CHAPTER TWO

STATISTICAL ESTIMATIONS
2.1Basic Concepts
Introduction
In many cases values for a population parameter are unknown. If parameters are unknown it is
generally not sufficient to make some convenient assumption about their values, rather those unknown
parameters should be estimated.
 Hypothesis Testing -e.g. Use sample evidence to test hypotheses about the population mean.
 Estimation e.g. Estimate the population mean using the information derived from sample. There
are two types of estimations for a population parameter:
- Point estimation
- Interval estimation
Definition of Terms:
 Estimation: is the process of predicting the unknown population parameter through sampling i.e. it

is the process of using sample statistic so as to estimate the unknown population parameter. It is
simply the act of guessing the value of a population parameter. The objective of estimation is to
determine the approximate value of a population parameter on the basis of a sample statistic. E.g.
The sample mean ( x ) is employed to estimate the population mean (  )
 Estimator: is a sample statistic that is used to estimate an unknown population parameter. E.g.
sample mean, sample proportion, etc.
 Estimate: is a single numerical value obtained for an estimator. E.g. 1, 2, 3, - - -. For instance, the
sample mean is an estimator for the population mean.
 Parameter: is a characteristic of a population. E.g. population mean, population standard
deviation, population proportion etc
 Statistic: is a characteristic of a sample. E.g. sample mean, sample proportion, sample standard
deviation, etc.

2.2Types of Estimates
2.2.1 Point Estimation
It is a single numerical value obtained from a random sample used to estimate the corresponding
population parameter. A random sample of observations is taken from the population of interest and
the observed values are used to obtain a point estimate of the relevant parameter.
 The Sample mean, x is the best estimator of the population mean (). Different samples from a population
yield different point estimates of ().
 Sample proportion p is a good estimator of population proportion, p.
Population proportion (P) is equal to the number of elements in the population belonging to the
X
category of interest divided by the total number of elements in the population, p = N Where: X = is

the number of success in the population and N = population size

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 x
Sample proportion, p = n where; X = is the number of elements in the sample found to belong to

the category of interest and n = is the sample size. p = Number of success in a sample
Number sampled
Example: of 2000 persons sampled 1600 favored more strict environmental protection measures, what
is the estimated population proportion.
p = 1600 = 0.80
2000
80% is an estimate of the proportion in the population that favors more strict measures.
In general: The statistic x estimates 
S estimates 
S2 estimates 2
p Estimates p
2.2.1.1 Estimators and their properties / Goodness of an estimator/
A good estimator should satisfy the following properties.
 Unbiasedness - An estimator is said to be unbiased if its expected value is equal to the population
parameter it estimates (E ( x ) = ). The sample mean, x , is therefore, an unbiased estimator of the
population mean. Any systematic deviation of the estimator away from the parameter of interest is
called Bias.
 Efficiency - An estimator is efficient if it has a relatively small variance (as standard deviation). If there
are two unbiased estimators of a parameter, the one whose variance is smaller is said to be relatively
efficient.
 Consistency - An estimator is said to be consistent if its probability of being close to the parameter it
estimates increases as the sample size increases. The sample mean is a

x 
consistent estimator of ( ). This is so because the standard deviation of x is n . As the sample
 
size n increases, the standard deviation of x decreases and hence the probability that x will be closes to
its expected value (), increases.
 Sufficiency - An estimator is said to be sufficient if it contains all the information in the data about the
parameter it estimates. The sample mean is sufficient estimator of (). Other estimators like the median
and mode do not consider all values. But the mean considers all values (added and divided by the
sample size).
2.2.2 Interval Estimation
There is always a sort of sampling error that can be measured by the Standard Error of the mean which
relates to the precision of the estimated mean. Because of sampling variation we cannot say that the
exact parameter value is some specific number, but we can determine a range of values within which
we are confident the unknown parameter lies.
Interval estimate states the range within which a population parameter probably lies. The interval with
in which a population parameter is expected to lie is usually referred to as the confidence interval.

