A PowerPoint Presentation Package to Accompany

Applied Statistics in Business &

Economics, 4th edition
David P. Doane and Lori E. Seward
Prepared by Lloyd R. Jaisingh

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 8

Sampling Distributions and Estimation

Chapter Contents
8.1 Sampling Variation
8.2 Estimators and Sampling Errors
8.3 Sample Mean and the Central Limit Theorem
8.4 Confidence Interval for a Mean () with Known
8.5 Confidence Interval for a Mean () with Unknown
8.6 Confidence Interval for a Proportion ()
8.7 Estimating from Finite Populations
8.8 Sample Size Determination for a Mean
8.9 Sample Size Determination for a Proportion
8.10 Confidence Interval for a Population Variance, 2 (Optional)

8-2

Chapter 8

Sampling Distributions and Estimation

Chapter Learning Objectives (LOs)

LO8-1:
LO8-2:
LO8-3:
LO8-4:
LO8-5:

Define sampling error, parameter, and estimator.

Explain the desirable properties of estimators.
State the Central Limit Theorem for a mean.
Explain how sample size affects the standard error.
Construct a 90, 95, or 99 percent confidence interval for .

8-3

Chapter 8

Sampling Distributions and Estimation

Chapter Learning Objectives (LOs)

LO8-6: Know when to use Students t instead of z to estimate .
LO8-7: Construct a 90, 95, or 99 percent confidence interval for .
LO8-8: Construct confidence intervals for finite populations.
LO8-9: Calculate sample size to estimate a mean or proportion.
LO8-10: Construct a confidence interval for a variance (optional).

8-4

Chapter 8

8.1 Sampling Variation

Sample statistic a random variable whose value depends on

which population items are included in the random sample.
Depending on the sample size, the sample statistic could either
represent the population well or differ greatly from the population.
This sampling variation can easily be illustrated.

8-5

Consider eight random samples of size n = 5 from a large

population of GMAT scores for MBA applicants.

The sample means tend to be close to the population mean

( = 520.78).

Chapter 8

8.1 Sampling Variation

8-6

Chapter 8

8.1 Sampling Variation

The dot plots show that the sample means have much less
variation than the individual sample items.

8-7

8.2 Estimators and Sampling Distributions

Chapter 8

LO8-1

LO8-1: Define sampling error, parameter and estimator.

Some Terminology

Estimator a statistic derived from a sample to infer the value of

a population parameter.
Estimate the value of the estimator in a particular sample.
Population parameters are usually represented by
Greek letters and the corresponding statistic
by Roman letters.

8-8

8.2 Estimators and Sampling Distributions

Examples of Estimators

Chapter 8

LO8-1

Sampling Distributions

The sampling distribution of an estimator is the probability distribution of

all possible values the statistic may assume when a random sample of
size n is taken.
Note: An estimator is a random variable since samples vary.
8-9

Chapter 8

8.2 Estimators and Sampling Distributions

LO8-1

Sampling error is the difference between an estimate and the

corresponding population parameter. For example, if we use the sample
mean as an estimate for the population mean, then the

Bias

Bias is the difference between the expected value of the estimator and
the true parameter. Example for the mean,

An estimator is unbiased if its expected value is the parameter being

estimated. The sample mean is an unbiased estimator of the population
mean since

On average, an unbiased estimator neither overstates nor understates

the true parameter.
8-10

8.3 Sample Mean and the Central Limit Theorem

Applying The Central Limit Theorem

Chapter 8

LO8-3

The Central Limit Theorem permits us to define an interval within which the
sample means are expected to fall. As long as the sample size n is large
enough, we can use the normal distribution regardless of the population
shape (or any n if the population is normal to begin with).

8-11

8.3 Sample Mean and the Central Limit Theorem

Chapter 8

LO8-4

LO8-4: Explain how sample size affects the standard error.

Sample Size and Standard Error
Even if the population standard deviation is large, the sample means will
fall within a narrow interval as long as n is large. The key is the standard
error of the mean:.. The standard error decreases as n increases.
For example, when n = 4 the standard error is halved. To halve it again
requires n = 16, and to halve it again requires n = 64. To halve the
standard error, you must quadruple the sample size (the law of diminishing
returns).

8-12

Illustration: All Possible Samples from a Uniform Population

Consider a discrete uniform population consisting of the integers

{0, 1, 2, 3}.

The population parameters are: = 1.5, = 1.118.

Chapter 8

8.3 Sample Mean and the Central Limit Theorem

8-13

Illustration: All Possible Samples from a Uniform Population

Chapter 8

8.3 Sample Mean and the Central Limit Theorem

The population is uniform, yet the distribution of all possible

sample means of size 2 has a peaked triangular shape.

8-14

Chapter 8

LO8-5

8.4 Confidence Interval for a Mean () with

known ()

LO8-5: Construct a 90, 95, or 99 percent confidence interval for .

What is a Confidence Interval?

8-15

What is a Confidence Interval?

Chapter 8

LO8-5

8.4 Confidence Interval for a Mean () with

known ()

The confidence interval for with known is:

8-16

Choosing a Confidence Level

A higher confidence level leads to a wider confidence interval.

Greater confidence
implies loss of precision
(i.e. greater margin of
error).
95% confidence is
most often used.

Chapter 8

LO8-5

8.4 Confidence Interval for a Mean () with

known ()

Confidence Intervals for Example 8.2

8-17

Interpretation

Chapter 8

LO8-5

8.4 Confidence Interval for a Mean () with

known ()

A confidence interval either does or does not contain .

