Finite Populations

If we take a sample without replacement from a finite population, we can adjust the
test statistic for  or  by multiplying the standard error in the denominator by the Finite
Population Correction Factor (FPCF):

N n
FPCF = (finite population correction factor)
N 1

The adjusted test statistics for a mean or proportion are:

Test for  (unknown )1 Test for 

x  0 p  0
tcalc = zcalc =
s N n  0( 1   0 ) N  n
n N 1 n N 1

The FPCF can be ignored if the population is infinite (e.g., an ongoing process such as an
assembly line or customer arrivals) or if the sample comprises less than 5% of the
population, i.e., if n/N < 0.05. The FPCF is a fraction between 0 (if n = N) and 1 (if n =
1). When n/N is small, the FPCF is near 1 so it has little effect on the calculation, but as
nN the FPCF approaches zero, and it begins to have a material effect. The advantage of
using the FPCF is that it increases the power of the test. By reducing the standard error in
the denominator, it becomes more likely that a false null hypothesis will be rejected, ceteris
paribus.

Testing a Mean: Bond Fund Expense Ratios

The expense ratio is defined as a stock or bond fund’s expenses expressed as a
percent of the fund’s assets. A random sample of 60 major bond funds from a list of 352
major bond funds showed a mean expense ratio of 0.83567 with a standard deviation of
0.35810. At  = .025, is the population mean greater than .75 (i.e., 3/4 of one percent)?
Because  is unknown, we use Student’s t with degrees of freedom equal to df = 60–1 =
59.

Step 1: Choose the hypotheses

For a right-tail test, the hypotheses are:

H0:   .75 (mean does not exceed .75)

H1:  > .75 (mean exceeds .75)

Step 2: Specify the decision rule

The hypotheses and decision rules are the same, regardless of whether the population
is finite or infinite (the FPCF only affects the test statistic). For a right-tail test at  =
.025, the critical value is z.025 = 1.960. Figure 9-23 illustrates the decision rule:

1
The test statistic for known  is omitted because  is rarely known. For known , change s to  and t to z.
 Reject H0 if zcalc > 1.960
Otherwise, do no reject H0

Figure 9-23: Right-Tailed z Test for  = .05

Step 3: Calculate the Test Statistic

Because the population is finite and we have sampled more than 5% (n/N = 60/352 =
.17 or 17%) we should use the Finite Population Correction Factor (FPCF). We also show
the calculation without the FPCF, to illustrate its effect. The numerator is the same in
both calculations. The FPCF only affects the denominator (i.e., the standard error of the
mean).

Using the FRPC

x  0 .83567  .75 .08567
tcalc =    2.032
s N  n .35810 352  60 .04217
n N 1 60 352  1

Without the FPCF

x   0 .83567  .75 .08567
tcalc =    1.853
s .35810 .04623
n 60

Step 4: Make the Decision

If we use the FPCF, we reject H0 because the test statistic (2.032) exceeds the critical
value z.025 = 1.960. However, if we omit the FPCF, we cannot reject H0 because the test
statistic (1.853) does not exceed the critical value z.025 = 1.960. This example illustrates
how the FPCF increases the power of the test (the ability of the test to detect a false H0).
In a borderline situation, the FPCF may have a material effect.
Testing a Proportion: ATM Withdrawals
In a random sample of 1,000 ATM withdrawals from a university credit union, 177
occurred on Friday. The sample was from 10,715 withdrawals during the month. At  =
0.05, can we conclude that more than 1/7 of all withdrawals occur on Friday (i.e., is
Friday greater than a typical day in the 7-day week)?

Step 1: Choose the Hypotheses

The hypotheses for a right-tail test are:

H0:   1/7 or H0:   .1429

H1:  > 1/7 or H1:  > .1429

Step 2: State the Decision Rule

To assume normality we require n > 10 and n(1–) > 10. Inserting  = 1/7 and n =
1000 we see that these conditions are easily met since (1000)(.1429) = 143 and (1000)(1-
.1429) = 857. For a normal distribution, the decision rule at the 5% level of significance
is:

Reject H0 if z > 1.645

Otherwise, do not reject H0

This decision rule is illustrated in Figure 9-24.

Figure 9-24 Left-Tail z Test Using  = 0.05

Step 3: Calculate the Test Statistic

Because p = x/n = 177/1000 = .177, the sample seems to favor H1. However, we
assume that H0 is true and see if the sample contradicts this assumption. The sample
exceeds 5 percent of the population (n/N = 1000/10715 = .093) so we would prefer the
FPCF formula.

