Statistics for

Business and Economics

6th Edition

Chapter 8

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, μ
 when Population Variance σ2 is Known
 when Population Variance σ2 is Unknown
 Confidence Intervals for the Population
Proportion, p̂ (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 μ x
Proportion P p̂

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

 A point estimator θ̂ is said to be an

unbiased estimator of the parameter  if the
expected value, or mean, of the sampling
distribution of θ̂ is ,

E(θˆ )  θ
 Examples:
 The sample mean is an unbiased estimator of μ
 The sample variance is an unbiased estimator of σ2
 The sample proportion is an unbiased estimator of P

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

 θ̂1 is an unbiased estimator, θ̂ 2 is biased:

θ̂1 θ̂ 2

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

 Let θ̂ be an estimator of 

 The bias in θ̂ is defined as the difference

between its mean and 

Bias(θˆ )  E(θˆ )  θ

 The bias of an unbiased estimator is 0

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

 Let θ̂ be an estimator of 

 θ̂ is a consistent estimator of  if the

difference between the expected value of θ̂
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 θ̂1 and θ̂ 2 be two unbiased estimators of , based on
the same number of sample observations. Then,
ˆ )  Var( θˆ )
 θ̂1 is said to be more efficient than θ̂ 2 if Var( θ1 2

 The relative efficiency of θ̂1 with respect to θ̂ 2 is the ratio

of their variances:
Var( θˆ 2 )
Relative Efficiency 
Var( θˆ )
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
Population μ is between
Mean 40 & 60.
(mean, μ, 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

σ2 Known σ2 Unknown

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 8-18
 Confidence Interval for μ
(σ2 Known)
 Assumptions
 Population variance σ2 is known
 Population is normally distributed
 If population is not normal, use large sample

 Confidence interval estimate:

σ σ
x  z α/2  μ  x  z α/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,
σ σ
x  z α/2  μ  x  z α/2
n n

 Can also be written as x  ME

where ME is called the margin of error
σ
ME  z α/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

σ
ME  z α/2
n

The margin of error can be reduced if

 the population standard deviation can be reduced (σ↓)

 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

α α
 .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 μx  μ
extend from x1
σ x2 100(1-)%
xz of intervals
n
constructed
to
σ contain μ;
xz
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.
σ
 Solution: x z
n

 2.20  1.96 (.35/ 11 )

 2.20  .2068

1.9932  μ  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

σ2 Known σ2 Unknown

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 8-28
 Student’s t Distribution

 Consider a random sample of n observations

 with mean x and standard deviation s
 from a normally distributed population with mean μ

 Then the variable

x μ
t
s/ n
follows the Student’s t distribution with (n - 1) degrees
of freedom

Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 8-29
 Confidence Interval for μ
(σ2 Unknown)

 If the population standard deviation σ 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 μ
(σ Unknown)
(continued)
 Assumptions
 Population standard deviation is unknown
 Population is normally distributed
 If population is not normal, use large sample
 Use Student’s t Distribution
 Confidence Interval Estimate:

S S
x  t n-1,α/2  μ  x  t n-1,α/2
n n
where tn-1,α/2 is the critical value of the t distribution with n-1 d.f. and an
area of α/2 in each tail:
P(t n1  t n1,α/2 )  α/2
Statistics for Business and Economics, 6e © 2007 Pearson Education, Inc. Chap 8-31
 Student’s 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
 Student’s 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
 Student’s 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 μ

t n1,α/2  t 24,.025  2.0639

 d.f. = n – 1 = 24, so

The confidence interval is

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

Confidence
Intervals

Population Population
Mean Proportion

σ Known σ 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 ( p̂ )

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)
σP 
n
 We will estimate this with sample data:

pˆ (1 pˆ )
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

pˆ (1 pˆ ) ˆ (1 pˆ )
p
pˆ  z α/2  P  pˆ  z α/2
n n

 where
 zp̂/2 is the standard normal value for the level of confidence desired
 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.

pˆ (1 pˆ ) ˆ (1 pˆ )
p
pˆ  z α/2  P  pˆ  z α/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