Lect 5

Paris Graduate School of Management (PGSM)
International Executive Master of Business Administration
Paris Graduate School of Management

École Supérieure de Gestion et Commerce International
INTERNATIONAL EXECUTIVE
MASTER OF BUSINESS ADMINISTRATION
IEMBA
Paris Graduate School of Management

École Supérieure de Gestion et Commerce International
INTERNATIONAL EXECUTIVE
MASTER OF BUSINESS ADMINISTRATION
Management Decision Making
January 2024
© 2024 International Executive MBA - Paris Graduate School of Management.

All rights reserved.
LECTURES 5
Chapter 8
Interval Estimation
n Interval Estimation of a Population Mean:
Large-Sample Case
Small-Sample Case
n Determining the Sample Size
n Interval Estimation of a Population Proportion
x

[--------------------- x ---------------------]
[--------------------- x ---------------------]
[--------------------- x ---------------------]

Interval Estimation of a Population Mean:

Large-Sample Case
n Sampling Error
n Probability Statements about the Sampling Error
n Constructing an Interval Estimate:
Large-Sample Case with  Known
n Calculating an Interval Estimate:
Large-Sample Case with  Unknown
Sampling Error
n The absolute value of the difference between an

unbiased point estimate and the population parameter
it estimates is called the sampling error.
n For the case of a sample mean estimating a population
mean, the sampling error is
Sampling Error = | x  |

Probability Statements
About the Sampling Error
x
n Knowledge of the sampling distribution of enables

us to make probability statements about the
sampling error even though the population mean 
is not known.
n A probability statement about the sampling error is a
precision statement.
Probability Statements
About the Sampling Error
n Precision Statement
There is a 1 - probability that the value of a
sample mean will provide a sampling error of
z /2  x or less. Sampling
distribution
x
1 -  of all of
/2 x /2
values
x


Interval Estimate of a Population Mean:

Large-Sample Case (n > 30)
n With  Known 
x  z /2
n
where: x is the sample mean

1 - is the confidence coefficient
z/2 is the z value providing an area of
/2 in the upper tail of the standard
normal probability distribution
 is the population standard deviation
n is the sample size
Interval Estimate of a Population Mean:

n With  Unknown
In most applications the value of the population
standard deviation is unknown. We simply use the
value of the sample standard deviation, s, as the point
estimate of the population standard deviation.
s
x  z /2
n

Example: National Discount, Inc.

National Discount has 260 retail outlets throughout the
United States. National evaluates each potential location for
a new retail outlet in part on the mean annual income of the
individuals in the marketing area of the new location.
Sampling can be used to develop an interval estimate of
the mean annual income for individuals in a potential
marketing area for National Discount.
A sample
x of size n = 36 was taken. The sample mean, ,
is $21,100 and the sample standard deviation, s, is $4,500.
We will use .95 as the confidence coefficient in our interval
estimate.

n Precision Statement
There is a .95 probability that the value of a sample
mean for National Discount will provide a sampling
error of $1,470 or less……. determined as follows:
95% of the sample means that can be observed are
within + 1.96  x of the population mean .
If  x  s  4,500  750 , then 1.96  x= 1,470.

n 36


n Interval Estimate of the Population Mean:  Unknown
Interval Estimate of  is:
$21,100 + $1,470
or $19,630 to $22,570
We are 95% confident that the interval contains the

population mean.

Small-Sample Case (n < 30)
n Population is Not Normally Distributed
The only option is to increase the sample size to
n > 30 and use the large-sample interval-estimation
procedures.
n Population is Normally Distributed and  is Known
The large-sample interval-estimation procedure can
be used.
n Population is Normally Distributed and  is Unknown
The appropriate interval estimate is based on a
probability distribution known as the t distribution.

t Distribution
n The t distribution is a family of similar probability
distributions.
n A specific t distribution depends on a parameter known as
the degrees of freedom.
n As the number of degrees of freedom increases, the
difference between the t distribution and the standard
normal probability distribution becomes smaller and
smaller.
n A t distribution with more degrees of freedom has less
dispersion.
n The mean of the t distribution is zero.