Using the FPCF

p  0 .1770  .1429
zcalc =   3.24
 0( 1   0 ) N  n .1429( 1  .1429 ) 10715  1000
n N 1 1000 10715  1
Without the FPCF
p  0 .1770  .1429
zcalc =   3.08
 0( 1   0 ) .1429( 1  .1429 )
n 1000

Either with or without the FPCF, the test statistic is in the rejection region, so we easily
reject H0. The right-tail p-value (p = .0006) is obtained from Appendix C-2 or from Excel
using =1–NORM.S.DIST(3.24). The p-value is so small that it cannot be shown on a graph,
indicating that the sample result is not due to chance. Stated differently, if we were to
reject H0, we would expect Type I error only about 6 times in 10,000 decisions.

Section Exercises
9.90 Is the FPCF needed?
a. n = 20, N = 144 b. n = 50, N = 1,500 c. n = 200, N = 30,000

9.91 Calculate the test statistic and p-value for each sample.
a. H0:  = 200 versus H1:   200,  = .025, x = 203, s = 8, n = 16, N = 50
b. H0:   200 versus H1:  < 200,  = .05, x = 198, s = 5, n = 25, N = 100
c. H0:   200 versus H1:  > 200, = .05, x = 205, s = 8, n = 36. N = 200

9.92 Calculate the test statistic for each sample.

a. H0:   .60 versus H1:  > .60, = .05, x = 56, n = 80, N = 500
b. H0:  = .30 versus H1:   .30,  = .05, x = 18, n = 40, N = 200
c. H0:   .10 versus H1:  < .10,  = .01, x = 3, n = 100, N = 1000

9.93 An auditor reviewed 25 oral surgery insurance claims from a particular surgical office, determining
that the mean out-of-pocket patient billing above the reimbursed amount was $275.66 with a
standard deviation of $78.11. There were 512 claims filed by this particular surgical office during
that year. (a) At the 5% level of significance, does this sample prove a violation of the guideline that
the average patient should pay no more than $250 out-of-pocket? State your hypotheses and decision
rule. (b) Is this a close decision? (c) Do the test without the FPCF. Did it make a difference?

9.94 During the 2000-2001 season, there were 300 players listed on the NBA team rosters who played
more than 600 minutes. A random sample of 58 players showed that 21 of them averaged 10 points
or more per game. (a) At the 5% level of significance, does this demonstrate that more than 25
percent of the NBA players average 10 points or more per game? State your hypotheses and decision
rule, and show all work. (b) Repeat the calculation without the FPCF. (c) Did the FPCF make a
material difference?

9.95 There are 4,000 private buses known to police in Detroit. Police inspected a random sample of 617
buses belonging to private schools, youth organizations, and religious groups and “red-tagged” 443
as (meaning that the bus “shall not be driven in the transportation of any passenger” and doing so
“will be cause for arrest”). (a) At the .05 level of significance, does this sample refute the hypothesis
that a majority of the private buses are safe? Hint: Use the FPCF. (b) Why is the FPCF needed?

9.96 During the 2000-2001 season, there were 300 players listed on the NBA team rosters who played
more than 600 minutes. A random ample of 12 of these players was chosen from the first 11 teams in
alphabetical order (Atlanta Hawks, Boston Celtics, Charlotte Hornets, Chicago Bulls, Cleveland
Cavaliers, Dallas Mavericks, Denver Nuggets, Detroit Pistons, Golden State Warriors, Houston
Rockets, Indiana Pacers). (a) At the .025 level of significance, does this sample show that the
average NBA player gets over 300 rebounds per season? State your hypotheses and decision rule,
and show all work. (b) Does the FPCF have a material effect?

Rebounds by 12 Randomly-Chosen NBA Players in 2000-2001 Season

Player Rebounds Player Rebounds
Lorenzen Wright 535 Hersey Hawkins 80
Nazr Mohammed 307 Laymond Murray 340
Chris Crawford 110 Greg Buckner 157
Paul Pierce 522 Maurice Taylor 378
Baron Davis 408 Jalen Rose 359
Jamaal Magloire 295 Zan Tabak 213
Source: The World Almanac and Book of Facts, 2002, pp. 938-940.