Business Statistics

Workshop 9 solutions

Question 9.1

It is generally agreed that convertibles offer freedom and excitement. They create a sensation
of being a part of your surroundings that no sunroof can offer. On the other hand, sedans are
stylish yet practical for small families. The back doors are also handy for rear seat access, and
the boot is a secure way to store luggage or cargo.

A car importer believes that there is a relationship between buyers' gender and their preference
of sedans or convertibles. Two importers gathered some information on the preference of male
and female buyers and this is shown in tables A and B below:

Gender
TABLE A
Male Female Total

Convertibles 30 8
Preference
Sedans 56 38

Total

Gender
TABLE B
Male Female Total

Convertibles 15 4
Preference
Sedans 28 19

Total

(a) In a test for independence between the two variables, using either one of these two tables
of observed frequencies, what is the number of degrees of freedom of the χ2 distribution
under the null hypothesis?

There are two row categories and two column categories and so we have
(2-1)(2-1) = 1 degree of freedom

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Business Statistics

(b) Note that the sample size in Table A is twice that in Table B, and that exactly the same
proportion are in each category in each case. Conduct a test of independence for the
variables preference and gender at the 5% level of significance using Table A. Use the p-
value approach. Show all steps and workings for each step.

fo (fe) Gender

Preference Male Female Total

Convertibles 30 ( 38 × 86 = 24.76) 8(
38 × 46
= 13.24) 38
132 132

Sedans 94 × 86 94 × 46 94
56 ( = 61.24) 38 ( = 32.76)
132 132

Total 86 46 132

(This table is not required in the test)

Construct contingency table with observed and expected frequencies

𝒇𝟎 𝒇𝒆 (𝒇𝟎 − 𝒇𝒆 )𝟐
𝒇𝒆
38 × 86
30 = 24.76 1.11
132
38 × 46
8 = 13.24 2.07
132
94 × 86
56 = 61.24 0.45
132
94 × 46
38 = 32.76 0.84
132
TOTAL 4.47

Check appropriateness of using χ2 distribution

Since every cell in the contingency table has expected frequencies greater than 5, confirm χ2
distribution is appropriate.

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Step 1: Hypotheses

H0: The variables preference and gender are independent

H1: The variables preference and gender are dependent.

Step 2: Test Statistic

(𝑓0 − 𝑓𝑒 )2
χ2 = ∑
𝑓𝑒
𝑎𝑙𝑙 𝑐𝑒𝑙𝑙𝑠

𝛘𝟐𝒄𝒂𝒍𝒄 = 𝟒. 𝟒𝟕

Step 3: p-value

p-value = P(χ2 > 4.47)

Df = (r-1)(c-1) = (2-1)(2-1) = 1
Excel function: “=CHISQ.DIST.RT(4.47,1)
p-value = 0.0345

Step 4: Decision Rule

Reject H0 if p-value < α

Since 0.0345 < 0.05, we can reject H0.

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Business Statistics

Step 5: Conclusion

We can reject H0 at the 5% level of significance.

The sample does provide enough evidence against H0.
That is, the variables preference and gender are dependent.
Video Solution for Q9.1

Question 9.2

Conduct a test of independence for the variables preference and gender at the 5% level of
significance using Table B in question 9.1. Use the p-value approach. Show all steps and
workings for each step.
Construct contingency table with observed and expected frequencies

𝒇𝟎 𝒇𝒆 (𝒇𝟎 − 𝒇𝒆 )𝟐
𝒇𝒆
19 × 43
15 = 12.38 0.55
66
19 × 23
4 = 6.62 1.04
66
47 × 43
28 = 30.62 0.22
66
47 × 23
19 = 16.38 0.42
66
TOTAL 2.23

Check appropriateness of using χ2 distribution

Since every cell in the contingency table has expected frequencies greater than 5, confirm χ2

distribution is appropriate.

Step 1: Hypotheses

H0: The variables preference and gender are independent

H1: The variables preference and gender are dependent.

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Business Statistics

Step 2: Test Statistic

2
(𝑓0 − 𝑓𝑒 )2
χ = ∑
𝑓𝑒
𝑎𝑙𝑙 𝑐𝑒𝑙𝑙𝑠

𝛘𝟐𝒄𝒂𝒍𝒄 = 𝟐. 𝟐𝟑

Step 3: p-value

P (χ2 > 2.23)

Df = (r-1) (c-1) = (2-1) (2-1) = 1
Excel function: “=CHISQ.DIST.RT(2.23,1)”
p-value = 0.1354

Step 4: Decision Rule

Reject H0 if p-value < α

Since 0.1354 > 0.05, we cannot reject H0.

Step 5: Conclusion

We cannot reject H0 at the 5% level of significance.

The sample does not provide enough evidence against H0.
That is, the variables preference and gender are not dependent.
Video Solution for Q9.2

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Business Statistics

9.3

In question 9.1 and 9.2, you should have found that the two tests give different sample values
of χ2 , and different conclusions regarding the independence of the variables.

(a) Point out why the formula for the χ2 value allows it to be different in the two cases even
though all the observed and expected frequencies are proportional.

(f0 −fe )2
The formula for the test statistic χ2 = ∑all cells has a square of frequencies in the
fe

numerator and just a frequency in the denominator. So, if you double all the frequencies,
you will double χ2 .

(b) Explain why it is intuitively reasonable that the two tests should give different
conclusions.

If you have a very small sample, then rather big deviations from the expected frequencies

can occur without significance. It only takes a few extra in one category over another to

make a big difference in proportion. As the sample size increases, the same proportionate

difference will only occur if many data points are present above expectation, and the

probability of this is lower.

Video Solutions for Q9.3

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Business Statistics

Further practice:

Q9.4

Correctly predicting the direction of change in foreign currency exchange can be lucrative. 216
investors were asked to predict the direction of change over a certain period, and the actual
direction was later recorded. The results are given in the following table.

Predicted direction:

Actual Down Up TOTAL

Direction: Down 65 64

Up 39 48

TOTAL

(a) Test the hypothesis that a relationship exists between the predicted and actual rates of
exchange. Use a 10% level of significance and the p-value approach.

Construct contingency table with observed and expected frequencies.

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Business Statistics

Check appropriateness of using χ2 distribution

Since every cell in the contingency table has expected frequencies greater than 5, confirm χ2

distribution is appropriate.

Step 1: Hypotheses

H0: The variables preference and gender are independent

H1: The variables preference and gender are dependent.

Step 2: Test Statistic

2
(𝑓0 − 𝑓𝑒 )2
χ = ∑
𝑓𝑒
𝑎𝑙𝑙 𝑐𝑒𝑙𝑙𝑠

𝛘𝟐𝒄𝒂𝒍𝒄 = 𝟎. 𝟔𝟒𝟑

Step 3: p-value

P (χ2 > 0.643)

Df = (r-1) (c-1) = (2-1) (2-1) = 1
Excel function: “=CHISQ.DIST.RT(0.643,1)”
p-value = 0.4226

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Business Statistics

Step 4: Decision Rule

Reject H0 if p-value < α

Since 0.4226 > 0.05, we cannot reject H0.

Step 5: Conclusion

We cannot reject H0 at the 10% level of significance.

The sample does not provide enough evidence against H0.
That is, the variables predicted and actual directions are not dependent.

(b) Based on this data, would you say that the predictions of investors should be taken into
account in forecasting exchange rate changes?

No. Based on this data it has not been established even at the 10% level of significance
that there is a significant relationship between predictions by investors and what actually
happens.