Small-Sample Case (n < 30) with  Unknown
n Interval Estimate
s
x  t /2
n
where 1 - = the confidence coefficient

t/2 = the t value providing an area of /2
in the upper tail of a t distribution
with n - 1 degrees of freedom
s = the sample standard deviation

Example: Apartment Rents

A reporter for a student newspaper is writing an
article on the cost of off-campus housing. A sample of 10
one-bedroom units within a half-mile of campus resulted in
a sample mean of $550 per month and a sample standard
deviation of $60.
Let us provide a 95% confidence interval estimate of
the mean rent per month for the population of one-bedroom
units within a half-mile of campus. We’ll assume this
population to be normally distributed.

n t value
At 95% confidence, 1 -  = .95,  = .05, and /2 = .025.
t.025 is based on n - 1 = 10 - 1 = 9 degrees of freedom.
InDegrees
the t distribution table weinsee
Area thatTail
Upper t.025 = 2.262.
of Freedom .10 .05 .025 .01 .005
. . . . . .
7 1.415 1.895 2.365 2.998 3.499
8 1.397 1.860 2.306 2.896 3.355
9 1.383 1.833 2.262 2.821 3.250
10 1.372 1.812 2.228 2.764 3.169
. . . . . .


s
x  t.025
n
60
550  2.262
10
550 + 42.92
or $507.08 to $592.92
We are 95% confident that the mean rent per month for
the population of one-bedroom units within a half-mile
of campus is between $507.08 and $592.92.
Sample Size for an Interval Estimate

of a Population Mean
n Let E = the maximum sampling error mentioned in the
n E is the amount added to and subtracted from the point
estimate to obtain an interval estimate.
n E is often referred to as the margin of error.
n We have 
E  z /2
n
n Solving for n we have ( z / 2 ) 2  2

n
E2

n Sample Size for an Interval Estimate of a Population

Mean
Suppose that National’s management team wants an
estimate of the population mean such that there is a .95
probability that the sampling error is $500 or less.
How large a sample size is needed to meet the required
precision?

n Sample Size for Interval Estimate of a Population Mean

z /2  500
n
At 95% confidence, z.025 = 1.96.

Recall that = 4,500.
Solving for n we have
(1.96)2 (4, 500)2
n  311.17
(500)2
We need to sample 312 to reach a desired precision of + $500
at 95% confidence.

Interval Estimation
of a Population Proportion
n Interval Estimate
p (1  p )
p  z / 2
n
where: 1 - is the confidence coefficient

z/2 is the z value providing an area of
p /2 in the upper tail of the standard
normal probability distribution
is the sample proportion
Example: Political Science, Inc.

n Interval Estimation of a Population Proportion
Political Science, Inc. (PSI) specializes in voter polls and
surveys designed to keep political office seekers informed of
their position in a race. Using telephone surveys,
interviewers ask registered voters who they would vote for
if the election were held that day.
In a recent election campaign, PSI found that 220
registered voters, out of 500 contacted, favored a particular
candidate. PSI wants to develop a 95% confidence interval
estimate for the proportion of the population of registered
voters that favors the candidate.


n Interval Estimate of a Population Proportion
p (1  p )
p  z / 2
n
p
where: n = 500, = 220/500 = .44, z/2 = 1.96

. 44 (1. 44 )
. 44  1. 96
500
.44 + .0435
PSI is 95% confident that the proportion of all voters
that favors the candidate is between .3965 and .4835.
Sample Size for an Interval Estimate

of a Population Proportion
n Let E = the maximum sampling error mentioned in the
n We have p (1  p )
E  z / 2
n
n Solving for n we have

( z / 2 ) 2 p (1  p )
n
E2

n Sample Size for an Interval Estimate of a Population

Proportion
Suppose that PSI would like a .99 probability that
the sample proportion is within + .03 of the population
proportion.
How large a sample size is needed to meet the
required precision?

n Sample Size for Interval Estimate of a Population Proportion
At 99% confidence, z.005 = 2.576.
( z / 2 ) 2 p (1  p ) ( 2. 576) 2 (. 44 )(. 56)
n   1817
E2 (. 03) 2
Note: We used .44 as the best estimate of p in the above

expression. If no information is available about p, then .5 is
often assumed because it provides the highest possible
sample size. If we had used p = .5, the recommended n
would have been 1843.

