Introduction to Prediction

Introduction
Statistical inference is the process by which we acquire information about populations from samples. There are two types of inference:
Estimation Hypotheses testing

Concepts of Estimation
The objective of estimation is to determine the value of a population parameter on the basis of a sample statistic. There are two types of estimators: Point Estimator Interval estimator

Point Estimator
A point estimator draws inference about a population by estimating the value of an unknown parameter using a single value or point.

Point Estimator
A point estimator draws inference about a population by estimating the value of an unknown parameter using a single value or point.
Population distribution Parameter

?
Sampling distribution Point estimator

Interval Estimator
An interval estimator draws inferences about a population by estimating the value of an unknown parameter using an interval.
Population distribution Sample distribution Parameter

Interval estimator

Estimators Characteristics
Selecting the right sample statistic to estimate a parameter value depends on the characteristics of the statistic.
Estimators desirable characteristics:
Unbiasedness: An unbiased estimator is one whose expected value is equal to the parameter it estimates. Consistency: An unbiased estimator is said to be consistent if the difference between the estimator and the parameter grows smaller as the sample size increases. Relative efficiency: For two unbiased estimators, the one with a smaller variance is said to be relatively efficient.

Estimating the Population Mean when the Population Variance is Known

How is an interval estimator produced from a sampling distribution?
A sample of size n is drawn from the population, and its mean x is calculated. By the central limit theorem x is normally distributed (or approximately normally distributed.), thus

Estimating the Population Mean when the Population Variance is Known

Z=

x n

We have established before that P( z 2 x + z 2 ) = 1 n n

The Confidence Interval for ( is known)

This leads to the following equivalent statement

P( x z 2

x + z 2 ) = 1 n n

The confidence interval

Interpreting the Confidence Interval for

1 of of all all the the values values of of x obtained obtained in in repeated repeated 1 sampling from from a a given given distribution, distribution, construct construct an an interval interval sampling
x z 2 n , x + z 2 n

that includes includes (covers) (covers) the the expected expected value value of of the the that population. population.

Graphical Demonstration of the Confidence Interval for

Confidence level 1-

x z 2
Lower confidence limit

x + z 2

2z 2

Upper confidence limit

The Confidence Interval for ( is known)

Four commonly used confidence levels
Confidence Confidence level level 0.90 0.90 0.95 0.95 0.98 0.98 0.99 0.99

0.10 0.10 0.05 0.05 0.02 0.02 0.01 0.01

/22 / 0.05 0.05 0.025 0.025 0.01 0.01 0.005 0.005

1.645 1.645 1.96 1.96 2.33 2.33 2.575 2.575

z/2

The Confidence Interval for ( is known)

Example: Estimate the mean value of the distribution resulting from the throw of a fair die. It is known that = 1.71. Use a 90% confidence level, and 100 repeated throws of the die Solution: The confidence interval is 1.71 = x .28 x z 2 = x 1.645 100 n
The mean values obtained in repeated draws of samples of size 100 result in interval estimators of the form [sample mean - .28, Sample mean + .28], 90% of which cover the real mean of the distribution.

The Confidence Interval for ( is known)

Recalculate the confidence interval for 95% confidence level. Solution: x z
2

1 . 71 = x 1 . 96 = x . 34 n 100

.95 .90
x . 28 x . 34 x + . 28

x + . 34

The Confidence Interval for ( is known)

The width width of of the the 90% 90% confidence confidence interval interval = = 2(.28) 2(.28) = = .56 .56 The The width width of of the the 95% 95% confidence confidence interval interval = = 2(.34) 2(.34) = = .68 .68 The Because the the 95% 95% confidence confidence interval interval is is wider, wider, it it is is Because more likely likely to to include include the the value value of of . . more

The Confidence Interval for ( is known)

Example
Doll Computer Company delivers computers directly to its customers who order via the Internet. To reduce inventory costs in its warehouses Doll employs an inventory model, that requires the estimate of the mean demand during lead time. It is found that lead time demand is normally distributed with a standard deviation of 75 computers per lead time. Estimate the lead time demand with 95% confidence.

The Confidence Interval for ( is known)

Example 10.1 Solution The parameter to be estimated is , the mean demand during lead time. We need to compute the interval estimation for . From the data provided in file Xm10-01, the sample mean is x = 370 . 16 .
x z 2 n = 370 . 16 z .025 75 25 75 25

Since 1 - =.95, = .05. Thus /2 = .025. Z.025 = 1.96

= 370 . 16 1 . 96

= 370 . 16 29 . 40 = [340 . 76 , 399 . 56 ]

The Confidence Interval for ( is known)

Using Excel
Tools > Data Analysis Plus > Z Estimate: Mean

Information and the Width of the Interval

Wide interval estimator provides little information. Where is ?
?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ?

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Information and the Width of the Interval

Wide interval estimator provides little information. Where is ?

Ahaaa! Here is a much narrower interval. If the confidence level remains unchanged, the narrower interval provides more meaningful information.

The Width of the Confidence Interval

The width of the confidence interval is affected by

the population standard deviation () the confidence level (1-) the sample size (n).

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The Affects of on the interval width

/2 = .05 90% Confidence level

/2 = .05

n n 1. 5 1 . 5 2z .05 = 2(1.645) n n

2z.05

= 2(1.645 )

Suppose the standard deviation has increased by 50%.

Tomaintain maintaina acertain certainlevel levelof ofconfidence, confidence,a alarger larger To standarddeviation deviationrequires requiresa alarger largerconfidence confidenceinterval. interval. standard

The Affects of Changing the Confidence Level

/2 = 5% /2 = 2.5% Confidence level 90% 95%

n n

/2 = 5% /2 = 2.5%

2z.05

= 2(1.645)

2z.025

= 2(1.96)

Let us increase the confidence level from 90% to 95%.

Largerconfidence confidencelevel levelproduces producesa awider widerconfidence confidenceinterval interval Larger

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The Affects of Changing the Sample Size

90% Confidence level

2z.05

= 2(1.645)

Increasingthe thesample samplesize sizedecreases decreasesthe thewidth widthof ofthe the Increasing confidenceinterval intervalwhile whilethe theconfidence confidencelevel levelcan canremain remain confidence unchanged. unchanged.

Selecting the Sample size

We can control the width of the confidence interval by changing the sample size. Thus, we determine the interval width first, and derive the required sample size. The phrase estimate the mean to within W units, translates to an interval estimate of the form

xw

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Selecting the Sample size

The required sample size to estimate the mean is
z 2 n= w
2

Selecting the Sample size

Example
To estimate the amount of lumber that can be harvested in a tract of land, the mean diameter of trees in the tract must be estimated to within one inch with 99% confidence. What sample size should be taken? Assume that diameters are normally distributed with = 6 inches.

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Selecting the Sample size

Solution
The estimate accuracy is +/-1 inch. That is w = 1. The confidence level 99% leads to = .01, 2 z 2 2.575(6) 2 thus z/2 = z.005 2.575. n == = 239 = w 1 We compute
If the the standard standard deviation deviation is is really really 6 6 inches, inches, If the interval interval resulting resulting from from the the random random sampling sampling the will be be of of the the form form x 1 If the the standard standard deviation deviation will .. If is greater greater than than 6 6 inches inches the the actual actual interval interval will will is be wider wider than than +/-1. +/-1. be

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