Chapter 8

Confidence Interval
Estimation

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 Objectives

In this chapter, you learn:

 To construct and interpret confidence interval estimates
for the mean and the proportion.
 To determine the sample size necessary to develop a
confidence interval for the mean or proportion.

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 Online Topics For Chapter

 Application of Confidence Interval Estimation In

Auditing: Section 8.6.
 Estimation and Sample Size Estimation for
Finite Population: Section 8.7.
 Bootstrapping: Section 8.8.

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 Chapter Outline

Content of this chapter

 Confidence Intervals for the Population

Mean, μ:
 when Population Standard Deviation σ is Known.
 when Population Standard Deviation σ is Unknown.
 Confidence Intervals for the Population
Proportion, π.
 Determining the Required Sample Size.

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 Point and Interval Estimates
DCOVA

 A point estimate is a single number.

 A confidence interval provides additional
information about the variability of the estimate.

Lower Upper
Confidence Confidence
Point Estimate Limit
Limit
Width of
confidence interval

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Point Estimates
DCOVA

We can estimate a with a Sample

Population Parameter … Statistic
(a Point Estimate)

Mean μ X
Proportion π p

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 Confidence Intervals
DCOVA

 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.

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 Confidence Interval Estimate
DCOVA
 An interval gives a range of values:
 Takes into consideration variation in sample
statistics from sample to sample.
 Based on observations from 1 sample.
 Gives information about closeness to
unknown population parameters.
 Stated in terms of level of confidence:
 e.g. 95% confident, 99% confident.
 Can never be 100% confident.

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 Confidence Interval Example
DCOVA
Cereal fill example
 Population has µ = 368 and σ = 15.

 If you take a sample of size n = 25 you know:

 368 ± 1.96 * 15 / 25 = (362.12, 373.88) contains 95% of

the sample means of sample size 25.
 95% of the intervals formed in this manner will contain µ.
 When you don’t know µ, you use X to estimate µ.
 If X = 362.3 the interval is 362.3 ± 1.96 * 15 / 25 = (356.42, 368.18).
 Since 356.42 ≤ 368 ≤ 368.18 the interval based on this sample makes
a correct statement about µ.

But what about the intervals from other possible samples

of size 25?

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 Confidence Interval Example
(continued)
DCOVA
Lower Upper Contain
Sample # X
Limit Limit µ?

1 362.30 356.42 368.18 Yes

2 369.50 363.62 375.38 Yes

3 360.00 354.12 365.88 No

4 362.12 356.24 368.00 Yes

5 373.88 368.00 379.76 Yes

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 Confidence Interval Example
(continued)
DCOVA
 In practice you only take one sample of size n.
 In practice you do not know µ so you do not
know if the interval actually contains µ.
 However you do know that 95% of the intervals
formed in this manner will contain µ.
 Thus, based on the one sample you actually
selected, you can be 95% confident your
interval will contain µ (this is a 95% confidence
interval).
Note: 95% confidence is based on the fact that we used Z = 1.96.
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 Estimation Process
DCOVA

Random Sample
We can be 95%
Population Mean confident that
(mean, μ, is X = 50 μ is between 40
unknown) & 60.

Sample

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 General Formula
DCOVA
 The general formula for all confidence
intervals is:
Point Estimate ± (Critical Value)(Standard Error)
Where:
Point Estimate is the sample statistic estimating the
population parameter of interest.

Critical Value is a table value based on the sampling

distribution of the point estimate and the desired confidence
level.

Standard Error is the standard deviation of the point

estimate.
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Confidence Level
DCOVA
 Confidence the interval will
contain the unknown population
parameter.
 A percentage (less than 100%).

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Confidence Level, (1-) (continued)

DCOVA
 Suppose confidence level = 95%.
 Also written (1 - ) = 0.95, (so  = 0.05).
 A relative frequency interpretation:
 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.

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Confidence Intervals
DCOVA
Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

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 Confidence Interval for μ
(σ Known) DCOVA
 Assumptions:
 Population standard deviation σ is known.

 Population is normally distributed.

 If population is not normal, use large sample (n > 30).