End of Chapter 8
Chapter 9
Hypothesis Testing
n Developing Null and Alternative Hypotheses
n Type I and Type II Errors
n One-Tailed Tests About a Population Mean:
Large-Sample Case
n Two-Tailed Tests About a Population Mean:
Large-Sample Case
n Tests About a Population Mean:
Small-Sample Case
continued

Chapter 9
Hypothesis Testing
n Tests About a Population Proportion
n Hypothesis Testing and Decision Making
n Calculating the Probability of Type II Errors
n Determining the Sample Size for a Hypothesis Test
about a Population Mean
Developing Null and Alternative Hypotheses

n Hypothesis testing can be used to determine whether a
statement about the value of a population parameter
should or should not be rejected.
n The null hypothesis, denoted by H0 , is a tentative
assumption about a population parameter.
n The alternative hypothesis, denoted by Ha, is the
opposite of what is stated in the null hypothesis.
n Hypothesis testing is similar to a criminal trial. The
hypotheses are:
H0: The defendant is innocent
Ha: The defendant is guilty


n Testing Research Hypotheses
• The research hypothesis should be expressed as the
alternative hypothesis.
• The conclusion that the research hypothesis is true
comes from sample data that contradict the null
hypothesis.

n Testing the Validity of a Claim
• Manufacturers’ claims are usually given the benefit
of the doubt and stated as the null hypothesis.
• The conclusion that the claim is false comes from
sample data that contradict the null hypothesis.


n Testing in Decision-Making Situations
• A decision maker might have to choose between two
courses of action, one associated with the null
hypothesis and another associated with the
alternative hypothesis.
• Example: Accepting a shipment of goods from a
supplier or returning the shipment of goods to the
supplier.
A Summary of Forms for Null and Alternative

Hypotheses about a Population Mean
n The equality part of the hypotheses always appears in
the null hypothesis.
n In general, a hypothesis test about the value of a
population mean  must take one of the following
three forms (where 0 is the hypothesized value of the
population mean).

H0:  > 0 H0:  < 0 H0:  = 0
Ha:  < 0 Ha:  > 0 Ha:  0

Example: Metro EMS

n Null and Alternative Hypotheses
A major west coast city provides one of the most
comprehensive emergency medical services in the
world. Operating in a multiple hospital system with
approximately 20 mobile medical units, the service goal
is to respond to medical emergencies with a mean time
of 12 minutes or less.
The director of medical services wants to
formulate a hypothesis test that could use a sample of
emergency response times to determine whether or not
the service goal of 12 minutes or less is being achieved.
Example: Metro EMS

n Null and Alternative Hypotheses
Hypotheses Conclusion and Action
H0:  The emergency service is meeting
the response goal; no follow-up
action is necessary.
Ha: The emergency service is not
meeting the response goal;
appropriate follow-up action is
necessary.
Where:  = mean response time for the population

Type I and Type II Errors

n Since hypothesis tests are based on sample data, we
must allow for the possibility of errors.
n A Type I error is rejecting H0 when it is true.
n A Type II error is accepting H0 when it is false.
n The person conducting the hypothesis test specifies the
maximum allowable probability of making a
Type I error, denoted by  and called the level of
significance.
n Generally, we cannot control for the probability of
making a Type II error, denoted by .
n Statistician avoids the risk of making a Type II error by
using “do not reject H0” and not “accept H0”.
Example: Metro EMS

n Type I and Type II Errors
Population Condition
H0 True Ha True
Conclusion ( ) ( )
Accept H0 Correct Type II

