Statistics for

Business and Economics

6th Edition

Chapter 8
Click to add Text

Estimation: Single Population

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-1
 Chapter Goals
After completing this chapter, you should be
able to:
Distinguish between a point estimate and a
confidence interval estimate
Construct and interpret a confidence interval
estimate for a single population mean using both
the Z and t distributions
Form and interpret a confidence interval estimate
for a single population proportion

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-2
 Confidence Intervals

Content of this chapter

Confidence Intervals for the Population
Mean,
when Population Variance 2 is Known
when Population Variance 2 is Unknown
Confidence Intervals for the Population
Proportion, p (large samples)

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-3
 Definitions

An estimator of a population parameter is

a random variable that depends on sample
information . . .
whose value provides an approximation to this
unknown parameter

A specific value of that random variable is called

an estimate

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-4
 Point and Interval Estimates

A point estimate is a single number,

a confidence interval provides additional
information about variability

Lower Upper
Confidence Confidence
Point Estimate
Limit Limit

Width of
confidence interval

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-5
 Point Estimates

We can estimate a with a Sample

Population Parameter Statistic
(a Point Estimate)

Mean x
Proportion P p

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-6
 Unbiasedness
A point estimator is said to be an
unbiased estimator of the parameter if the
expected value, or mean, of the sampling
distribution of is ,

E( )
Examples:
The sample mean is an unbiased estimator of

The sample variance is an unbiased estimator of

2

The sample proportion is an unbiased estimator of P

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-7
 Unbiasedness
(continued)

1 is an unbiased estimator, 2 is biased:

1 2

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-8
 Bias

Let be an estimator of

The bias in is defined as the difference

between its mean and

Bias( ) E( )

The bias of an unbiased estimator is 0

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-9
 Consistency

Let be an estimator of

is a consistent estimator of if the

difference between the expected value of and
decreases as the sample size increases

Consistency is desired when unbiased

estimators cannot be obtained

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-10
 Most Efficient Estimator

Suppose there are several unbiased estimators of

The most efficient estimator or the minimum variance
unbiased estimator of is the unbiased estimator with the
smallest variance
Let 1 and 2 be two unbiased estimators of , based on
the same number of sample observations. Then,
1 is said to be more efficient than 2 if Var( 1 ) Var( 2 )

The relative efficiency of 1 with respect to 2 is the ratio

of their variances:
Var( 2 )
Relative Efficiency
Var( )1

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-11
 Confidence Intervals

How much uncertainty is associated with a

point estimate of a population parameter?

An interval estimate provides more

information about a population characteristic
than does a point estimate

Such interval estimates are called confidence

intervals

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-12
 Confidence Interval Estimate
An interval gives a range of values:
Takes into consideration variation in sample
statistics from sample to sample
Based on observation from 1 sample
Gives information about closeness to
unknown population parameters
Stated in terms of level of confidence
Can never be 100% confident

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-13
 Confidence Interval and
Confidence Level

If P(a < < b) = 1 - then the interval from a

to b is called a 100(1 - )% confidence
interval of .
The quantity (1 - ) is called the confidence
level of the interval ( between 0 and 1)

In repeated samples of the population, the true value

of the parameter would be contained in 100(1 - )%
of intervals calculated this way.
The confidence interval calculated in this manner is
written as a < < b with 100(1 - )% confidence

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-14
 Estimation Process

Random Sample I am 95%

confident that
is between
Population Mean 40 & 60.
(mean, , is X = 50
unknown)

Sample

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-15
 Confidence Level, (1-)
(continued)
Suppose confidence level = 95%
Also written (1 - ) = 0.95
A relative frequency interpretation:
From repeated samples, 95% of all the
confidence intervals that can be constructed will
contain the unknown true parameter
A specific interval either will contain or will
not contain the true parameter
No probability involved in a specific interval

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-16
 General Formula

The general formula for all confidence

intervals is:

Point Estimate (Reliability Factor)(Standard Error)

The value of the reliability factor

depends on the desired level of
confidence

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-17
 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

2 Known 2 Unknown

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-18
 Confidence Interval for
(2 Known)
Assumptions
Population variance 2 is known
Population is normally distributed
If population is not normal, use large sample

Confidence interval estimate:

x z/2 x z/2
n n
(where z/2 is the normal distribution value for a probability of /2 in
each tail)
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-19
 Margin of Error
The confidence interval,

x z/2 x z/2
n n

Can also be written as x ME

where ME is called the margin of error

ME z/2
n

The interval width, w, is equal to twice the margin of

error
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-20
 Reducing the Margin of Error

ME z/2
n

The margin of error can be reduced if

the population standard deviation can be reduced ()

The sample size is increased (n)

The confidence level is decreased, (1 )

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-21
 Finding the Reliability Factor, z/2
Consider a 95% confidence interval:
1 .95

.025 .025
2 2

Z units: z = -1.96 0 z = 1.96

Lower Upper
X units: Confidence Point Estimate Confidence
Limit Limit

Find z.025 = 1.96 from the standard normal distribution table

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-22
 Common Levels of Confidence
Commonly used confidence levels are 90%,
95%, and 99%
Confidence
Confidence
Coefficient, Z/2 value
Level
1
80% .80 1.28
90% .90 1.645
95% .95 1.96
98% .98 2.33
99% .99 2.58
99.8% .998 3.08
99.9% .999 3.27

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-23
 Intervals and Level of Confidence
Sampling Distribution of the Mean

/2 1 /2
x
Intervals x
extend from x1
x2 100(1-)%
xz of intervals
n
to constructed
contain ;
xz
n 100()% do
Confidence Intervals not.
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-24
 Example

A sample of 11 circuits from a large normal

population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is 0.35 ohms.