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The confidence interval for the population mean is the interval that has a high probability of containing
the population means, 
Three confidence intervals are used extensively.
 90% confidence interval,
 95% confidence interval and
 99% confidence interval
A 95% confidence interval means that about 95% of the similarly constructed intervals will contain the
parameter being estimated. If we use the 99% confidence interval we expect about 99% of the intervals
to contain the parameter being estimated.
Another interpretation of the 95 % confidence interval is that 95 % of the sample means for a specified
sample size will lie within 1.96 standard deviations of the hypothesized population mean. For 99% the
sample means will lie, with in 2.58 standard deviations of the hypothesized population mean.
 Where do the values 1.96 and 2.58 come from?
The middle 95% of the sample mean lie equally on either side of the mean. And logically
0.95/2=0.4750 or 47.5% of the area is to the right of the mean and the area to the left of the mean is
0.4750. The Z value for this probability is 1.96. The Z to the right of the mean is + 1.96 and Z to the
left is – 1.96.
2.2.2.1 Interval Estimation of the Mean
a) Compute the standard error of the mean
Standard error of the mean is the standard deviation of the sample means.
  = population standard deviation, n = sample size
x 
n
If the population standard deviation is not known, the standard deviation of the sample s, is used to
S
Sx 
approximate the population standard deviation. n
This indicates that the error in estimating the population means decreases as the sample size increases.
b) The 95% and 99% confidence intervals are constructed as follows when n > 30.
x
x 
95% confidence interval  1.96 n

x
 s
99% confidence interval x  2.58 n
1.96 & 2.58 indicate the Z values corresponding to the middle 95% or 99% of the observation
respectively.
S
xZ xZ
In general a confidence interval for the mean is computed by, n , or n Z reflects the
selected level of confidence.
Example
An experiment involves selecting a random sample of 256 middle managers for studying their annual
income. The sample mean is computed to be Br. 35,420 and the sample standard deviation is Br. 2,050.
a) What is the estimated mean income of all middle managers (the population)?
b) What is the 95% confidence interval (rounded to the nearest 10)
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 c) What are the 95% confidence limits?
d) Interpret the finding.
Solution
a) Sample mean is 35420 so this will approximate the population mean so  = 35420. It is estimated
from the sample mean.
b) The confidence interval is between 35168.87 and 35671.13 found by
S  2050 
X  1.96  
n = 35420  1.96  256  = 35168.87 and 35671.13
C) The end points of the confidence interval are called the confidence limits. In this case they are
rounded to 35168.87 and 35671.13. 35168.87 is the lower limit and 35671.13 is the upper limit.
D) Interpretation - The population means annual income would be found between 35168.87 and
35671.13 at 95 out of the 100 confidence intervals. About 5 out of the 100 confidence intervals
would not contain the population mean annual income.
Exercise
() A research firm conducted a survey to determine the mean amount smokers spend on cigarette
during a week. A sample of 49 smokers revealed that the sample mean is Br. 20 with standard
deviation of Br. 5. Construct 95% confidence interval for the mean amount spent.
2.2.2.2 Interval Estimation of the difference between two independent
means
If all possible samples of large size n 1 and n2 are drawn from two different populations, then sampling
x x 2 is approximately normal with mean (µ1-µ2)
distribution of the difference between two means 1 &
and standard deviation  x 1 - x 2 = √12/n1 +22/n2
For a desired confidence level, the confidence interval limits for the population mean (µ 1-µ2) are given
by x 1 - x 2 ± Z x 1 - x 2
Example:
The strength of the wire produced by company A has a mean of 4,500kg and a standard deviation of
200 kg. Company B has a mean of 4,000 kg and a standard deviation of 300 kg. A sample of 50 wires
of company A and 100 wires of company B are selected at random for testing the strength. Find 99%
confidence limits on the difference in the average strength of the populations of wires produced by the
two companies.
Solution: the following information is given:
Company A: x 1 = 4500  = 200 n1 = 50
Company B: x 2 = 4000  = 300 n2 = 50
Therefore, x 1 - x 2 = 4500 – 4000 = 500 and Z = 2.576
 x 1 - x 2 = √12/n1 +22/n2 = √40,000/50 + 90,000/100 = 41.23
x x x x
The required 99 % confidence interval limits are given by ( 1 - 2) ± Z 1 - 2
= 500 ± 2.576(41.23) = 500 ± 106.2
Hence the 99% confidence limit on the difference in the average strength of wires produced by the two
companies are likely to fall in the interval 393.80 =< µ =< 6.6.20.