(Conclude  Conclusion Error
Reject H0 Type I Correct

(Conclude  rror Conclusion

The Use of p-Values

n The p-value is the probability of obtaining a sample
result that is at least as unlikely as what is observed.
n The p-value can be used to make the decision in a
hypothesis test by noting that:
• if the p-value is less than the level of significance ,
the value of the test statistic is in the rejection
region.
• if the p-value is greater than or equal to , the value
of the test statistic is not in the rejection region.
n Reject H0 if the p-value < .
The Steps of Hypothesis Testing

n Determine the appropriate hypotheses.
n Select the test statistic for deciding whether or not to
reject the null hypothesis.
n Specify the level of significance  for the test.
n Use to develop the rule for rejecting H0.
n Collect the sample data and compute the value of the
test statistic.
n a) Compare the test statistic to the critical value(s) in
the rejection rule, or
b) Compute the p-value based on the test statistic and
compare it to to determine whether or not to reject
H0.

One-Tailed Tests about a Population Mean:

n Hypotheses
H0:   or H0: 
Ha: Ha:
n Test Statistic
x 
0 x 
0
z Known

/ n  zUnknown

s/ n
n Rejection Rule
Reject H0 if z > zReject H0 if z < -z
Example: Metro EMS

n One-Tailed Test about a Population Mean: Large n
Let  = P(Type I Error) = .05
Sampling distribution
x
of (assuming H0 is
Reject H0
true and  = 12)
Do Not Reject H0 
1.645x x
12 c
(Critical value)

Example: Metro EMS

n One-Tailed Test about a Population Mean: Large n
x
Let n = 40, = 13.25 minutes, s = 3.2 minutes
(The sample standard deviation s can be used to
estimate the
z population
x 

13.standard
25  12 deviation
2. 47 .)
/ n 3. 2 / 40
Since 2.47 > 1.645, we reject H0.

Conclusion: We are 95% confident that Metro EMS
is not meeting the response goal of 12 minutes;
appropriate action should be taken to improve
Example: Metro EMS

n Using the p-value to Test the Hypothesis
x
Recall that z = 2.47 for = 13.25. Then p-value = .0068.
Since p-value < , that is .0068 < .05, we reject H0.
Reject H0
Do Not Reject H0 p-value
z
0 1.645 2.47

Two-Tailed Tests about a Population Mean:

n Hypotheses
H0: 
 
 
Ha: 
n Test Statistic x  0
z Known x  0
 zUnknown

/ n s/ n
n Rejection Rule
Reject H0 if |z| > z
Example: Glow Toothpaste

n Two-Tailed Tests about a Population Mean: Large n
The production line for Glow toothpaste is designed
to fill tubes of toothpaste with a mean weight of 6
ounces.
Periodically, a sample of 30 tubes will be selected in
order to check the filling process. Quality assurance
procedures call for the continuation of the filling
process if the sample results are consistent with the
assumption that the mean filling weight for the
population of toothpaste tubes is 6 ounces; otherwise
the filling process will be stopped and adjusted.


n Two-Tailed Tests about a Population Mean: Large n
A hypothesis test about the population mean can be
used to help determine when the filling process should
continue operating and when it should be stopped and
corrected.
• Hypotheses 
H0:  
Ha: 
• Rejection Rule
ssuming a .05 level of significance,
Reject H if z < -1.96 or if z > 1.96

n Two-Tailed Test about a Population Mean: Large n
Sampling distribution
x
of (assuming H0 is
true and  = 6)
Reject H0 Do Not Reject H0 Reject H0
 
z
-1.96 0 1.96


n Two-Tailed Test about a Population Mean: Large n
Assume that a sample of 30 toothpaste tubes
provides a sample mean of 6.1 ounces and standard
x
deviation of 0.2 ounces.
0
Let n = 30, z  x=6.1 
6.1  6
ounces, s2=
.74.2 ounces
s/ n .2 / 30

Conclusion: We are 95% confident that the mean filling
weight of the toothpaste tubes is not 6 ounces. The

n Using the p-Value for a Two-Tailed Hypothesis Test
Suppose we define the p-value for a two-tailed test as
double the area found in the tail of the distribution.
With z = 2.74, the standard normal probability
table shows there is a .5000 - .4969 = .0031 probability
of a difference larger than .1 in the upper tail of the
distribution.
Considering the same probability of a larger
difference in the lower tail of the distribution, we have
p-value = 2(.0031) = .0062
The p-value .0062 is less than  = .05, so H is rejected.