 Confidence interval estimate:

σ
X  Z α/2
n
where is the point estimate
X
Zα/2 is the normal distribution critical value for a probability of /2 in each tail
is the standard error
σ/ n

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 Finding the Critical Value, Zα/2
DCOVA
Z α/2  1.96
 Consider a 95% confidence interval:
1  α  0.95so α  0.05

α α
 0.025  0.025
2 2

Z units: Zα/2 = -1.96 0 Zα/2 = 1.96

Lower Upper
X units: Confidence Point Estimate Confidence
Limit Limit

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 Common Levels of Confidence
DCOVA
 Commonly used confidence levels are 90%,
95%, and 99%.
Confidence
Confidence
Coefficient, Zα/2 value
Level
1 
80% 0.80 1.28
90% 0.90 1.645
95% 0.95 1.96
98% 0.98 2.33
99% 0.99 2.58
99.8% 0.998 3.08
99.9% 0.999 3.27

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 Intervals and Level of Confidence
DCOVA
Sampling Distribution of the Mean

/2 1  /2
x
Intervals μx  μ
extend from x1
σ x2 (1-)100%
X  Zα / 2
n of intervals
to constructed
σ contain μ;
X  Zα / 2
n ()100% do
Confidence Intervals not.

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 Example
DCOVA
 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.

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 Example DCOVA
(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 0.35 ohms.

σ
X  Zα/2
 Solution: n
 2.20  1.96 (0.35/ 11 )
 2.20  0.2068
1.9932  μ  2.4068

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 Interpretation
DCOVA
 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.

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Confidence Intervals
DCOVA
Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

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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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 Confidence Interval for μ
(σ Unknown)
DCOVA

 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.

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 Confidence Interval for μ
(σ Unknown) (continued)

 Assumptions: DCOVA
 Population standard deviation is unknown.
 Population is normally distributed.
 If population is not normal, use large sample (n
> 30).
 Use Student’s t Distribution.
 Confidence Interval Estimate:
S
X  tα / 2
n
(where tα/2 is the critical value of the t distribution with n -1 degrees
of freedom and an area of α/2 in each tail.)
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 Student’s t Distribution
DCOVA

 The t is a family of distributions.

 The tα/2 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

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Degrees of Freedom (df)
DCOVA
Idea: Number of observations that are free to vary
after sample mean has been calculated.

Example: Suppose the mean of 3 numbers is 8.0.

Let X1 = 7 If the mean of these three

Let X2 = 8 values is 8.0,
What is X3? then X3 must be 9
(i.e., X3 is not free to vary)
Here, n = 3, so degrees of freedom = n – 1 = 3 – 1 = 2.
(2 values can be any numbers, but the third is not free to vary
for a given mean.)
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 Student’s t Distribution
DCOVA
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
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 Student’s t Table
DCOVA
Upper Tail Area
Let: n = 3
df .10 .05 .025 df = n - 1 = 2
 = 0.10
1 3.078 6.314 12.706 /2 = 0.05

2 1.886 2.920 4.303

3 1.638 2.353 3.182 /2 = 0.05

The body of the table

contains t values, not 0 2.920 t
probabilities

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 Selected t distribution values
DCOVA
With comparison to the Z value

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

0.80 1.372 1.325 1.310 1.28

0.90 1.812 1.725 1.697 1.645
0.95 2.228 2.086 2.042 1.96
0.99 3.169 2.845 2.750 2.58

Note: t Z as n increases
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Example of t distribution
confidence interval DCOVA

A random sample of n = 25 has X = 50 and

S = 8. Form a 95% confidence interval for μ.

 d.f. = n – 1 = 24, so t α/2  t 0.025  2.0639

The confidence interval is

S 8
X  t α/2  50  (2.0639)
n 25

46.698 ≤ μ ≤ 53.302

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 Example of t distribution
confidence interval
(continued)
DCOVA
 Interpreting this interval requires the
assumption that the population you are
sampling from is approximately a normal
distribution (especially since n is only 25).
 This condition can be checked by creating a:
 Normal probability plot or
 Boxplot.

