Paper: 15-Quantitative Techniques for Management Decisions

Module: 19- Estimation: Point Estimation, Interval Estimation, Population

mean-(known or unknown)

Prof. S. P. Bansal
Principle Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof. Yoginder Verma

Co-Principle Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Prof. Pankaj Madan

Paper Coordinator Dean- FMS
Gurukul Kangri Vishwavidyalaya, Haridwar

Prof. Pankaj Madan

Content Writer Dean-FMS
Gurukul Kangri Vishwavidyalay, Haridwar
Items Description of Module

Subject Name Management

Paper Name Quantitative Techniques for Management Decisions

Module Title
Estimation: Point Estimation, Interval Estimation, Population mean-(known or unknown)

Module Id 19

Pre- Requisites Basic mathematical operations

Objectives Point Estimation

Properties of Point Estimator
Drawback of Point Estimates
Confidence Interval Estimation
Interval Estimation of Population Mean (σ known)
Interval Estimation of Population Mean (σ unknown)

Keywords Estimation, Point Estimator, Margin of Error, Interval Estimation

Module-19Estimation: Point Estimation, Interval Estimation, Population mean-(known or unknown)

Introduction to Estimation
Point Estimation: Definition, properties of point estimator; unbiasedness, consistency and efficiency, drawback of
point estimates
Confidence Interval Estimation
Interval Estimation of Population Mean (σ known)

Interval Estimation of Population Mean (σ unknown)

Summary
Self Check Exercise with Solution
Quadrant-I

Estimation: Point Estimation, Interval Estimation, Population mean-(known or unknown)

Learning Objectives:

 Point Estimation
 Properties of Point Estimator
 Drawback of Point Estimates
 Confidence Interval Estimation
 Interval Estimation of Population Mean (σ known)
 Interval Estimation of Population Mean (σ unknown)
1. Introduction
Estimation statistics is data analysis framework that uses a combination of effect sizes,
confidence intervals, precision planning and meta analysis to plan experiments analyze
data and interpret results. It is distinct from null hypothesis significance testing, which is
considered to be less informative. Estimation statistics or simply estimation is also known
as the new statistics; a distinction introduced in the fields of psychology, medical
research, life sciences and wide range of other experimental sciences where NHST still
remains prevalent, despite estimation statistics having been recommended as preferable
for several decades.
The primary aim of estimation methods is to estimate the size of an effect and report an
effect size along with its confidence intervals, the latter of which is related to the
precision of the estimate. Estimation at its core involves analyzing data to obtain a point
estimate and an interval estimate that summarizes a range of likely values of the
underlying population effect.
2. Point Estimation
A sample statistics (such as 𝑥,
̅ s, or𝑝̅ ) that is calculated using sample data to estimate
most likely value of the corresponding unknown population parameter (such as µ, σ or p)
is termed as point estimator, and the numerical value of the estimator is termed as point
estimate. For example if we calculate that 10 percent of the items in a random sample
taken from a day’s production are defective, then the result ‘10 percent’ is a point
estimate of the percentage of the items in the whole lot that are defective. Thus, until the
 next sample of items is not drawn and examined, we may proceed on manufacturing with
the assumption that any day’s production contains 10 percent defective items.
3. Properties of Point Estimator
For a statistical point estimate, the sampling distributor of the estimator provides
information about the best estimator. Before any statistical inference is drawn, it is
essential to resolve following two important issues:
(i) Selection of an appropriate statistics to serve as the best estimator of a population
parameter.
(ii) The nature of the sampling distribution of this selected statistic. Since the sample
statistic value varies from sample to sample, the accuracy of a given estimator
also varies from sample to sample. This means that there is no certainty of the
accuracy achieved for the sample one happens to draw. Although in practice only
one sample is selected at any given time, we should judge the accuracy of an
estimator based on its average value over all possible samples of equal size.
Hence, we prefer to choose the estimator whose ‘average accuracy’ is close to the
value of population parameter being estimated. The criteria of selecting an
estimator are:
 Unbiasedness
 Consistency
 Efficiency

As different sample statistics can be used as point estimators of different population

parameters, the following general notations will be used:

θ= Population parameter (such as µ, σ, p) of interest being estimated

θ̅= Sample statistic (such as 𝑥̅ , 𝑠, 𝑝̅ ) or point estimator of θ

Unbiasedness: The value of a statistic measured from a given sample is likely to be

above or below the actual value of a population parameter of interest due to sampling
error. Thus it is desirable that the mean of sampling distribution of sample means
taken from a population is equal to the population mean. If it is true, then the sample
statistic is said to be an unbiased estimator of the population parameter. Hence the
sample statistic θ̅ is said to be an unbiased estimator of the population parameter,
provided E(θ̅) = θ where E(θ̅) = expected value or mean of the sample statistic θ̅. If
E(θ̅) ≠ θ for the sampling distribution of θ̅, then θ̅ is said to be a biased estimator.