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 2.2.2.3 Interval estimation for a population proportion
The confidence interval for a population proportion is estimated
p  Zp
Where p is the standard error of the proportion and

σ p=
√ p(1− p )
n

Therefore the confidence interval for population proportion is constructed by

p Z n √
p(1−p )

Example. Suppose 1600 of 2000 union members sampled said they plan to vote for the proposal to
merge with a national union. Union by laws state that at least 75% of all members must approve for the
merger to be enacted. Using the 0.95 degree of confidence, what is the interval estimate for the
1600
population proportion? Based on the confidence interval, what conclusion can be drawn? p = 2000 =
0.8. The sample proportion is 80%

The interval is computed as follows. p Z √ p(1−p )

n √
0. 80(1−0 .8 )
= 0.80  1.96 2000 = 0.0089  1.96
√ 0. 00008 = 0.78247 and 0.81753 rounded to 0.782 and 0.818.
Based on the sample results when all union members vote, the proposal will probably pass because
0.75 lie below the interval between 0.782 and 0.818.
Exercise
(1). A sample of 200 people was assumed to identify their major source of news information; 110
stated that their major source was television news coverage. Construct a 90% confidence interval for
the proportion of people in the population who consider television their major source of news
information.

2.2.3 Student’s t- Distribution

When the population is large and the variable is normally distributed and the standard deviation is
known or when the standard deviation is unknown and the sample size greater than 30, the standard
normal distribution is employed to construct the confidence interval for the mean and proportion.
However, in many situations the sample size is less than 30 and population standard deviation is
unknown, the standard normal distribution, Z, is not appropriate. The student’s t or the t distribution is
used.
Characteristics of the Student’s t Distribution
The t distribution shares some characteristics of the normal distribution and differs from it in others.
Both are a continuous distribution, bell-shaped and symmetrical. The t distribution is differs from the
standard normal distribution in the following ways:
 There is no one t distribution, but rather a ‘family’ of t distribution. All have the same mean of zero but
their standard deviation differs according to the sample size, n. The t distribution differs for different
sample size.
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  As the sample size increases, the t distribution approaches the standard normal distribution.
 It is more spread out and flatter at the center than is the Z. However as the sample size increases the
curve representing t distribution approaches the Z distribution.

t distribution for sample size of 28

t distribution for sample size of 20

t distribution for sample size of 10

As the sample size decreases the curve representing the t distribution will have wider tails and will be
more flat at the center.

Z Distribution

t Distribution

The t distribution depends on a parameter known as a degree of freedom. Degree of freedom means the
freedom to freely move data points or the freedom to freely assign values arbitrarily.
The symbol df will be used for degrees of freedom. The degrees of freedom for a confidence interval
for the mean are found by subtracting 1 from the sample size.
That is, df = n – 1 where n is the sample size.
As the number of degrees of freedom increases, t distribution gradually approaches the normal
distribution and the sample standard deviation s becomes a better estimate of population standard
deviation. When the sample size is small less than 30 and standard deviation of population is unknown,
the interval estimate of a population mean will be:
S
x±t
√n

