21 . 63
220 220
and
x  21.63  22
z   .91
/ n 6 / 220

p-value = P(Z < -.91) = .5 - .3186 = .1814

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 COMPUTE
SSA Envelope Plan
11.44

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SSA Envelope Plan COMPUTE
11.45

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 INTERPRET
SSA Envelope Plan
11.46

Conclusion: There is not enough evidence to infer

that the mean is less than 22.

There is not enough evidence to infer that the plan

will be profitable.

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One– and Two–Tail Testing
11.47
The department store example (Example 11.1) was a
one tail test, because the rejection region is located
in only one tail of the sampling distribution:

More correctly, this was an example of a right tail

test.

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One– and Two–Tail Testing
11.48
The SSA Envelope example is a left tail test because
the rejection region was located in the left tail of the
sampling distribution.

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Right-Tail Testing
11.49

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Left-Tail Testing
11.50

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Two–Tail Testing
11.51
Two tail testing is used when we want to test a
research hypothesis that a parameter is not equal (≠)
to some value

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Example 11.2
11.52
In recent years, a number of companies have been
formed that offer competition to AT&T in long-distance
calls.

All advertise that their rates are lower than AT&T's, and as a
result their bills will be lower.

AT&T has responded by arguing that for the average

consumer there will be no difference in billing.

Suppose that a statistics practitioner working for AT&T

determines that the mean and standard deviation of
monthly long-distance bills for all its residential customers
are $17.09 and $3.87, respectively.

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Example 11.2
11.53
He then takes a random sample of 100 customers
and recalculates their last month's bill using the rates
quoted by a leading competitor.

Assuming that the standard deviation of this

population is the same as for AT&T, can we
conclude at the 5% significance level that there is a
difference between AT&T's bills and those of the
leading competitor?

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 IDENTIFY
Example 11.2
11.54

The parameter to be tested is the mean of the

population of AT&T’s customers’ bills based on
competitor’s rates.

What we want to determine whether this mean differs

from $17.09. Thus, the alternative hypothesis is

H1: µ ≠ 17.09

The null hypothesis automatically follows.

H0: µ = 17.09

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 IDENTIFY
Example 11.2
11.55

The rejection region is set up so we can reject the null

hypothesis when the test statistic is large or when it is
small.

stat is “small” stat is “large”

That is, we set up a two-tail rejection region. The total
area in the rejection region must sum to α, so we divide
this probability by 2.

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 IDENTIFY
Example 11.2
11.56

At a 5% significance level (i.e. α = .05), we have

α/2 = .025. Thus, z.025 = 1.96 and our rejection region
is:

z < –1.96 -or- z > 1.96

-z.025 +z.025 z
0

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 COMPUTE
Example 11.2
11.57
Manually:
From the data (Xm11-02), we calculate = 17.55

Using our standardized test statistic:

We find that:

Since z = 1.19 is not greater than 1.96, nor less than –1.96
we cannot reject the null hypothesis in favor of H1. That is
“there is insufficient evidence to infer that there is a
difference between the bills of AT&T and the competitor.”

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 COMPUTE
Two-Tail Test p-value
11.58

In general, the p-value in a two-tail test is determined by

p-value = 2P(Z > |z|)
where z is the actual value of the test statistic and |z| is
its absolute value.

For Example 11.2 we find

p-value = 2P(Z > 1.19)
= 2(.1170)
= .2340

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 COMPUTE
Example 11.2
11.59

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Example 11.2 COMPUTE
11.60

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Example 11.2 INTERPRET
11.61

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Summary of One- and Two-Tail Tests…
11.62

One-Tail Test Two-Tail Test One-Tail Test

(left tail) (right tail)

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Developing an Understanding of Statistical Concepts
11.63
As is the case with the confidence interval estimator,
the test of hypothesis is based on the sampling
distribution of the sample statistic.

The result of a test of hypothesis is a probability

statement about the sample statistic.

We assume that the population mean is specified by

the null hypothesis.

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Developing an Understanding of Statistical Concepts
11.64

We then compute the test statistic and determine

how likely it is to observe this large (or small) a value
when the null hypothesis is true.