Determine a 95% confidence interval for the

true mean resistance of the population.

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-25
 Example
(continued)

A sample of 11 circuits from a large normal

population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is .35 ohms.

Solution:
x z
n

2.20 1.96 (.35/ 11)

2.20 .2068

1.9932 2.4068
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-26
 Interpretation
We are 95% confident that the true mean
resistance is between 1.9932 and 2.4068
ohms
Although the true mean may or may not be
in this interval, 95% of intervals formed in
this manner will contain the true mean

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-27
 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

2 Known 2 Unknown

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-28
 Students t Distribution

Consider a random sample of n observations

with mean x and standard deviation s

from a normally distributed population with mean

Then the variable

x
t
s/ n
follows the Students t distribution with (n - 1) degrees
of freedom

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-29
 Confidence Interval for
(2 Unknown)

If the population standard deviation is

unknown, we can substitute the sample
standard deviation, s
This introduces extra uncertainty, since
s is variable from sample to sample
So we use the t distribution instead of
the normal distribution

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-30
 Confidence Interval for
( Unknown)
(continued)
Assumptions
Population standard deviation is unknown
Population is normally distributed
If population is not normal, use large sample
Use Students t Distribution
Confidence Interval Estimate:
S S
x t n-1,/2 x t n-1,/2
n n

where tn-1,/2 is the critical value of the t distribution with n-1 d.f.
and an area of /2 in each tail:
P(tn1 t n1,/2 ) /2
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-31
 Students t Distribution

The t is a family of distributions

The t value depends on degrees of
freedom (d.f.)
Number of observations that are free to vary after
sample mean has been calculated

d.f. = n - 1

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-32
 Students t Distribution
Note: t Z as n increases

Standard
Normal
(t with df = )

t (df = 13)
t-distributions are bell-
shaped and symmetric, but
have fatter tails than the t (df = 5)
normal

0 t
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-33
 Students t Table

Upper Tail Area

Let: n = 3
df .10 .05 .025 df = n - 1 = 2
= .10
1 3.078 6.314 12.706 /2 =.05
2 1.886 2.920 4.303
3 1.638 2.353 3.182 /2 = .05

The body of the table

contains t values, not 0 2.920 t
probabilities
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-34
 t distribution values
With comparison to the Z value

Confidence t t t Z
Level (10 d.f.) (20 d.f.) (30 d.f.) ____

.80 1.372 1.325 1.310 1.282

.90 1.812 1.725 1.697 1.645
.95 2.228 2.086 2.042 1.960
.99 3.169 2.845 2.750 2.576

Note: t Z as n increases

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-35
 Example
A random sample of n = 25 has x = 50 and
s = 8. Form a 95% confidence interval for

d.f. = n 1 = 24, so t n1,/2 t 24,.025 2.0639

The confidence interval is

S S
x t n-1,/2 x t n-1,/2
n n
8 8
50 (2.0639) 50 (2.0639)
25 25
46.698 53.302
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-36
 Confidence Intervals

Confidence
Intervals

Population Population
Mean Proportion

Known Unknown

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-37
 Confidence Intervals for the
Population Proportion, p

An interval estimate for the population

proportion ( P ) can be calculated by
adding an allowance for uncertainty to
the sample proportion ( p )

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-38
 Confidence Intervals for the
Population Proportion, p
(continued)

Recall that the distribution of the sample

proportion is approximately normal if the
sample size is large, with standard deviation

P(1 P)
P
n
We will estimate this with sample data:

p (1 p )
n
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-39
 Confidence Interval Endpoints
Upper and lower confidence limits for the
population proportion are calculated with the
formula

p (1 p ) (1 p )
p
p z/2 P p z /2
n n

where
z/2 is the standard normal value for the level of confidence desired
p is the sample proportion
n is the sample size

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-40
 Example

A random sample of 100 people

shows that 25 are left-handed.
Form a 95% confidence interval for
the true proportion of left-handers

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-41
 Example
(continued)
A random sample of 100 people shows
that 25 are left-handed. Form a 95%
confidence interval for the true proportion
of left-handers.

p (1 p ) (1 p )
p
p z /2 P p z /2
n n
25 .25(.75) 25 .25(.75)
1.96 P 1.96
100 100 100 100
0.1651 P 0.3349
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-42
 Interpretation

We are 95% confident that the true

percentage of left-handers in the population
is between
16.51% and 33.49%.

Although the interval from 0.1651 to 0.3349

may or may not contain the true proportion,
95% of intervals formed from samples of
size 100 in this manner will contain the true
proportion.

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-43
 PHStat Interval Options

options

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-44
 Using PHStat
(for , unknown)
A random sample of n = 25 has X = 50 and
S = 8. Form a 95% confidence interval for

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-45
 Chapter Summary
Introduced the concept of confidence
intervals
Discussed point estimates
Developed confidence interval estimates
Created confidence interval estimates for the
mean (2 known)
Introduced the Students t distribution
Determined confidence interval estimates for
the mean (2 unknown)
Created confidence interval estimates for the
proportion
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 8-46