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Computing t value
x−μ
The t variable representing the student’s t distribution is defined as: t = s / √ n where: x is the sample
mean of n measurements,  is the population mean and s is the sample standard deviation
x−μ
Note that t is just like Z = σ / √ n except that we replace  with s. unlike our methods of large
samples,  cannot be approximated by s when the sample size is less than 30 and we cannot use the
normal distribution. The table for the t distribution is constructed for selected levels of confidence for
degree of freedom up to 30. To use the table we need to know two numbers, the tail area, (1 minus
confidence level selected), and the degree of freedom.
(1 – Confidence level selected) is , the Greek letter alpha. This is the error we committee in
estimating.
S
The confidence interval for the sample mean is x  t √n
Example: A traffic department in town is planning to determine mean number of accidents at a high-
risk intersection. Only a random sample of 10 days measurements were obtained. The numbers of
accidents per day were:
8 7 10 15 11 6 8 5 13 12
Construct a 95% confidence interval for the mean number of accident per day.
a) Compute x and s
95
x = 10 = 9.5 per day

S x=
√ ∑ ( x−x )2 =
n−1 √ 94 . 5
9 = 3.24 per day
α 0 . 05
=
The confidence level is 95%,  = 1 – 0.95 = 0.05 (one tail) and two tails is 2 2 = 0.025
The degree of freedom, df = n – 1 = 10 – 1 = 9 from the t table t_0.025, df_ 9 = 2.26
s
The confidence interval is x  t_.0025 df(9) √ n
3. 24
9.5  (2.26) √ 10 = 9.5  2.3 = 7.2 to 11.80
With 95% confidence the mean number of accident at this particular intersection is between 7.2 and
11.8.

Exercise
(2). A quality controller of a company plans to inspect the average diameter of small bolts made. A
random sample of 6 bolts was selected. The sample is computed to be 2.0016mm and the sample
standard deviation 0.0012mm. Construct the 99% confidence interval for all bolts made.

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 Chapter 3
3.1 Hypothesis testing

Hypothesis and Hypothesis Testing Defined

Hypothesis is a statement or an assumption about the value of a population parameter or parameters.
Examples
- The mean monthly income of all employees of a company is br. 2000.
- The average age of students in a college is 22 years
- 5% of the products of a firm are defective
F All these hypothesis have one thing in common: The population of interest are so large that for
various reasons it would not be feasible to study all the items, or persons, in the population
Hypothesis Testing Defined
Hypothesis testing is a procedure based on sample evidence and probability distribution used to
determine whether the hypothesis is a reasonable statement and should not be rejected, or is
unreasonable and should be rejected. It is simply selecting a sample from the populations, calculate
sample statistic and based on certain decision rules accept or reject the hypothesis.
Hypothesis Testing: is the procedure that enables decision-makers to draw inferences about
population characteristics by analyzing the difference between the value of sample statistic and the
corresponding hypothesized parameter value.
 When researchers conduct studies they want to see if a specific variable of interest will have an
effect on a specific population.
 Hypothesis testing allows researchers to use sample data and to infer the results from the sample to
the population.
 The goal of hypothesis testing is to decide whether the results of a study indicate a real relationship
between variables, or if the results simply show the random fluctuation that would be the result of
chance.
 Hypothesis tests are one of the most commonly used statistical procedures. They can be performed
with a wide range of statistics (i.e. z-tests, t-tests, correlations, ANOVAs, etc.).

Definitions of Some Terms:

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- Statistical hypothesis: is an assertion or statement about the population whose plausibility is to be
evaluated on the basis of the sample data.
- Test statistic: is a statistics whose value serves to determine whether to reject or accept the
hypothesis to be tested. It is a random variable.
- Statistic test: is a test or procedure used to evaluate a statistical hypothesis and its value depends on
sample data.

There are two types of hypothesis:

Null hypothesis: Alternative hypothesis:
- It is the hypothesis to be tested. - It is the hypothesis available when the null
- It is the hypothesis of equality or the hypothesis hypothesis has to be rejected.
of no difference. - It is the hypothesis of difference.
- Usually denoted by H0. - Usually denoted by H1 or Ha.

