Macquarie University

Department of Economics
ECON6034: Econometrics & Business Statistics
Semester 2, 2020

Exercises Week 7: Solution

Question 1: Confidence Intervals

State, with reasons, whether each of the following statements is true or false.

(a) For a given probability content and sample size, the larger the population standard
deviation, σ, the wider the confidence interval for the population mean.

True. For a given sample size, the larger the population variance (or equivalently the
larger the population standard deviation) the larger the standard error of the sample
mean. Thus, the CI of the same probability content will become wider, i.e. we need a
wider interval to have the same confidence that we have captured the true value of the
mean in our interval.

(b) For a given probability content and sample size, the larger the population mean, µ,
the wider the confidence interval for the population mean.

False. With everything else being equal, the population mean does not affect the width
of a confidence interval. Its change only shifts the position of the sampling distribution
of the sample mean without changing its variance.

(c) For a given probability content and the population standard deviation, the larger the
sample size n, the narrower the confidence interval for the population mean.

True. As the sample size increases, the standard error of X-bar decreases. The narrower
confidence interval shows that we have a more precise estimate of the interval
containing the true mean.

(d) For a given population standard deviation σ and sample size n, a 95% confidence
interval is wider than a 90% confidence interval.

True. Having a higher probability content (level of confidence), with everything else
unchanged, implies that on average the CI has more chance to contain the population
mean within it. This in turn implies that the CI should be wider. In other words, if we
want to be more confident that our interval captures the true mean, we must make it
wider.
Question 2:

Random variable X has the following distribution: 𝑋~𝑁(𝜇, 𝜎 ! ). From prior studies using
large samples, the population variance has been estimated to be 𝜎 ! = 10.0, which we
will treat as being the known population variance. A sample of 80 observations have a
sample mean of 137.0. Construct a 95% confidence interval for the true mean (2 dec.).
Hint: The 95% CI is [136.31, 137.69]. Use the lecture notes to derive these lower and
upper limits yourself.

Solution:
(# %&) $
Since the variance is known, 𝑋.~ N(µ, 𝜎 ! /𝑛) and Z = ~ N(0, 1).
() !+*

𝑃(−1.96 < 𝑍 < +1.96) = 95%

(𝑋. − 𝜇)
𝑃 ⎛−1.96 < < +1.96⎞ = 95%
>𝜎 !?𝑛
⎝ ⎠
𝜎 𝜎
𝑃 B𝑋. − 1.96 < 𝜇 < 𝑋. + 1.96 D = 95%
√𝑛 √𝑛
) √-.
Lower limit = 𝑋. − 1.96 = 137 − 1.96 = 136.31
√* √/.

) √-.
Upper limit = 𝑋. + 1.96 = 137 + 1.96 = 137.69
√* √/.

95% CI is [136.31, 137.69].

Question 3:

Let random variable X represent the height of a randomly selected student from the 10th
grade. X is understood to be normally distributed, but the population variance is not
known. A sample of 18 students has an average height of 170cm and a sample standard
deviation of 11cm. Construct a 90% confidence interval for the true mean height,
expressed in metres (3 dec.).
Hint: You should find that the 90% CI is [1.655, 1.745].
Solution:
Since the X is known to be normally distributed, 𝑋. will be normally distributed,
i.e. 𝑋.~ N(µ, 𝜎 ! /𝑛) . Since the true variance is not known, we construct the
standardised t-statistic using the sample variance:
(#$ %&)
𝑡 = ~𝑡*%- . The t statistic has a t-distribution with (n-1) degrees of freedom. For
(0 !+*

a 90% CI in this example we look up the 5% cutoff and find 𝑡-1,...4 = 1.740.

𝑠 𝑠
𝑃 B𝑋. − 1.74 < 𝜇 < 𝑋. + 1.74 D = 90%
√𝑛 √𝑛
0 ..--
Lower limit = 𝑋. − 1.74 = 1.70 − 1.74 = 1.655
√* √-/
0 ..--
Upper limit = 𝑋. + 1.74 = 1.70 + 1.74 = 1.745
√* √-/

90% CI is [1.655, 1.745].

Question 4:

A sample of 100 households in a village reveals an average number of people per

household of 6.0, with a sample variance of 0.09. The distribution of the number of
persons per household is known NOT to be normal. Construct a 90% confidence interval
for the true mean (3 dec.).

Solution:
Let X be a random variable equal to the number of persons in a randomly selected house.
X does not have a normal distribution, but the sample size is large, so according to the
Central Limit Theorem, 𝑋. will be normally distributed.
Since the true variance is not known, we construct the standardised t-statistic using the
sample variance:
(#$ %&)
𝑡 = ~ t(n-1). The t statistic has a t-distribution with (n-1) degrees of freedom. For
(0 !+*

a 90% CI in this example we look up the 5% cutoff and find 𝑡55,...4 = 1.660.
0 ..6
Lower limit = 𝑋. − 1.66 = 6.0 − 1.66 = 5.950
√* √-..
0 ..6
Upper limit = 𝑋. + 1.66 = 6.0 + 1.66 = 6.050
√* √-..

90% CI is [5.950, 6.050].

Question 5:

Let X be a random variable equal to the annual salary of a part-time cafe worker in a
particular cafe chain. The distribution of salaries of part-time workers in this chain is
unknown. A sample of 15 part-time workers in this cafe chain have an average salary of
$18000, with a sample standard deviation of $2000. Construct a 99% confidence
interval for the true mean salary, to the nearest whole dollar.

Solution:
This distribution of X is not known, and the sample size is not large enough to conclude
that the sample mean will be normally distributed, under the CLT. They only way to
proceed is to assume that X is normally distributed and derive results which are
conditional on that assumption.
We assume X~ N(µ, 𝜎 ! /𝑛), so 𝑋.~ N(µ, 𝜎 ! /𝑛) by the CLT. Since the true variance is
not known, we construct the standardised t-statistic using the sample variance:
(#$ %&)
𝑡 = ~ t(n-1).
(0 !+*

For a 99% CI in this example we look up the 0.5% cutoff and find 𝑡-7,....4 = 2.977.
0 !...
Lower limit = 𝑋. − 2.977 = 18000 − 2.977 = 16463
√* √-4

0 !...
Upper limit = 𝑋. + 2.977 = 18000 + 2.977 = 19537
√* √-4

99% CI is [16463, 19537].