Applied Dr.

Mahmoud Abd El-

Confidence Intervals
Statistics Raouf

1. Introduction
The need to use the sample statistic to draw conclusions about the population characteristic is one
of the fundamental applications of statistical inference in business and economics.

The sampling process is used to draw statistical inference about the characteristics of a population
or process of interest. On many occasions we do not have enough information to calculate an exact
value of population parameters ( such as μ , σ ) and therefore make the best estimate of this value from
the corresponding sample statistics (( such as x∧s).

A single sample statistic ( such as x∧s) is calculated from the sample to provide a best estimate of
the true value of the corresponding population parameter ( such as μ∧σ ). Such a single relevant
statistic is termed as point estimator, and the value of the statistic is termed as point estimate.

a point estimate does not provide information about ‘how close is the estimate’ to the population
parameter unless accompanied by a statement of possible sampling errors involved based on the
sampling distribution of the statistic. It is therefore important to know the precision of an estimate
before relying on it to make a decision. Thus, decision makers prefer to use an interval estimate that
is likely to contain the population parameter value. However, it is also important to state ‘how

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 Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

confident’ he is that the interval estimate actually contains the parameter value. Hence an interval
estimate of a population parameter is therefore a confidence interval with a statement of confidence
that the interval contains the parameter value.
2. Interval estimation of population mean (σ known)
The confidence interval estimate of a population mean is obtained by applying the formula:
X ± Error

Where
Z c∗σ
• Error=E=
√n
• Z c =¿critical value of standard normal variable that represents confidence level
σ
• =¿ The standard error of the mean is the standard deviation of X . It indicates the extent to which
√n
the observed value of sample mean can be away from the true value, due to sampling errors.
• n is the sample size
Suppose the population mean μ is unknown and the population standard deviation σ is known. Then
for a large sample size (n ≥ 30), the interval estimation of population mean μ is given by

X± (√ ) (√ )
Zc ∗σ
n
∨X−
Z c∗σ
n (√ )
< μ< X +
Z c∗σ
n
where Z c is the z-value representing an area under the carve of the standard normal probability distribution,
as shown in the following Figure.

(1-α) is the level of confidence (probability of being correct) such as 0.90,0.95.

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 Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

In general, a 95 per cent confidence interval estimate implies that if all possible samples of the same
size were drawn, then 95 per cent of them would include the true population mean somewhere
within the interval around their sample mean and only 5 per cent of them would not. The

values for Z α2 for the most commonly-used as well as the other confidence levels can be seen from

standard normal probability table as shown in the following table

Confidence Level, (1−α )(%) α α Zα

2
90% 0.10 2
0.05 1.645
95% 0.05 0.025 1.960
99% 0.01 0.005 2.575

Example 1: The average monthly electricity consumption for a sample of 100 families is 1250 units.
Assuming the standard deviation of electric consumption of all families is 150 units, construct a 95
per cent confidence interval estimate of the actual mean electric consumption.
Solution: The information given is: X =1250 , σ=150 , n=100 and confidence level ( 1−α )=95 %. Using

the ‘Standard Normal Curve’ we find that Z α2 =±1.96 . Thus confidence limits are given by
150 150
1250−1.96 < μ< 1250+1.96
√ 100 √ 100
1220.60 ≤ μ ≤ 1279.40
Thus for 95 % level of confidence, the population mean μ is likely to fall between 1220.60 units and
1279.40 units.
Example 2: A random sample of 64 sales invoices was taken from a large population of sales
invoices. The average value was found to be Rs.2000 with a standard deviation of Rs.540. Find a 90
per cent confidence interval for the true mean value of all the sales.

Solution: The information given is: X =2000 , s=540 , n=64 ,∧α=10 per cent, Z α2 =±1.64 for 95 per cent

confidence level. Therefore

X± (√ )
Zc ∗σ
n
=2000 ± 1 .
( 64∗540
√ 64)=2000± 110 .70

1889.30 ≤ μ ≤ 2110.70

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 Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

Thus the mean of the sales invoices for the whole population is likely to fall between Rs.1889.30 and
Rs.2110.70
The procedure of the confidence interval estimation of population mean μ when population standard
deviation is unknown and sample size is large or small, is summarized in following table.
Sample size Large n ≥ 30 Large n ≥ 30 Small n<30 Small n<30
σ known estimated by s known estimated by s
Interval
Estimate of μ
X± (√ )
Zc ∗σ
n
X± (√ )
Zc ∗S
n
X± (√ )
Zc ∗σ
n
X± (√ )
t df ∗S
n

3. Interval Estimation for Population Proportion

You know that normal distribution as an approximation of the sampling distribution of sample
x
proportion p= is based on the large sample conditions: np> 5 and nq=n( 1− p)>5 , The
n
confidence interval estimate for a population proportion at ( 1−α ) confidence coefficient is given
by

( √
p ± Z c∗
p(1−P)
n )
Example 3: Suppose we want to estimate the proportion of families in a town, which have two or
more children. A random sample of 144 families shows that 48 families have two or more children.
Setup a 95 per cent confidence interval estimate of the population proportion of families having
two or more children.
Solution: The sample proportion is:
x 48 1
p= = =
n 144 3
1
Using the information n=144 , p= 3 , Z α =±1.96 at 95 per cent confidence coefficient, we have
2

( √ )
( )
1 1
1−
( √
p ± Z c∗
p ( 1−P ) 1
n )
= ± 1.96∗
3
3
144
3

0.256 ≤ p ≤ 0.410

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 Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

Hence the population proportion of families who have two or more children is likely to be between
25.6 to 41 per cent, that is.