Steps for Testing Hypothesis

There are five-step or procedure that systematize hypothesis testing.
Step I. Identify the null hypothesis and the alternate hypothesis
The first step is to state the hypothesis to be tested. It is called the Null Hypothesis,
Hypothesis, designated by Ho
and read “H sub-zero”. The capital letter H stands for hypothesis and the subscript zero implies “no
difference or no change. There is usually a ‘not’ or a ‘no’ term in the null hypothesis meaning no
change”. The null hypothesis is set up for the purpose of either to rejecting or not to rejecting it. The
null hypothesis is a statement that will be rejected if our sample information provide us with
convincing evidence that it is false. And it will not be rejected if our sample data fail to provide ample
evidence that it is false. If the null hypothesis is not rejected based on sample data, in effect we are
saying that the evidence does not allow us to reject it.
Identify the Alternative hypothesis (H1): Alternative hypothesis is a statement describes what we will
believe if we reject the null hypothesis. It is designated H 1 (H sub – one) the alternative hypothesis will
be accepted if the sample data provide us with evidence that the null hypothesis is false.
The alternative hypothesis may be tested in keeping with either of the following two situations:
1. In two tailed test H1 does not state direction
2. If our interest is to know whether the value of has increased or decreased compared to the
hypothesized mean value (one tailed test because H1 states a direction)
(i) When is expected to be increased, rejection region on the right

(ii) When is expected to be decreased, rejection region on the left

Step II: Determine the level of significance

After setting up the null hypothesis and alternate hypothesis, the next step is to state the level of
significance. It is the probability of rejecting the null hypothesis when it is true. Level of significance

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is the risk we assume of rejecting the null hypothesis when it is a true. The level of significance is
designated by the Greek letter alpha, , it is also referred to as the level of risk.
Traditionally three levels of significance are known
0.05. level is selected for consumer research
0.01. for quality assurance
0.10. for political polling
The level of significance reflects the risk we want to assume. A0.01 level of significance will yield
smaller risk than 0.05 or 0.1. The researcher must decide on the level of significance before
formulating a decision rule and collecting sample data. This is very important to reduce bias. The level
of significance can be any level between 0 and 1.
To illustrate how it is possible to reject a true hypothesis, suppose that a computer manufacturer
purchase a component from a supplier. Suppose the contract specifies that the manufacture’s quality
assurance department will sample all incoming shipment of component. If more than 6% of the
components sampled are substandard the shipment will be rejected.
The null hypothesis is:
Ho= the incoming shipment of components contains 6% or less substandard components.
The alternative hypothesis is:
H1: More than 6% of the components are defective.
A sample of 50 components just received revealed that 4 components or 8% were substandard.
The shipment was rejected because it exceeded maximum of 6%. If the shipment was actually
substandard then the decision to return the component to the supplier was correct.
By rejecting a true hypothesis we committed a type I error.
A type I error is designated by  (alpha).
Type I error is rejecting the null hypothesis, Ho, when it is true.
The probability of committing another type of error, Type II error, is designated , beta, failure to
reject Ho when it is actually false.
We often refer to those two possible errors as the alpha error , and the beta error ,
 error – the probability of making a type I error
 error – the probability of making type II error
The following table shows the decision the researcher could make and the possible consequences.
Null Hypothesis The researcher The Researcher
does not reject Ho rejects Ho
If Ho is true Correct decision Type I error
If Ho is false Type II error Correct decision

Step III: Find the Test statistic

Test statistic – A value, determined from sample information, used to reject or not to reject the null
hypothesis.
There are many test statistics, Z (the normal distribution), the student t test, F, and X 2 or the chi –
square.

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The standard normal deviate, Z distribution is used as test statistic when the sample size is large, n 
30. Based on the sample size and the parameter to be tested the statistician will select the appropriate
test statistic.

F For example in hypothesis testing of population mean the test statistic Z is computed as
( when sample size is large and is known)

F Similarly test statistics T is computed as ( when sample size is small and is

unknown)
Step IV: Determine the decision rule
A decision rule is a statement of the conditions under which the null hypothesis is rejected and the
conditions under which it is not rejected.
The region or area of rejection defines the location of all those values that are so large or so small that
the probability of their occurrence under a true null hypothesis is rather remote.
Sampling distribution for the statistic Z, 0.05 level of significance.

