Hypothesis Testing

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Agenda

▸ The basic principles of hypothesis testing

▸ How to use hypothesis testing to test a
mean or proportion
▸ The assumptions of each hypothesis-testing
procedure, how to evaluate them, and the consequences if they
are seriously violated
▸ How to avoid the pitfalls involved in hypothesis testing
▸ The ethical issues involved in hypothesis testing
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Basic Principles of
Hypothesis Testing
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What is a Hypothesis?
▸ A hypothesis is a claim
(assertion) about a
population parameter:
▸ population mean

Example: The mean monthly cell phone bill

in this city is μ = $42
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The Null Hypothesis, H0

▸ States the claim or assertion to be tested

Example: The average number of TV sets in U.S. Homes is
equal to three ( H0 : μ = 3 )
▸ Is always about a population parameter, not about a sample
statistic

H0 : μ = 3 H0 : X = 3
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The Null Hypothesis, H0

▸ Begin with the assumption that the null hypothesis is true

▹ Similar to the notion of innocent until
proven guilty

▸ Refers to the status quo or historical value

▸ Always contains “=” , “≤” or “” sign
▸ May or may not be rejected
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The Alternative Hypothesis, H1

▸ Is the opposite of the null hypothesis

▹ e.g., The average number of TV sets in U.S. homes is not
equal to 3 ( H1: μ ≠ 3 )
▸ Challenges the status quo
▸ Never contains the “=” , “≤” or “” sign
▸ Contain “≠”, “<“ or “>” sign
▸ May or may not be proven
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The Hypothesis Testing

Process
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The Hypothesis Testing Process

▸ Claim: The population mean age is 50.

▹ H0: μ = 50, H1: μ ≠ 50
▸ Sample the population and find sample mean.
Population

Sample
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The Hypothesis Testing Process

▸ Suppose the sample mean age was X = 20.

▸ This is significantly lower than the claimed mean population
age of 50.
▸ If the null hypothesis were true, the probability of getting such
a different sample mean would be very small, so you reject
the null hypothesis .
▸ In other words, getting a sample mean of 20 is so unlikely if
the population mean was 50, you conclude that the
population mean must not be 50.
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1111
The Hypothesis Testing Process

Sampling
Distribution of X

X
20 μ = 50
If H0 is ... then you
If it is unlikely that true reject the null
you would get a
... When in fact this were hypothesis that
sample mean of
the population mean… μ = 50.
this value ...
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The Test Statistic and Critical Values

▸ If the sample mean is close to the assumed

population mean, the null hypothesis is not rejected.
▸ If the sample mean is far from the assumed
population mean, the null hypothesis is rejected.
▸ How far is “far enough” to reject H0?
▸ The critical value of a test statistic creates a “line in
the sand” for decision making -- it answers the
question of how far is far enough.
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The Test Statistic and Critical Values

▸ Sampling Distribution of the test statistic

Region of Region of
Rejection Rejection
Region of
Non-Rejection

Critical Values

“Too Far Away” From Mean of Sampling Distribution

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Possible Errors in Hypothesis Test Decision Making

▸ Type I Error
▹ Reject a true null hypothesis
▹ Considered a serious type of error
▹ The probability of a Type I Error is 
▹ Called level of significance of the test
▹ Set by researcher in advance
▸ Type II Error
▹ Failure to reject false null hypothesis
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Possible Errors in Hypothesis Test Decision Making

Possible Hypothesis Test Outcomes

Actual Situation

Decision H0 True H0 False

Do Not No Error Type II Error

Reject H0 Probability 1 - α Probability β

Reject H0 Type I Error No Error

Probability α Probability 1 - β
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Level of Significance and the Rejection Region

H0: μ = 3
Level of significance = 
H1: μ ≠ 3

 /2 /2

Critical values

Rejection Region

This is a two-tail test because there is a rejection region in both tails

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Hypothesis Tests for the Mean

Hypothesis
Tests for 

 Known  Unknown
(Z test) (t test)
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Z Test of Hypothesis for the Mean (σ Known)

▸ Convert sample statistic ( X ) to a ZSTAT test statistic

Hypothesis
Tests for 

σKnown
Known σUnknown
Unknown
(Z test) (t test)
The test statistic is:
X−μ
Z STAT =
σ
n
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Critical Value Approach to Testing

