LEARNING OBJECTIVES

The main objective of Chapter 9 is to help you to learn

how to test hypotheses on single populations, thereby
enabling you to:
1. Develop both one- and two-tailed null and
alternative hypotheses that can be tested in a
business setting by examining the rejection and
non-rejection regions in light of Type I and Type II
errors.
2. Reach a statistical conclusion in hypothesis testing
problems about a population mean with a known
population standard deviation using the z statistic.
3. Reach a statistical conclusion in hypothesis testing
problems about a population mean with an unknown
population standard deviation using the t statistic.
4. Reach a statistical conclusion in hypothesis testing
problems about a population proportion using the z
statistic.
5. Reach a statistical conclusion in hypothesis testing
problems about a population variance using the chi-
square statistic.
6. Solve for possible Type II errors when failing to reject
the null hypothesis
In the field of business, decision makers are continually
attempting to find answers to questions such as the
following:
■ Which management approach best motivates employees
in the retail industry?
■ How can the company’s retirement investment financial
portfolio be diversified for optimum performance?
■ Which indicator best predicts the general state of the
economy in the next six months?
■ What is the most effective means of advertising in a
business-to-business setting?
Business researchers are often called upon to provide insights
and information to decision makers to assist them in
answering such questions.
In searching for answers to questions and in attempting to
find explanations for business phenomena, business
researchers often develop “hypotheses” that can be studied
and explored.
Hypotheses are tentative explanations of a principle
operating in nature. In this text, we will explore various types
of hypotheses, how to test them, and how to interpret the
results of such tests so that useful information can be brought
to bear on the business decision-making process.
Research Hypotheses
A research hypothesis is a statement of what the
researcher believes will be the outcome of an
experiment or a study.
Before studies are undertaken, business researchers
often have some idea or theory based on experience or
previous work as to how the study will turn out.

Some examples of research hypotheses in business

might include:
■ Older workers are more loyal to a company.
■ The implementation of a Six Sigma quality approach in
manufacturing will result in greater productivity.
■ Airline company stock prices are positively correlated
with the volume of OPEC oil production.
Testing of Hypotheses is one of the most important aspects
of the theory of decision-making. In statistical Hypothesis,
decisions made by a decision maker depends primarily on
the strength of the evidence thrown up by a random sample
drawn from a population.
We can elaborate this by an example where the
operations manager of a cola company has to decide
whether the bottling operation is under statistical control
or it has gone out of control (and needs some corrective
action). Imagine that the company sells cola in bottles
labeled 1-liter, filled by an automatic bottling machine.
The implied claim that on the average each bottle
contains 1,000 cm3 of cola may or may not be true.
*If the claim is true, the process is said to be under statistical control.
It is in the interest of the company to continue the bottling process.

* If the claim is not true i.e. the average is either more than or less
than 1,000 cm3, the process is said to be gone out of control. It is in
the interest of the company to halt the bottling process and set right
the error
Therefore, to decide about the status of the bottling operation,
the operations manager needs a tool, which allows him to test
such a claim.
Testing of Hypotheses provides such a tool to the decision maker.
If the operations manager were to use this tool, he would collect a
sample of filled bottles from the on-going bottling process. The
sample of bottles will be evaluated and based on the strength of
the evidence produced by the sample; the operations manager
will accept or reject the implied claim and accordingly make the
decision. The implied claim (μ = 1,000 cm3) is a hypothesis that
needs to be tested and the statistical procedure, which allows us
to perform such a test, is called Hypothesis Testing or Testing of
Hypotheses
 Our hypothesis for the example of bottling process could
be:
“The average amount of cola in the bottles is equal to
1,000 cm3”

This statement is tentative as it implies some

assumption, which may or may not be found valid on
verification. Hypothesis testing is the process of
determining whether or not a given hypothesis is true.
The hypothesis is tested on the basis of the outcome of a
random sample.
THE NULL AND THE ALTERNATIVE HYPOTHESIS
As stated earlier, a hypothesis is a statement about a
population parameter or about a population distribution.
In any testing of hypotheses problem, we are faced with a
pair of hypotheses such that one and only one of them is
always true. One of this pair is called the null hypothesis
and the other one the alternative hypothesis.
A null hypothesis is an assertion about the value of a
population parameter.
It is an assertion that we hold as true unless we have
sufficient statistical evidence to conclude otherwise.