Non-rejection
Region or do not reject H0 Rejection region

Scale of Z
0 1.96
0.95 Probability 0.05 Probability

Initial Value

The above chart portrays the rejection region for a test of significance. The level of significance
selected is 0.05.
1. The area where the null hypothesis is not rejected includes the area to the left of 1.96
2. The area of rejection is to the right of 1.96
3. A one – tailed test is being applied
4. The 0.05 level of significant was chosen
5. The sampling distribution is for the test statistic Z, the standard normal deviate.
6. The value 1.96 separates the regions where the null hypothesis is rejected and where it is not
rejected
7. The value 1.96 is called the critical value. It is the corresponding value of the test statistic for
the selected level of significance i.e. Z value at the 0.05 level of significance is 1.96.

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Critical value: The dividing point between the region where the null hypothesis is rejected and the
region where it is not rejected.
Steps V: Take a sample and made a decision
At this step a decision is made to reject or not to reject the null hypothesis. For the above chart, if
based on sample data or information, Z is computed be 2.34 the null hypothesis is rejected at the 0.05
level of significance.
The decision to reject Ho is made because 2.34 lies in the region of rejection that is beyond 1.96. We
would reject the null hypothesis reasoning that it is highly improbable that a computed Z value this
large is due to sampling variation or chance. Had the computed value been 1.96 or less say 0.71 then
Ho would not be rejected.
rejected. It would be reasoned that such a small computed value could be attributed
to chance that is sampling variation.
One – Tailed and Two – Tailed tests of significance
One Tailed Test
The region of rejection is only in one tail of the curve. The above example indicates that the region of
rejection is in the right (upper) tail of the curve.

Non-rejection
Rejection region region or do not reject H0

0.95 Probability
Z
-1.96 0
0.05 Probability 0.95 Probability

Initial Value
Consider companies purchase larger quantities of tire. Suppose they want the tires to an average
mileage of 40,000 Kms of wear under normal usage. They will therefore reject a shipment of tires if
accelerated - life test reveal that the life of the tires is significantly below 40,000 Kms on the average.
The purchasers gladly accept a shipment if the mean life is greater than 40,000 Kms, they are not
concerned with this possibility.
They are only concerned if they have sample evidence to conclude that the tires will average less than
40,000 Kms of useful life.
Thus the test is set up to satisfy the concern of the companies that the mean life of the tires is less than
40,000Kms.
The null and alternate hypotheses are written: -

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Ho:  = 40,000 kms and
H1:  < 40,000 kms rejection region on the left
One way to determine the location of the rejection region is to look at the direction in which the
inequality sign in the alternate hypothesis is pointing.
Test is one – tailed, if H1 states  > or  < if 1 , states a direction, test is one - tailed.
Two-tailed test
A test is two - tailed if H1 does not state a direction.
Consider the following example:
Ho: there is no difference between the mean income of males and the mean income of females.
H1: there is a difference in the mean income of males and the mean income of females.
If Ho is rejected and H1 accepted the mean income of males could be greater than that of females or vis
versa. To accommodate these two possibilities, the 5% level of significance representing the area of
rejection is divided equally in to two tails of the sampling distribution. If the level of significant is 0.05
each rejection region will have 0.025 probability.
Note that the total area under the normal curve is one found by 0.95 + 0.025 + 0.025.

Non-rejection
Rejection region region or do not reject H0 Rejection region

0.95 Probability
Z
-1.96 0 + 1. 96
0.025 Probability 0.025 Probability

Initial value Initial value

3.3.2 Hypothesis Testing About Population Mean μ

Note that a sample of 30 or more is considered large.
μ
Suppose the assumed or hypothesized value of μ is denoted by 0 , then one can formulate two sided
(1) and one sided (2 and 3) hypothesis as follows:
1.
H 0 : μ=μ 0 vs H 1 : μ≠ μ0