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Example of Excel, Minitab, &
JMP Confidence Interval Output
DCOVA

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Confidence Intervals
DCOVA
Confidence
Intervals

Population Population
Mean Proportion

σ Known σ Unknown

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 Confidence Intervals for the
Population Proportion, π
DCOVA

 An interval estimate for the population

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

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Confidence Intervals for the
Population Proportion, π
(continued)
 Recall that the distribution of the sample DCOVA
proportion is approximately normal if the
sample size is large, with standard deviation:

 (1   )
σp 
n
 We will estimate this with sample data:

p(1 p)
n
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 Confidence Interval Endpoints
DCOVA
 Upper and lower confidence limits for the
population proportion are calculated with the
formula:

p(1  p)
p  Z α/2
n
 where
 Zα/2 is the standard normal value for the level of confidence desired
 p is the sample proportion
 n is the sample size.
 Note: must have np > 5 and n(1-p) > 5.

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 Example
DCOVA

 A random sample of 100 people

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

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 Example DCOVA
(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  Z α/2 p(1  p)/n

 25/100  1.96 0.25(0.75)/100
 0.25  1.96(0.0433)
 0.1651    0.3349

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 Interpretation
DCOVA
 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.

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Example of Excel, JMP, & Minitab
Confidence Interval for π DCOVA

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Determining Sample Size
DCOVA

Determining
Sample Size

For the For the

Mean Proportion

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 Sampling Error
DCOVA

 The required sample size can be found to reach a

desired margin of error (e) with a specified level of
confidence (1 - ).

 The margin of error is also called sampling error:

 the amount of imprecision in the estimate of the
population parameter.
 the amount added and subtracted to the point estimate
to form the confidence interval.

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 Determining Sample Size
DCOVA
Determining
Sample Size

For the
Mean Sampling error
(margin of error)
σ σ
X  Zα / 2 e  Zα / 2
n n

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 Determining Sample Size (continued)
DCOVA

Determining
Sample Size

For the
Mean

2 2
σ Z 
e  Zα / 2 Now solve
n  /2
for n to get 2
n e
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 Determining Sample Size (continued)
DCOVA

 To determine the required sample size for the

mean, you must know:

 The desired level of confidence (1 - ), which

determines the critical value, Zα/2.
 The acceptable sampling error, e.
 The standard deviation, σ.

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Required Sample Size Example
DCOVA
If  = 45, what sample size is needed to
estimate the mean within ± 5 with 90%
confidence?

Z 2 σ 2 (1.645) 2 (45)2
n 2
 2
 219.19
e 5

So the required sample size is n = 220

(Always round up)

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Example Excel & Minitab For Calculating
Sample Size For The Mean
DCOVA

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If σ is unknown
DCOVA

 If unknown, σ can be estimated when

using the required sample size formula.
 Use a value for σ that is expected to be at
least as large as the true σ.
 Select a pilot sample and estimate σ with
the sample standard deviation, S.

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 Determining Sample Size
(continued)

Determining DCOVA
Sample Size

For the
Proportion

π (1  π ) Now solve Z2 /2 π (1  π )

eZ for n to get n
n e 2

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 Determining Sample Size
(continued)

 To determine the required sample size for the DCOVA

proportion, you must know:

 The desired level of confidence (1 - ), which determines the

critical value, Zα./2.
 The acceptable sampling error, e.
 The true proportion of events of interest, π.
 π can be estimated with a pilot sample if necessary (or
conservatively use 0.5 as an estimate of π.)

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 Required Sample Size Example
DCOVA

How large a sample would be necessary to

estimate the true proportion of sales invoices
containing errors in a large population within
±7%, with 95% confidence?
(Assume a pilot sample yields p = 0.15.)

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 Required Sample Size Example
(continued)

Solution: DCOVA
For 95% confidence, use Zα/2 = 1.96
e = 0.07
p = 0.15, so use this to estimate π.

2 2
Z π (1  π) (1.96) (0.15)(1  0.15)
n /2
2
 2
 99.96
e (0.03)

So use n = 100

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Example Excel & Minitab Output For
Calculating Sample Size For A Proportion
DCOVA
Excel Uses A Normal Minitab Uses The Binomial
Approximation To Find n Distribution To Find n

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 Ethical Issues

 A confidence interval estimate (reflecting

sampling error) should always be included
when reporting a point estimate.
 The level of confidence should always be
reported.
 The sample size should be reported.
 An interpretation of the confidence interval
estimate should also be provided.

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 Chapter Summary

In this chapter we discussed:

 The construction and interpretation of confidence

interval estimates for the mean and the proportion.

 The determination of the sample size necessary to

develop a confidence interval for the mean and the
proportion.

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 58