For any point estimator with a normal distribution, it has been proved that
approximately 95 percent of all point estimates will lie within 2 (or more exactly
1.96) standard deviations of the mean of that distribution. This implies that for the
unbiased estimators, the difference between the point estimator and the true value of
the parameter will be less than 1.96 standard deviations (or standard error). This
quantity is called the margin of error and which provides an upper bound for the error
of estimation.

𝜎
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑒𝑟𝑟𝑜𝑟 = 1.96 × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 (𝑆𝐸)𝑜𝑓 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑜𝑟 = 1.96
√𝑛

If σ is unknown and sample size ≥30, or large, the sample standard deviation s can be
used to approximate σ.

Consistency: A point estimator is said to be consistent if its value θ̅ tends to become

closer to the population parameter θ as the sample size increases. For example, the
standard error of sampling distribution of the mean,𝜎𝑥̅ = 𝜎/√𝑛, tends to become
smaller as sample size n increases. Thus the sample mean 𝑥̅ is a consistent estimator
of the population mean µ. Similarly, the sample proportion 𝑝̅ is a consistent estimator
of the population proportion p because𝜎𝑝̅ = 𝜎/√𝑛.

Efficiency: For the sample population, out of two unbiased point estimators, the
desirable characteristic of an unbiased estimator is that the spread (as measured by the
variance of the sampling distribution should be as small as possible). Such unbiased
estimator is said to be efficient because an individual estimate will fall close to the
true value of population parameter with high probability. It is because of the reason
that there is less variation in the sampling distribution of the statistic. For example,
for a sample random sample of size n, if ̅̅̅
𝜃1 and ̅̅̅
𝜃2 are two unbiased point estimators
of the population parameter θ, then relative efficiency of ̅̅̅
𝜃2 to ̅̅̅
𝜃1 is given by
 ̅̅̅1 )
𝜎(𝜃
𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 =
̅̅̅2 )
𝜎(𝜃

4. Drawback of Point Estimates

The drawback of point estimate is that no information is available regarding its reliability,
i.e. how close it is to its true population parameter. In fact, the probability that a single
sample statistic actually equals the population parameter is extremely small. For this
reason, point estimates are rarely used alone to estimate population parameters. It is
better to offer a range of values within which the population parameters are expected to
fall so that reliability (probability) of the estimate can be measured. This is the purpose of
interval estimation.
5. Confidence Interval Estimation
A point estimate does not provide information about ‘how close is the estimate’ to the
population parameter unless accompanied by a statement of possible sampling error
involved based on the sampling distribution of the statistic. It is therefore important to
know the precision of an estimate before depending on it to make a decision. Thus
decision makers prefer to use an interval estimate (i.e. the range of values defined around
a sample statistic) that is likely to contain the population parameter value. An interval
estimation is a rule for calculating two numerical values, say a and b that create an
interval that contains the population parameter of interest. This interval is therefore
commonly referred to as confidence coefficient and denoted by (1-α). However, it is also
important to state ‘how confident’ one should be that the interval estimate contains the
parameter value. Hence an interval estimate of the population parameter is a confidence
interval with a statement of confidence that the interval contains the parameter value. In
other words, a confidence interval estimation is an interval of values computed from
sample data that is likely to contain the true population parameter value.
The confidence interval estimate a population parameter is obtained by applying the
formula:
Point estimate ± Margin of error
Where Margin of error = 𝑧𝑐 × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑒𝑟𝑟𝑜𝑟 𝑜𝑓 𝑎 𝑝𝑎𝑟𝑡𝑖𝑐𝑢𝑙𝑎𝑟 𝑠𝑡𝑎𝑡𝑖𝑠𝑡𝑖𝑐
 𝑧𝑐 = critical value of standard normal variable that represents confidence level
(probability of being correct) such as 0.90, 0.95, and so on.

6. Interval estimation of population mean (σ known)

Suppose the population mean µ is unknown and the true population standard deviation σ
is known. Then for a large sample size (n≥30), the sample mean 𝑥̅ is the best point
estimator for the population mean µ. Since sampling distribution is approximately
normal, it can be used to compute confidence interval of population mean µ as follows:
𝜎
𝑥̅ ± 𝑧𝛼⁄2 𝜎𝑥̅ 𝑜𝑟𝑥̅ ± 𝑧𝛼⁄2
√𝑛
𝜎 𝜎
𝑥̅ − 𝑧𝛼⁄2 ≤ 𝑥̅ + 𝑧𝛼⁄2
√𝑛 √𝑛

Where 𝑧𝛼⁄2 is the z-value representing an area 𝛼⁄2 in the right tail of the standard
normal probability distribution, and (1-α) is the level of confidence.