If the probability is small we conclude that the

assumption that the null hypothesis is true is
unfounded and we reject it.

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Developing an Understanding of Statistical Concepts
11.65
When we (or the computer) calculate the value of
the test statistic
x 
z
/ n
we’re also measuring the difference between the
sample statistic and the hypothesized value of the
parameter.

The unit of measurement of the difference is the

standard error.

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Developing an Understanding of Statistical Concepts
11.66
In Example 11.2 we found that the value of the test
statistic was z = 1.19. This means that the sample mean
was 1.19 standard errors above the hypothesized
value of.

The standard normal probability table told us that this

value is not considered unlikely. As a result we did not
reject the null hypothesis.

The concept of measuring the difference between

the sample statistic and the hypothesized value of the
parameter in terms of the standard errors is one that
will be used frequently throughout this book

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Probability of a Type II Error (β)
11.67
It is important that that we understand the
relationship between Type I and Type II errors; that is,
how the probability of a Type II error is calculated
and its interpretation.

Recall Example 11.1…

H0: µ = 170
H1: µ > 170

At a significance level of 5% we rejected H0 in favor

of H1 since our sample mean (178) was greater than
the critical value of (175.34).

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Probability of a Type II Error (β)
11.68
A Type II error occurs when a false null hypothesis is
not rejected.

In example 11.1, this means that if is less than

175.34 (our critical value) we will not reject our null
hypothesis, which means that we will not install the
new billing system.

Thus, we can see that:

β = P( < 175.34 given that the null hypothesis is

false)

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Example 11.1 (revisited)
11.69
β = P( < 175.34 given that the null hypothesis is false)

The condition only tells us that the mean ≠ 170. We need

to compute β for some new value of µ. For example,
suppose that if the mean account balance is $180 the
new billing system will be so profitable that we would
hate to lose the opportunity to install it.

β = P( < 175.34, given that µ = 180), thus…

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Example 11.1 (revisited)
11.70

Our original hypothesis…

our new assumption…

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Effects on β of Changing α
11.71

Decreasing the significance level α, increases the value of β and

vice versa. Change α to .01 in Example 11.1.

Stage 1: Rejection region

z  z  z.01  2.33
x x 170
z   2.33
 / n 65 / 400
x  177.57

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Effects on β of Changing α
11.72

Stage 2 Probability of a Type II error

  P ( x  177 . 57 |   180 )
 x 177 . 57  180 
 P   
/ n 65 / 400 
 P z   . 75 
 . 2266

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Effects on β of Changing α
11.73
Decreasing the significance level α, increases the value
of β and vice versa.

Consider this diagram again. Shifting the critical value

line to the right (to decrease α) will mean a larger area
under the lower curve for β… (and vice versa)

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Judging the Test
11.74
A statistical test of hypothesis is effectively defined by
the significance level (α) and the sample size (n), both of
which are selected by the statistics practitioner.

Therefore, if the probability of a Type II error (β) is

judged to be too large, we can reduce it by
Increasing α,
and/or
increasing the sample size, n.

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Judging the Test
11.75

For example, suppose we increased n from a sample size of 400

account balances to 1,000 in Example 11.1.

Stage 1: Rejection region

z  z   z .05  1 . 645
x x  170
z   1 . 645
 / n 65 / 1, 000
x  173 . 38

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Judging the Test
11.76
Stage 2: Probability of a Type II error

  P ( x  173.38 |   180)
 x   173.38  180 
 P  
 / n 65 / 1,000 
 P  z   3.22 
 0 (approximately )

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 Compare β at n=400 and n=1,000…
11.77
By increasing the sample size we reduce the
probability of a Type II error: n=400 175.35

173.38
n=1,000

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Developing an Understanding of Statistical Concepts
11.78
The calculation of the probability of a Type II error for n
= 400 and for n = 1,000 illustrates a concept whose
importance cannot be overstated.

By increasing the sample size we reduce the probability

of a Type II error. By reducing the probability of a Type II
error we make this type of error less frequently.

And hence, we make better decisions in the long run.

This finding lies at the heart of applied statistical analysis
and reinforces the book's first sentence, "Statistics is a
way to get information from data."