For example, a null hypothesis might assert that the population

mean is equal to 1,000. Unless we obtain sufficient evidence that
it is not 1,000, we will accept it as 1,000.
We write the null hypothesis compactly as:
H0: μ =1,000
Where the symbol H0 denotes the null hypothesis.
The alternative hypothesis is the negation of the null
hypothesis.
For the null hypothesis H0: μ =1,000,
the alternative hypothesis is μ ≠ 1000. We will write it as
Ha: μ ≠ 1,000

We use the symbol Ha (or H1) to denote the

alternative hypothesis.
H0: μ = 1,000 cm3
H1: μ ≠ 1,000 cm3
EIGHT STEPS OF HYPOTHESIS
■ Step 1. Establish a null and alternative hypothesis.
■ Step 2. Determine the appropriate statistical test.
■ Step 3. Set the value of alpha, the Type I error rate.
■ Step 4. Establish the decision rule.
■ Step 5. Gather sample data.
■ Step 6. Analyze the data.
■ Step 7. Reach a statistical conclusion.
■ Step 8. Make a business decision.
Rejection and Nonrejection Regions

Using the critical values established at step 4 of the

hypothesis testing process, the possible statistical outcomes
of a study can be divided into two groups:

1. Those that cause the rejection of the null hypothesis

2. Those that do not cause the rejection of the null

hypothesis.
A Type I error is committed by rejecting a true null hypothesis. With
a Type I error, the null hypothesis is true, but the business researcher
decides that it is not.
As an example, suppose the flour-packaging process actually is “in
control” and is averaging 40 ounces of flour per package. Suppose
also that a business researcher randomly selects 100 packages,
weighs the contents of each, and computes a sample mean. It is
possible, by chance, to randomly select 100 of the more extreme
packages (mostly heavy weighted or mostly light weighted) resulting
in a mean that falls in the rejection region. The decision is to reject
the null hypothesis even though the population mean is actually 40
ounces. In this case, the business researcher has committed a Type I
error.
A Type II error is committed when a business researcher
fails to reject a false null hypothesis. In this case, the null
hypothesis is false, but a decision is made to not reject it.
Suppose in the case of the flour problem that the
packaging process is actually producing a population
mean of 41 ounces even though the null hypothesis is 40
ounces. A sample of 100 packages yields a sample mean
of 40.2 ounces, which falls in the nonrejection region.
The business decision maker decides not to reject the
null hypothesis. A Type II error has been committed. The
packaging procedure is out of control and the hypothesis
testing process does not identify it.
EXAMPLE
A survey of CPAs across the United States found that the
average net income for sole proprietor CPAs is $74,914.*
Because this survey is now more than ten years old, an
accounting researcher wants to test this figure by taking a
random sample of 112 sole proprietor accountants in the
United States to determine whether the net income figure
changed. The sample mean is $78,695. The researcher
could use the eight steps of hypothesis testing to do so.
Assume the population standard deviation of net incomes
for sole proprietor CPAs is $14,530.
HYPOTHESIZE:
At step 1, the hypotheses must be established. Because the
researcher is testing to determine whether the figure has
changed, the alternative hypothesis is that the mean net
income
EXAMPLE:
The U.S. Farmers’ Production Company builds large
harvesters. For a harvester to be properly balanced when
operating, a 25-pound plate is installed on its side. The
machine that produces these plates is set to yield plates
that average 25 pounds. The distribution of plates
produced from the machine is normal. However, the shop
supervisor is worried that the machine is out of adjustment
and is producing plates that do not average 25 pounds.
To test this concern, he randomly selects 20 of the plates
produced the day before and weighs them. Table 9.1 shows
the weights obtained, along with the computed sample
meanand sample standard deviation.
n = 20,
degrees of freedom =19 .
 = 0.05,  /2= 0.025
EXAMPLE
If  = 0.10,  /2= 0.05
At times a researcher needs to test hypotheses about a
population variance.
Suppose a company produces industrial wire that is specified to
be a particular thickness. Because of the production process, the
thickness the wire will vary slightly from one end to the other
and from lot to lot and batch to batch. Even if the average
thickness of the wire as measured from lot to lot is on
specification, the variance of the measurements might be too
great to be acceptable. In other words, on the average the wire
is the correct thickness, but some portions of the wire might be
too thin and others unacceptably thick.
By conducting hypothesis tests for the variance of the thickness
measurements, the quality control people can monitor for
variations in the process that are too great
The procedure for testing hypotheses about a population
variance is similar to the techniques presented in
Chapter 8 for estimating a population variance from the
sample variance. Formula 9.5 used to conduct these
tests assumes a normally distributed population.
DEMONSTRATION
PROBLEM 9.4

A small business has 37 employees. Because of the

uncertain demand for its product, the company usually pays
overtime on any given week. The company assumed
that about 50 total hours of overtime per week is required
and that the variance on this figure is about 25. Company
officials want to know whether the variance of overtime
hours has changed. Given here is a sample of 16 weeks of
overtime data (in hours per week). Assume hours of
overtime are normally distributed. Use these data
to test the null hypothesis that the variance of overtime
data is 25. Let =0.1
9.5 TESTING HYPOTHESES ABOUT A POPULATION
VARIANCE