Session - 10 - QM1a - Section C

QM1a - Session 10
July - Aug 2022
Maya Ganesh, Assistant Professor
Production & Quantitative Methods, IIM Ahmedabad
1/32
Recap
Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 1 / 32

Sample statistics

Sample statistics
A sample statistic is a characteristic of the sample

Sample statistics
A population parameter is a characteristic of the population

Sample statistics
We use different notations to distinguish between the two groups of

numbers

Sample statistics
We use different notations to distinguish between the two groups of

numbers

Sample

Sampling variation
Sample mean varies from one sample to another

Sampling variation
Sample mean can be (and most likely is) different from the popula-
tion mean

Sampling variation
tion mean
Sample mean is a random variable

Sampling variation
tion mean
Sample mean is a random variable

Sample mean if population is normally distributed
Suppose that the random variables X1 , X2 , X3 , ....Xn form a random

sample from the normal distribution with mean µ and variance ‡ 2 ,
and let X̄ denote their sample mean. Then:


‡2
X̄ has the normal distribution with mean µ and variance
n


‡2
X̄ has the normal distribution with mean µ and variance
n
! ‡2 "
X̄ ≥ N µ,
n

Central limit theorem
The distribution of the sample mean:
I will be normal when the distribution of data in the population

is normal
I will be approximately normal even if the distribution of data in
the population is not normal,under some conditions


is normal
Mean of sample mean (i.e. mean of X̄ ) = µ (the same as the

population mean of the raw data)


is normal
Mean of sample mean (i.e. mean of X̄ ) = µ (the same as the

population mean of the raw data)
‡
Standard deviation of sample mean (i.e SD of X̄ ) = Ô , where ‡
n
is the population standard deviation and n is the sample size

Central limit theorem - Be careful!

Central limit theorem - Key components
The central limit theorem is valid when,
I Randomization- Sampling is random. The data must be sam-
pled randomly such that every member in a population has the
same statistical possibility of being selected. of being selected
to be in the sample.

I Independence - Each data point in the sample is independent
of the other

of the other
I 10% condition - It’s often cited that a sample should be no
more than 10% of a population if sampling is done without
replacement.

of the other
replacement.
I Large Sample Condition - The sample size is large enough

of the other
replacement.
I Large Sample Condition - The sample size is large enough
I A sample size of 30 is usually considered large enough but there
are more precise conditions (depending on skewness, kurtosis
etc)
I Adequate sample size depends on the distribution of data –
primarily its symmetry and presence of outliers
I If data is quite symmetric and has few outliers, even smaller
samples are fine. Otherwise, we need larger samples
Central limit theorem - Example
Suppose salaries at a very large corporation have a mean of INR

62,000 and a standard deviation of INR 32,000.
If a single employee is randomly selected, what is the probability

their salary exceeds INR 66,000?



It is impossible to answer this question without knowing the distri-

bution of salaries!




bution of salaries!
If 100 employees are randomly selected, what is the probability their

average salary exceeds INR 66,000?




bution of salaries!
If 100 employees are randomly selected, what is the probability their

average salary exceeds INR 66,000?

Bernoulli random variables
I Takes 1 with probability p

I Takes 0 with probability 1 ≠ p
I Mean: p
I Variance: p (1 ≠ p)
What is sum of Bernoulli random variables?


I Mean: p
Binomial


I Mean: p
Binomial

Sample proportion is also normally distributed
I n is the number of trials and p is the possibility of getting 1

I X is the total number of times you get 1

I Clearly, X ≥ Bin(n, p)

X X1 + X2 + ...Xn
I Sample proportion, p̂ = =
n n

X X1 + X2 + ...Xn
n n
(Sample proportion is nothing but the sample mean of indicator

variables)

X X1 + X2 + ...Xn
n n

variables)
X
I E [p̂] = E [ ]=p
n

X X1 + X2 + ...Xn
n n

variables)
X
I E [p̂] = E [ ]=p
n
X p (1 ≠ p)
I Var (p̂) = Var ( )=
n n
Normal approximation of the binomial distribution
If X is binomially distributed with parameters n and p, then,

X has the same distribution as the sum of n independent Bernoulli

random variables, each with parameter p


And, from central limit theorem, we have the distribution of mean

of Bernoulli random variables normal distribution as n approaches
Œ.


And, from central limit theorem, we have the distribution of mean

of Bernoulli random variables normal distribution as n approaches
Œ.
p (1 ≠ p)
p̂ ≥ N(p, ) approximately
n
and, Number of occurences, X ≥ N(np, np(1 ≠ p))
Essentially, Bin(n, p) can be approximated by normal distribution for

large n.

Poisson or Normal?
But didn’t you in an earlier session say that Poisson approximates

Binomial??

Poisson or Normal?
I The Poisson approximation for Binomial is not so good if p is

close to 0.5. It is good if n is large and p is close to 0. How
close p should be and how large n should be, depends on how
much accurate we want. In general, if p Æ 0.1 and n Ø 50, the
approximation is quite good. (np < 5 or n(1 ≠ p) < 5)

Poisson or Normal?

I The Normal approximation for Binomial is ‘not so good’ if p is

not close to 0.5 (when n is not sufficiently large). It is good
even for moderately large n if p is close to 0.5. How close p
should be and how large n should be, depends on how much
accurate we want. In general, if 0.4 Æ p Æ 0.6 and n Ø 30, the
approximation is quite satisfatory. np > 5 or n(1 ≠ p) > 5)

Poisson or Normal?