7. Interval estimation of population mean (σ unknown)

If the standard deviation of σ of a population is not known, then it can be approximated
by the sample standard deviation, s when the sample size, n(≥30) is large. So, the interval
estimator of a population mean µ for a large sample n(≥30) with confidence coefficient
(1-α) is given by
𝑠
𝑥̅ ± 𝑧𝛼⁄2 𝑠𝑥̅ = 𝑥̅ ± 𝑧𝛼⁄2
√𝑛
When the population standard deviation is not known and the sample size is small, the
procedure of interval estimation of population mean is based on a probability distribution
known as the t-distribution. This distribution is very similar to the normal distribution.
However the t-distribution has more area in the tails and the less in the centre than does
normal distribution. The t-distribution depends on a parameter known as degree of
freedom. As the number of degrees of freedom increases, t-distribution gradually
approaches the normal distribution, and the sample standard deviation s becomes a better
estimate of population standard deviation σ.
 The interval estimate of a population mean when the sample size is small (n≤30) with
confidence coefficient (1-α) is given by
𝑠 𝑠 𝑠
𝑥̅ ± 𝑡∝⁄2 𝑜𝑟 𝑥̅ − 𝑡𝛼⁄2 ≤ 𝜇 ≤ 𝑥̅ + 𝑡𝛼⁄2
√𝑛 √𝑛 √𝑛
Where 𝑡𝛼⁄2 is the critical value of t-test statistic providing an area α/2 in the right tail of
the t-distribution with n-1 degrees of freedom, and

∑(𝑥𝑖 − 𝑥̅ )2
𝑠=√
𝑛−1

The critical values of t for the given degrees of freedom can be obtained from the table of
t-distribution

Confidence Interval for µ

Sample size Interval Estimate of Population Mean µ

Large
σ is known 𝜎
𝑥̅ ± 𝑧𝛼⁄2
√𝑛
σ is estimated by s 𝑥̅ ± 𝑧𝛼⁄2 𝑠
√𝑛

Small
σ is known 𝜎
𝑥̅ ± 𝑧𝛼⁄2
√𝑛
σ is estimated by s 𝜎
𝑥̅ ± 𝑡𝛼⁄2
√𝑛
8. Summary
In any estimation problem, we need to obtain both a point estimate and an interval
estimate. The point estimate is our best guess of the true value of the parameter, while the
interval estimate gives a measure of accuracy of that point estimate by providing an
interval that contains plausible values. When the variable of interest is quantitative, the
sample mean 𝑥̅ provides a point estimates of unknown mean. When the variable has a
binomial distribution, the sample proportion is a point estimate of the unknown
population proportion is a point estimate of the unknown population proportion p.
 Confidence interval are frequently used as interval estimates Articles in the literature
commonly report 95% confidence intervals (95% CI). The 95% CI is calculated in such a
way that under repeated sampling it will contain the true population parameter.
9. Self-Check Exercise with solutions
Q.1. The average monthly electricity consumption for a sample of 100 families is 1250
units. Assuming the standard deviation of electric consumption of all families is 150
units, construct a 95 percent confidence interval estimate of the actual mean electric
consumption.
Solution:
The information given is: 𝑥̅ = 1250, 𝜎 = 150, 𝑛 = 100 and confidence level (1-α)= 95
percent. Using the standard normal curve we find that the half of 0.95 yields a confidence
coefficient 𝑧𝛼⁄2 = 1.96. Thus confidence limits with 𝑧𝛼⁄2 = ±1.96 for 95% confidence
are given by
𝜎 150
𝑥̅ ± 𝑧𝛼⁄2 = 1250 ± 1.96 = 1250 ± 29.40 𝑢𝑛𝑖𝑡𝑠
√𝑛 √100
Thus for 95 percent level of confidence, the population mean µ is likely to fall between
1220.60 units, that is 1220.60≤µ≤1274.40.
Q.2. A random sample of 64 sales invoices was taken from a large population of sales
invoice. The average value was found to be Rs 2000 with a standard deviation of Rs 540.
Find a 90 percent confidence interval for the true mean value of all the sales.
Solution:
The information given is: 𝑥̅ = 2000, 𝑠 = 540, 𝑛 = 64 𝑎𝑛𝑑 𝛼 = 10 𝑝𝑒𝑟𝑐𝑒𝑛𝑡
Therefore
𝑠 540
𝑠𝑥̅ = = = 67.50
√𝑛 √64
𝑧𝛼⁄2 = 1.64
The required confidence interval of population mean µ is given by
𝑠
𝑥̅ ± 𝑧𝛼⁄2 = 2000 ± 1.64(67.50) = 2000 ± 110.70
√𝑛
Thus the mean of the sales invoices for the whole population is likely to fall between Rs
1889.30 and Rs 2110.70, that is 1889.30≤µ≤2110.70.
Q.3. A survey conducted by a shopping mall group showed that a family in a metro city
spends an average of Rs 500 on clothes every month. Suppose a sample of 81 families
resulted in a sample mean of Rs 540 per month and a sample standard deviation of Rs
150, develop a 95 percent confidence interval estimator of the mean amount spent per
month by family.
Solution
The information given is:
𝜎 150
𝑥̅ ± 𝑧𝛼⁄2 𝜎𝑥 = 𝑥̅ ± 𝑧𝛼⁄2 = 540 ± 1.96
√𝑛 √181
=540±40.67 or Rs 499.33and Rs 580.67
Hence for 95 percent level of confidence, the population mean µ is likely to fall between
Rs 499.33 and Rs 580.67, i.e. 499.33≤µ≤580.67.