The confidence level quantifies the risk.
Out of 100 confidence intervals, approximately 95% may contain ,
while approximately 5% might not contain when constructing 95%
confidence intervals.

When Can We Assume Normality?

If is known and the population is normal, then we can safely use the
formula to compute the confidence interval.
If is known and we do not know whether the population is normal, a common
rule of thumb is that n 30 is sufficient to use the formula as long as the
distribution
Is approximately symmetric with no outliers.
Larger n may be needed to assume normality if you are sampling from a strongly
skewed population or one with outliers.

8-18

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

LO8-6: Know when to use Students t instead of z to estimate .

Students t Distribution

Use the Students t distribution instead of the normal distribution

when the population is normal but the standard deviation is
unknown and the sample size is small.

8-19

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

LO8-6: Know when to use Students t instead of z to estimate .

Students t Distribution

8-20

Students t Distribution

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

t distributions are symmetric and shaped like the standard normal

distribution.
The t distribution is dependent on the size of the sample.

Comparison of Normal and Students t

Figure 8.11

8-21

Degrees of Freedom

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

Degrees of Freedom (d.f.) is a parameter based on the sample

size that is used to determine the value of the t statistic.
Degrees of freedom tell how many observations are used to
calculate , less the number of intermediate estimates used in
the calculation. The d.f for the t distribution in this case, is given
by d.f. = n -1.
As n increases, the t distribution approaches the shape of the
normal distribution.
For a given confidence level, t is always larger than z, so a
confidence interval based on t is always wider than if z were
used.

8-22

Comparison of z and t

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

For very small samples, t-values differ substantially from the

normal.
As degrees of freedom increase, the t-values approach the
normal z-values.
For example, for n = 31, the degrees of freedom, d.f. = 31 1 =
30.
So for a 90 percent confidence interval, we would use
t = 1.697, which is only slightly larger than z = 1.645.

8-23

Example GMAT Scores Again

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

Figure 8.13
8-24

Example GMAT Scores Again

Construct a 90% confidence interval for the mean GMAT score of

all MBA applicants.
x = 510

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

s = 73.77

Since is unknown, use the Students t for the confidence

interval with d.f. = 20 1 = 19.
First find t/2 = t.05 = 1.729 from Appendix D.

8-25

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

For a 90% confidence

interval, use Appendix
D to find t0.05 = 1.729
with d.f. = 19.
Note: One can use Excel,
Minitab, etc. to
obtain these values
as well as to
construct confidence
Intervals.
We are 90 percent confident
that the true mean GMAT
score might be within the
interval [481.48, 538.52]
8-26

Confidence Interval Width

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

Confidence interval width reflects

- the sample size,
- the confidence level and
- the standard deviation.
To obtain a narrower interval and more precision
- increase the sample size or
- lower the confidence level (e.g., from 90% to 80% confidence).

8-27

Using Appendix D

Chapter 8

LO8-6

8.5 Confidence Interval for a Mean () with

Unknown ()

Beyond d.f. = 50, Appendix D shows d.f. in steps of 5 or 10.

If the table does not give the exact degrees of freedom, use the
t-value for the next lower degrees of freedom.
This is a conservative procedure since it causes the interval to be
slightly wider.
A conservative statistician may use the t distribution for
confidence intervals when is unknown because
using z would underestimate the margin of error.

8-28

8.6 Confidence Interval for a Proportion ()

Chapter 8

LO8-7

LO8-7: Construct a 90, 95, or 99 percent confidence interval for .

A proportion is a mean of data whose only values are 0 or 1.

8-29

8.6 Confidence Interval for a Proportion ()

Applying the CLT

Chapter 8

LO8-7

The distribution of a sample proportion p = x/n is symmetric if = .50

and regardless of , approaches symmetry as n increases.

8-30

8.6 Confidence Interval for a Proportion ()

Chapter 8

LO8-7

When is it Safe to Assume Normality of p?

Rule of Thumb: The sample proportion p = x/n may be assumed to

be normal if both n 10 and n(1- ) 10.

Sample size to assume

normality:

Table 8.9

8-31

8.6 Confidence Interval for a Proportion ()

Confidence Interval for

Chapter 8

LO8-7

Since is unknown, the confidence interval for p = x/n

(assuming a large sample) is

8-32

8.6 Confidence Interval for a Proportion ()

Chapter 8

LO8-7

Example Auditing

8-33

8.7 Estimating from Finite Population

Chapter 8

LO8-8

LO8-8: Construct Confidence Intervals for Finite Populations.

N = population size; n = sample size

8-34

8.8 Sample Size determination for a Mean

Chapter 8

LO8-9

LO8-9: Calculate sample size to estimate a mean or proportion.

Sample Size to Estimate

To estimate a population mean with a precision of + E (allowable

error), you would need a sample of size. Now,

8-35

8.8 Sample Size determination for a Mean

How to Estimate ?

Chapter 8

LO8-9

Method 1: Take a Preliminary Sample

Take a small preliminary sample and use the sample s in place of
in the sample size formula.

Method 2: Assume Uniform Population

Estimate rough upper and lower limits a and b and set
= [(b-a)/12].

Method 3: Assume Normal Population

Estimate rough upper and lower limits a and b and set = (b-a)/4.
This assumes normality with most of the data with 2 so the
range is 4.

Method 4: Poisson Arrivals

In the special case when is a Poisson arrival rate, then =
8-36

8.9 Sample Size determination for a Proportion

To estimate a population proportion with a precision of E

(allowable error), you would need a sample of size

Since is a number between 0 and 1, the allowable error E is

also between 0 and 1.

Chapter 8

LO8-9

8-37