▸ For a two-tail test for the mean, σ known:

▸ Convert sample statistic ( X ) to test statistic (ZSTAT)
▸ Determine the critical Z values for a specified
level of significance  from a table or computer
▸ Decision Rule: If the test statistic falls in the rejection region,
reject H0 ; otherwise, do not reject H0
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Two-Tail Tests
H0: μ = 3
◼ There are two H1: μ  3
cutoff values
(critical values),
defining the /2 /2
regions of
rejection
3 X
Reject Do not reject H0 Reject
H0 -Zα/2 0 +Zα/2 H0 Z

Lower Upper
critical critical
value value
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6 Steps in Hypothesis Testing

1. State the null hypothesis, H0 and the alternative hypothesis, H1

2. Choose the level of significance, , and the sample size, n
3. Determine the appropriate test statistic and sampling
distribution
4. Determine the critical values that divide the rejection and
nonrejection regions
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6 Steps in Hypothesis Testing

5. Collect data and compute the value of the test statistic

6. Make the statistical decision and state the managerial
conclusion. If the test statistic falls into the non rejection
region, do not reject the null hypothesis H0. If the test statistic
falls into the rejection region, reject the null hypothesis.
Express the managerial conclusion in the context of the
problem
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Hypothesis Testing Example

Test the claim that the true mean # of TV

sets in US homes is equal to 3.
(Assume σ = 0.8)
1. State the appropriate null and alternative
hypotheses
H0: μ = 3 H1: μ ≠ 3 (This is a two-tail test)
2. Specify the desired level of significance and the
sample size
Suppose that  = 0.05 and n = 100 are chosen for this
test
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Hypothesis Testing Example
3. Determine the appropriate technique
σ is assumed known so this is a Z test.
4. Determine the critical values
For  = 0.05 the critical Z values are ±1.96
5. Collect the data and compute the test statistic
Suppose the sample results are
n = 100, X = 2.84 (σ = 0.8 is assumed known)
So the test statistic is:
X − μ 2.84 − 3 − .16
Z STA T = = = = − 2.0
σ 0.8 .08
n 100
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Hypothesis Testing Example
▸ 6. Is the test statistic in the rejection region?

/2 = 0.025 /2 = 0.025

Reject H0 if Reject Do not reject H0 Reject

ZSTAT < -1.96 H0 H0
-Zα/2 = -1.96 0 +Zα/2 = +1.96
or ZSTAT >
1.96;
otherwise, do Here, ZSTAT = -2.0 < -1.96, so
not reject H0 the test statistic is in the
rejection region
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Hypothesis Testing Example
6 (continued). Reach a decision and interpret the result

 = 0.05/2  = 0.05/2

Reject Do not reject H0 Reject

H0 H0
-Zα/2 = -1.96 0 +Zα/2= +1.96
-2.0

Since ZSTAT = -2.0 < -1.96, reject the null hypothesis

and conclude there is sufficient evidence that the
mean number of TVs in US homes is not equal to 3
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27 Connection Between Two Tail Tests and Confidence
Intervals
▸ For X = 2.84, σ = 0.8 and n = 100, the 95% confidence
interval is:
0.8 0.8
2.84 - (1.96) to 2.84 + (1.96)
100 100

2.6832 ≤ μ ≤ 2.9968

▸ Since this interval does not contain the hypothesized mean

(3.0), we reject the null hypothesis at  = 0.05
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Assumptions of each
Hypothesis Testing
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Do You Ever Truly Know σ?

▸ Probably not!
▸ In virtually all real world business situations, σ is not known.
▸ If there is a situation where σ is known then µ is also known (since
to calculate σ you need to know µ.)

▸ If you truly know µ there would be no need to gather a sample to

estimate it.
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Hypothesis Testing: σ Unknown

▸ If the population standard deviation is unknown, you instead use the

sample standard deviation S.

▸ Because of this change, you use the t distribution instead of the Z

distribution to test the null hypothesis about the mean because t
distribution is more spread-out than the standard normal Z
distribution.

▸ When using the t distribution, you must assume the population you
are sampling from follows a normal distribution.

▸ All other steps, concepts, and conclusions are the same.