4. Sample Size Determination

the sample size n, which is also related to the width of the confidence intervals Obviously, the

width or range of the confidence interval can be decreased by increasing the sample size n.

Thus for estimating the population mean μ with a condition that the error in its estimation should

not exceed a fixed value, say E, we require that the sample mean x should fall within the range, μ ± E

with a specified probability. Thus the margin of error acceptable can be written as:
Z c∗σ
E=
√n
Z c∗σ Z c 2∗σ 2
√ n= →n=
E E2

Example 4: Suppose the sample standard deviation of P/E ratios for stocks listed on the Mumbai

Stock Exchange (BSE) is s = 7.8. Assume that we are interested in estimating the population mean

of P/E ratio for all stocks listed on BSE with 95 per cent confidence. How many stocks should be

included in the sample if we desire a margin of error of 2?

Solution: The information given is: E=2 , s=7.8 , Z α2 =1.96at 95 per cent level of confidence. Using

the formula for n and substituting the given values, we have

2 2
Z c ∗σ 2
1 .96 ∗7 . 8
2
n= 2
= 2
≅59
E 2
Thus a sample size n = 59 should be chosen to estimate the population mean of P/E ratio for all
stocks on the BSE.
Self-Assessment Questions
1) A personnel manager has found that historically the scores on aptitude tests given to applicants
for entry level positions follow a normal distribution with a standard deviation of 32.4 points.
A random sample of nine test scores from the current group of applicants had a mean score

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 Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

of 187.9 points. Find an 90% confidence interval for the population mean score of the
current group of applicants.

2) It is known that the standard deviation in the volumes of 20-ounce (591- milliliter) bottles of
natural spring water bottled by a particular company is 5 milliliters. One hundred bottles are
randomly sampled and measured.
a) Calculate the standard error of the mean.
b) Find the margin of error of a 90% confidence interval estimate for the population mean
volume.
c) Calculate the width for a 99% confidence interval for the population mean volume.

3) A business school placement director wants to estimate the mean annual salaries 5 years after
students graduate. A random sample of 25 such graduates found a sample mean of $42,740
and a sample standard deviation of $4,780. Find a 90% confidence interval for the population
mean, assuming that the population distribution is normal.

4) A process produces bags of refined sugar. The weights of the contents of these bags are
normally distributed with standard deviation 1.2 ounces. The contents of a random sample of 25
bags had a mean weight of 19.8 ounces. Find the upper and lower confidence limits of a
99% confidence interval for the true mean weight for all bags of sugar produced by the process.

5) A college admissions officer for an MBA program has determined that historically applicants
have under graduate grade point averages that are normally distributed with standard
deviation 0.45. From a random sample of 25 applications from the current year, the sample
mean grade point average is 2.90. Find a 95% confidence interval for the population mean.

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Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

6) A security feature on some web pages is graphic representations of words that are readable by
human beings but not machines. When a certain design format was tested on 450 subjects, by
having them attempt to read ten disguised words, 448 subjects could read all the words.
a) Give a point estimate of the proportion p of all people who could read words disguised in this
way.
b) Show that the sample is not sufficiently large to construct a confidence interval for the
proportion of all people who could read words disguised in this way.
7) In a random sample of 250 employed people, 61 said that they bring work home with them at
least occasionally.
a) Give a point estimate of the proportion of all employed people who bring work home with
them at least occasionally.
b) Construct a 99% confidence interval for that proportion.

8) In a random sample of 12,447 hip replacement or revision surgery procedures nationwide, 162
patients developed a surgical site infection.
a) Give a point estimate of the proportion of all patients undergoing a hip surgery procedure who
develop a surgical site infection.
b) Verify that the sample is sufficiently large to use it to construct a confidence interval for that
proportion.
c) Construct a 95% confidence interval for the proportion of all patients undergoing a hip
surgery procedure who develop a surgical site infection.
9) In order to estimate the proportion of entering students who graduate within six years, the
administration at a state university examined the records of 600 randomly selected students who
entered the university six years ago, and found that 312 had graduated.
a) Give a point estimate of the six-year graduation rate, the proportion of entering students who
graduate within six years.
b) Assuming that the sample is sufficiently large, construct a 99% confidence interval for the
six-year graduation rate.

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 Applied Dr. Mahmoud Abd El-
Confidence Intervals
Statistics Raouf

10)In a research study in cattle breeding, 159 of 273 cows in several herds that were in estrus were
detected by means of an intensive once a day, one-hour observation of the herds in early
morning.
a) Give a point estimate of the proportion of all cattle in estrus who are detected by this method.
b) Assuming that the sample is sufficiently large, construct a 90% confidence interval for the
proportion of all cattle in estrus who are detected by this method.