Confidence Interval Approach to a

Two-Tailed Test about a Population Mean
n Select a simple random sample from the population and
x
use the value of the sample mean to develop the
confidence interval for the population mean .
n If the confidence interval contains the hypothesized
value 0, do not reject H0. Otherwise, reject H0.

n Confidence Interval Approach to a Two-Tailed
Hypothesis Test
The 95% confidence interval for  is
x  z / 2  6.1  1. 96(. 2 30 )  6.1. 0716
n
or 6.0284 to 6.1716
Since the hypothesized value for the population
mean, 0 = 6, is not in this interval, the hypothesis-
testing conclusion is that the null hypothesis,
H0:  = 6, can be rejected.

Tests about a Population Mean:

Small-Sample Case (n < 30)
n Test Statistic  Known  Unknown
x  0 x  0
t  t 
/ n s/ n
This test statistic has a t distribution with n - 1 degrees

of freedom.
n Rejection Rule
One-Tailed Two-Tailed
H0:  Reject H0 if t > t
H0:  Reject H0 if t < -t
H0:  Reject H0 if |t| > t
p -Values and the t Distribution

n The format of the t distribution table provided in most
statistics textbooks does not have sufficient detail to
determine the exact p-value for a hypothesis test.
n However, we can still use the t distribution table to
identify a range for the p-value.
n An advantage of computer software packages is that the
computer output will provide the p-value for the
t distribution.

Example: Highway Patrol

n One-Tailed Test about a Population Mean: Small n
A State Highway Patrol periodically samples
vehicle speeds at various locations on a particular
roadway. The sample of vehicle speeds is used to test
the hypothesis
H0:  < 65.
The locations where H0 is rejected are deemed the best
locations for radar traps.
At Location F, a sample of 16 vehicles shows a
mean speed of 68.2 mph with a standard deviation of
3.8 mph. Use an  = .05 to test the hypothesis.
Example: Highway Patrol

n One-Tailed Test about a Population Mean: Small n
x
Let n = 16, = 68.2 mph, s = 3.8 mph
 = .05, d.f.x = 16-168
0
= .15,
2  65t = 1.753
t   3.37
s/ n 3.8 / 16

Conclusion: We are 95% confident that the mean speed
of vehicles at Location F is greater than 65 mph.
Location F is a good candidate for a radar trap.

Summary of Test Statistics to be Used in a

Hypothesis Test about a Population Mean
Yes n > 30 ? No
s known ? No Popul.
Yes approx.
Yes Use s to normal
estimate s s known ? No ?
No
Use s to
Yes
estimate s
z
x 
z
x 
z
x 
t
x  Increase n
/ n s/ n / n s/ n to > 30
A Summary of Forms for Null and Alternative

Hypotheses about a Population Proportion
n The equality part of the hypotheses always appears in
the null hypothesis.
n In general, a hypothesis test about the value of a
population proportion p must take one of the following
three forms (where p0 is the hypothesized value of the
population proportion).

H0: p > p0 H0: p < p0 H0: p = p0
H a: p < p 0 Ha: p > p0 H a: p p0

Tests about a Population Proportion:

Large-Sample Case (np > 5 and n(1 - p) > 5)
n Test Statistic z
p  p0
p
p0 (1  p0 )
p 
n
where:
n Rejection Rule
One-Tailed Two-Tailed
H0: pp Reject H0 if z > z
H0: pp Reject H0 if z < -z
H : pp Reject H if |z| > z
Example: NSC
n Two-Tailed Test about a Population Proportion: Large n
For a Christmas and New Year’s week, the
National Safety Council estimated that 500 people
would be killed and 25,000 injured on the nation’s
roads. The NSC claimed that 50% of the accidents
would be caused by drunk driving.
A sample of 120 accidents showed that 67 were
caused by drunk driving. Use these data to test the
NSC’s claim with  = 0.05.