I The Normal approximation for Binomial is ‘not so good’ if p is

not close to 0.5 (when n is not sufficiently large). It is good
even for moderately large n if p is close to 0.5. How close p
should be and how large n should be, depends on how much
accurate we want. In general, if 0.4 Æ p Æ 0.6 and n Ø 30, the
approximation is quite satisfatory. np > 5 or n(1 ≠ p) > 5)
Poisson approximation to Binomial
Normal approximation to Binomial

Poisson approximation - Example
A factory puts biscuits into boxes of 100. The probability that a

biscuit is broken is 0.03. Find the probability that a box contains 2
broken biscuits

Normal approximation - Example
Based on past experience, 7% of all luncheon vouchers are in error.

If a random sample of 400 vouchers is selected, what is the approx-
imate probability that fewer than 25 are in error?

Normal approximation - Continuity Correction factor
In order for a continuous distribution (like the normal) to be used

to approximate a discrete one (like the binomial), a continuity cor-
rection should be used.
I First, remember that a discrete random variable can only take
on only specified values, whereas a continuous random variable
used to approximate it can take on any values whatsoever within
an interval around those specified values

Normal approximation - Continuity Correction factor
In order for a continuous distribution (like the normal) to be used

to approximate a discrete one (like the binomial), a continuity cor-
rection should be used.
I First, remember that a discrete random variable can only take
on only specified values, whereas a continuous random variable
used to approximate it can take on any values whatsoever within
an interval around those specified values
I Second, remember that with a continuous distribution, the

probability of obtaining a particular value of a random variable
is zero. On the other hand, when the normal approximation is
used to approximate a discrete distribution, a continuity cor-
rection should be employed so that we can approximate the
probability of a specific value of the discrete distribution

Normal approximation - Continuity Correction factor table

Normal approximation - Example - cont.
Based on past experience, 7% of all luncheon vouchers are in error.

If a random sample of 400 vouchers is selected, what is the approx-
imate probability that fewer than 25 are in error?
Applying the continuity correction factor,

Example
We load on a plane 100 packages whose weights are independent
random variables that are uniformly distributed between 5 and 50
pounds. What is the probability that the total weight will exceed
3000 pounds?

Example
3000 pounds?
It is not easy to calculate the CDF of the total weight and the desired
probability, but an approximate answer can be quickly obtained using
the central limit theorem.

Example
3000 pounds?
We want to calculate P(S100 > 3000), where S100 is the sum of the
100 packages

Example
3000 pounds?
We want to calculate P(S100 > 3000), where S100 is the sum of the
100 packages

Example
The monthly sales of a vegetable vendor is on an average 5000 INR
with a standard deviation of 1000 INR. Assume that the distribution
of monthly sales is approximately normally distributed. The veg-
etable vendor decides to source directly from farmers to get fresh
produce from next year onwards. If there is a 7% sales increase due
to this, what will be the probability that monthly sales for January
next year will be greater than 6000 INR?

SO LONG! :)

Session - 10 - QM1a - Section C

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QM1a - Session 10

July - Aug 2022

Maya Ganesh, Assistant Professor

Production & Quantitative Methods, IIM Ahmedabad

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 1 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 2 / 32

A sample statistic is a characteristic of the sample

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 2 / 32

A sample statistic is a characteristic of the sample

A population parameter is a characteristic of the population

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 2 / 32

A sample statistic is a characteristic of the sample

A population parameter is a characteristic of the population

We use different notations to distinguish between the two groups of

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 2 / 32

A sample statistic is a characteristic of the sample

A population parameter is a characteristic of the population

We use different notations to distinguish between the two groups of

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 2 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 3 / 32

Sample mean varies from one sample to another

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 4 / 32

Sample mean varies from one sample to another

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 4 / 32

Sample mean varies from one sample to another

Sample mean is a random variable

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 4 / 32

Sample mean varies from one sample to another

Sample mean is a random variable

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 4 / 32

Suppose that the random variables X1 , X2 , X3 , ....Xn form a random

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 7 / 32

Suppose that the random variables X1 , X2 , X3 , ....Xn form a random

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 7 / 32

Suppose that the random variables X1 , X2 , X3 , ....Xn form a random

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 7 / 32

The distribution of the sample mean:

I will be normal when the distribution of data in the population

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 8 / 32

The distribution of the sample mean:

I will be normal when the distribution of data in the population

Mean of sample mean (i.e. mean of X̄ ) = µ (the same as the

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 8 / 32

The distribution of the sample mean:

I will be normal when the distribution of data in the population

Mean of sample mean (i.e. mean of X̄ ) = µ (the same as the

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 8 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 9 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 10 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 10 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 10 / 32

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 10 / 32

Suppose salaries at a very large corporation have a mean of INR

If a single employee is randomly selected, what is the probability

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 11 / 32

Suppose salaries at a very large corporation have a mean of INR

If a single employee is randomly selected, what is the probability

It is impossible to answer this question without knowing the distri-

Maya Ganesh, Assistant Professor QM1a - Session 10 July - Aug 2022 11 / 32

Suppose salaries at a very large corporation have a mean of INR

If a single employee is randomly selected, what is the probability

It is impossible to answer this question without knowing the distri-