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t Test of Hypothesis for the Mean (σ Unknown)

▸ Convert sample statistic ( X ) to a tSTAT test statistic

Hypothesis
Tests for 

σKnown
Known σUnknown
Unknown
(Z test) (t test)
The test statistic is:

X−μ
t STAT =
S
n
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Example: Two-Tail Test ( Unknown)

The average cost of a hotel room in New York is said to be $168

per night. To determine if this is true, a random sample of 25
hotels is taken and resulted in an X of $172.50 and an S of
$15.40. Test the appropriate hypotheses at  = 0.05.
(Assume the population distribution is normal)

H0: μ = 168
H1: μ  168
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Example Solution: Two-tail t-Test
H0: μ = 168
▸  = 0.05 H1: μ  168
/2=.025 /2=.025
▸ n = 25, df = 25-1=24
▸  is unknown, so
use a t statistic Reject
H0 -t 24,0.025
Do not reject H0 Reject
t 24,0.025 H0
0
▸ Critical Value: -2.0639 1.46
2.0639

±t24,0.025 = ± 2.0639 t STA T =

X−μ
=
172.50 − 168
= 1.46
S 15.40
n 25

Do not reject H0: insufficient evidence that

true mean cost is different than $168
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Connection of Two Tail Tests to Confidence Intervals

▸ For X = 172.5, S = 15.40 and n = 25, the 95% confidence

interval for µ is:

▸ 172.5 - (2.0639) 15.4/ 25 to 172.5 + (2.0639) 15.4/ 25

166.14 ≤ μ ≤ 178.86

▸ Since this interval contains the Hypothesized mean (168), we

do not reject the null hypothesis at  = 0.05
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One-Tail Tests

▸ In many cases, the alternative hypothesis focuses

on a particular direction

H0: μ ≥ 3 This is a lower-tail test since the

alternative hypothesis is focused on
H1: μ < 3
the lower tail below the mean of 3

H0: μ ≤ 3 This is an upper-tail test since the

H1: μ > 3 alternative hypothesis is focused on
the upper tail above the mean of 3
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Lower-Tail Tests

H0: μ ≥ 3
▸ There is only one critical value
H1: μ < 3
since the rejection area
is in only one tail


Reject Do not reject H0

H0 0
Z or t
-Zα or -tα
μ X

Critical
value
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Upper-Tail Tests

▸ There is only one H0: μ ≤ 3

critical value, since the H1: μ > 3

rejection area is in only one tail



Do not reject H0 Reject

Z or t 0 Zα or tα H 0
_
X μ

Critical
value
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Example: Upper-Tail t Test for Mean ( unknown)

A phone industry manager thinks that customer

monthly cell phone bills have increased and now
average over $52 per month. The company wishes
to test this claim. (Assume a normal population)

Form hypothesis test:

H0: μ ≤ 52 the average is not over $52 per month
H1: μ > 52 the average is greater than $52 per month
(i.e., sufficient evidence exists to support the
manager’s claim)
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Example: Find Rejection Region

▸ Suppose that  = 0.10 is chosen for this test and n = 25.

Find the rejection region:
Reject H0

 = 0.10

Do not reject H0 Reject

0 1.318 H0

Reject H0 if tSTAT > 1.318

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Example: Test Statistic

Obtain sample and compute the test statistic

Suppose a sample is taken with the following results:
n = 25, X = 53.1, and S = 10
▹ Then the test statistic is:
X−μ 53.1 − 52
t STAT = = = 0.55
S 10
n 25
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Example: Decision

Reach a decision and interpret the result:Reject H

0

 = 0.10

Do not reject H0 Reject

0
1.318 H0
tSTAT = 0.55

Do not reject H0 since tSTAT = 0.55 ≤ 1.318

Hence there is insufficient evidence that the
mean bill is over $52
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Potential Pitfalls and Ethical Considerations

▸ Use randomly collected data to reduce selection biases

▸ Do not use human subjects without informed consent
▸ Choose the level of significance, α, and the type of test (one-
tail or two-tail) before data collection
▸ Report all pertinent findings including both statistical
significance and practical importance
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Summary

▸ In this lesson, you should have

learnt below concepts:
▸ Basic principles of hypothesis
testing
▸ How to use hypothesis testing to
test a mean or proportion
▸ The assumptions of each
hypothesis-testing
▸ Pitfalls and the ethical issues
involved in hypothesis testing
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THANK YOU!
Any questions?