Example: NSC
n Two-Tailed Test about a Population Proportion:
Large n
• Hypothesis
H0: p = .5
H : p .5
p0 (1  p0 )a .5(1  .5)
• Test Statistic
p 
n

120
 .045644
p  p0 (67 /120)  .5
z   1.278
p .045644
Example: NSC
n Two-Tailed Test about a Population Proportion: Large n
• Rejection Rule
Reject H0 if z < -1.96 or z > 1.96
• Conclusion
Do not reject H0.
For z = 1.278, the p-value is .201. If we reject
H0, we exceed the maximum allowed risk of
committing a Type I error (p-value > .050).

Hypothesis Testing and Decision Making

n In many decision-making situations the decision maker
may want, and in some cases may be forced, to take
action with both the conclusion do not reject H0 and the
conclusion reject H0.
n In such situations, it is recommended that the
hypothesis-testing procedure be extended to include
consideration of making a Type II error.
Power of the Test

n The probability of correctly rejecting H0 when it is false
is called the power of the test.
n For any particular value of , the power is 1 – .
n We can show graphically the power associated with
each value of ; such a graph is called a power curve.

End of Chapter 9


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Paris Graduate School of Management (PGSM)

International Executive Master of Business Administration

Paris Graduate School of Management

Paris Graduate School of Management

© 2024 International Executive MBA - Paris Graduate School of Management.

International Executive Master of Business Administration

© 2024 International Executive MBA - Paris Graduate School of Management.

Interval Estimation of a Population Mean:

n The absolute value of the difference between an

© 2024 International Executive MBA - Paris Graduate School of Management.

n Knowledge of the sampling distribution of enables

© 2024 International Executive MBA - Paris Graduate School of Management.

Interval Estimate of a Population Mean:

where: x is the sample mean

Interval Estimate of a Population Mean:

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: National Discount, Inc.

Example: National Discount, Inc.

If  x  s  4,500  750 , then 1.96  x= 1,470.

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: National Discount, Inc.

We are 95% confident that the interval contains the

Interval Estimation of a Population Mean:

© 2024 International Executive MBA - Paris Graduate School of Management.

Interval Estimation of a Population Mean:

where 1 - = the confidence coefficient

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Example: Apartment Rents

Example: Apartment Rents

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: Apartment Rents

Sample Size for an Interval Estimate

n Solving for n we have ( z / 2 ) 2  2

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: National Discount, Inc.

n Sample Size for an Interval Estimate of a Population

Example: National Discount, Inc.

At 95% confidence, z.025 = 1.96.

© 2024 International Executive MBA - Paris Graduate School of Management.

where: 1 - is the confidence coefficient

Example: Political Science, Inc.

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: Political Science, Inc.

where: n = 500, = 220/500 = .44, z/2 = 1.96

Sample Size for an Interval Estimate

n Solving for n we have

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: Political Science, Inc.

n Sample Size for an Interval Estimate of a Population

Example: Political Science, Inc.

Note: We used .44 as the best estimate of p in the above

© 2024 International Executive MBA - Paris Graduate School of Management.

© 2024 International Executive MBA - Paris Graduate School of Management.

Developing Null and Alternative Hypotheses

© 2024 International Executive MBA - Paris Graduate School of Management.

Developing Null and Alternative Hypotheses

Developing Null and Alternative Hypotheses

© 2024 International Executive MBA - Paris Graduate School of Management.

Developing Null and Alternative Hypotheses

A Summary of Forms for Null and Alternative

© 2024 International Executive MBA - Paris Graduate School of Management.

Example: Metro EMS

Example: Metro EMS