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Developing an Understanding of Statistical Concepts
11.79
Throughout this book we introduce a variety of
applications in finance, marketing, operations
management, human resources management, and
economics.

In all such applications the statistics practitioner must

make a decision, which involves converting data into
information. The more information, the better the
decision.

Without such information decisions must be based on

guesswork, instinct, and luck. A famous statistician, W.
Edwards Deming said it best: "Without data you're just
another person with an opinion."

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Power of a Test
11.80
Another way of expressing how well a test performs is
to report its power: the probability of its leading us to
reject the null hypothesis when it is false. Thus, the
power of a test is .

When more than one test can be performed in a

given situation, we would naturally prefer to use the
test that is correct more frequently.

If (given the same alternative hypothesis, sample

size, and significance level) one test has a higher
power than a second test, the first test is said to be
more powerful.

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 SSA Example Calculating β
11.81
Calculate the probability of a Type II error
when the actual mean is 21.

Recall that
H0:μ = 22
H1:μ < 22
n = 220
σ=6
α = .10

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SSA Example Calculating β
11.82
Stage 1: Rejection region

z   z    z .10   1 . 28
x  22
  1 . 28
6 220
x  21 . 48

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 SSA Example Calculating β
11.83
Stage 2: Probability of a Type II error

  P ( x  21 .48 |   21)
 x 21 .48  21 
 P   
/ n 6 / 220 
 P z  1 .19 
 .1170

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Example 11.2 Calculating β
11.84
Calculate the probability of a Type II error
when the actual mean is 16.80.

Recall that
H0:μ = 17.09
H1:μ ≠ 17.09
n = 100
σ = 3.87
α = .05

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Example 11.2 Calculating β
11.85
Stage 1: Rejection region (two-tailed test)

z  z  / 2 or z   z  / 2
z  z .025  1 . 96 or z   z .025   1 . 96
x  17 . 09
 1 . 96  x  17 . 85
3 . 87 100
x  17 . 09
  1 . 96  x  16 . 33
3 . 87 / 100

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Example 11.2 Calculating β
11.86
Stage 2: Probability of a Type II error

  P (16 . 33  x  17 .85 |   16 .80 )

 16 . 33  16 .80 x  17 .85  16 .80 
 P    
 3 .87 / 100 / n 3 .87 / 100 
 P  1 .21  z  2 .71 
 .8835

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Judging the Test
11.87

The power of a test is defined as 1– β.

It represents the probability of rejecting the null
hypothesis when it is false.

I.e. when more than one test can be performed in a

given situation, its is preferable to use the test that is
correct more often. If one test has a higher power
than a second test, the first test is said to be more
powerful and the preferred test.

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The Road Ahead
11.88
ICI approach
Identify
Compute
Interpret

The most difficult part of statistics (in real life and on

final exams) is to identify the correct technique.

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The Road Ahead
11.89
There are several factors that identify the
correct technique. The first two are

1. Type of data
interval, ordinal, nominal

2. Problem objective

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Problem Objectives
11.90
1.Describe a population
2. Compare two populations
3. Compare two or more populations
4. Analyze the relationship between two
variables
5. Analyze the relationship among two or more
variables

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Table 11.2
11.91
Data Type
Problem Objective Nominal Ordinal Interval
Describe a Not
population 12.3. 15.1 Covered 12.1, 12.2
13.1,
Compare two 13.3,13.4,
populations 13.5, 15.2 19.1, 19.2 19.1, 19.2
Compare two or Chapter 14,
more populations 15.2 19.3 19.3
Analyze the
relationship between
two variables 15.2 19.4 Chapter 16
Analyze the
relationship among Not Not Chapter 17,
two or more variables Covered Covered 18
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Derivations
11.92
1. Factors determine which parameter we’re
interested in. (e.g. µ)
2. Each parameter has a “best” estimator
(statistic). (e.g. )
3. The statistic has a sampling distribution. (e.g.)
x  
z 
 / n
4. The formula representing the sampling distribution
is often the formula for the test statistic.
5. With some algebra the confidence interval
estimator can be derived from the sampling
distribution. 
x  z / 2
n
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