2. H 0 : μ=μ 0 vs H 1 : μ> μ 0
3. H 0 : μ =μ 0 vs H 1 : μ< μ0

Case 1: When sampling is from a normal distribution with σ known

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 X̄−μ
Z=
- The relevant test statistic is σ /√n
- After specifying α we have the following regions (critical and acceptance) on the standard normal
distribution corresponding to the above three hypothesis. Summary table for decision rule:
H0 Reject H0 if Accept H0 if Inconclusive if
μ≠ μ 0 |Z cal|>Z α /2 |Z cal|<Z α /2 Z cal=Z α /2 or Z cal =−Z α /2
μ< μ0 Z cal <−Z α Z cal >−Z α Z cal=−Z α
μ> μ0 Z cal > Z α Z cal < Z α Z cal=Z α
X̄ − μ0
Z cal=
Where: σ / √n
A Two Tailed Test
Example 1. The efficiency ratings of a company have been normally distributed over a period of many
years. The arithmetic mean () of the distribution is 200 and the standard deviation is 16. Recently,
however, young employees have been hired and new training and production methods introduced.
Using the 0.01 level of significance, we want to test the hypothesis that the mean is still 200.
Solution:
Step 1.
1. The null hypothesis is " The population mean is still 200 " the alternative hypothesis is “The
mean is different from 200 " or "The mean is not 200"
the two hypotheses are written as:
Ho :  =200
H1:   200
This is a two - tailed test because the alternate hypothesis does not state the direction of the difference.
That is, it does not state whether the mean is greater than or less than 200.
Step 2: - As noted the 0.01 level of significance is to be used. This is  the probability of committing a
type I error. That is the probability of rejecting a true hypothesis.
Step 3: - The test statistic for this type of problem is Z, the standard normal deviate
X−μ
σ
Z = √n
Step 4:
4: The decision rule is formulated by finding the critical values of Z from the table of normal
distribution.
Since this is a two - tailed test, half of 0.01 or 0.005 is in each tail. Each rejection region will have a
probability of 0.005.
The area where Ho is not rejected located between the two tails, is therefore, 0.99.
0.5000-0.005= 0.4950 so 0.4950 is the area between 0 and the critical value. The value nearest to
0.4950 is 0.495. The value for this probability is 2.58.

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 Non-rejection
Rejection region with Region or do not reject H0 Rejection region
probability 0.99 Probability with probability 0.01÷2 = 0.005
0.01÷2=0.005 0.4950=0.5-0.005 0.4950=0.5-0.005
Z
It is not rejected

The decision rule is therefore: Reject the null hypothesis and accept the alternate hypothesis if the
computed value of Z does not fall in the region between +2.58 and -2.58. Otherwise do not reject the
null hypothesis.

Step 5: Take a sample and make a decision

Take a sample from the population (efficiently ratings) compute Z and based on the decision rule,
arrive at a decision to reject Ho or not reject Ho.
The efficient ratings of 100 employees were analyzed. The mean of the sample was computed to be
203.5.
Compute Z
X−μ 203 .5−200 203 .5−200
=
σ 16 1.6
Z= √ n = √ 100 203.5-200= 2.19
Since 2.19 does not fall in the rejection region, Ho is not rejected. So we conclude that the difference
between 203.5, the sample mean, and 200 can be attributed to chance variation.
Note: Selecting the level of significance before setting up the decision rule and sampling the
population is important not to be biased.
Ho is not rejected at the 1% level. We would have biased the later decision by not initially selecting the
0.01 level. Instead we could have waited until after the sampling and selected a level of significance
that would cause the null hypothesis to be rejected. We could have chosen, for example , the 0.05 level.
The critical value for that level are + 1.96.
Since the computed value of Z (2.19) lies beyond 1.96 the null hypothesis would be rejected and we
could concluded that the mean efficiency rating is not 200.
P – Values is Hypothesis Testing
Additional value is often reported on the strength of the rejection, or how confident we are in rejecting
the null hypothesis. This method reports the probability (assuming that the null hypothesis is true) of
getting a value of the test statistic at least as extreme as that obtained.
This procedure compares the probability, called P – Value, with the significance level.
If the P- value is smaller than the significance level, Ho is rejected. If it is larger than the significant
level Ho is not rejected. This procedure not only results in decision regarding Ho but it gives us in
sight into the strength of the decision.

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A very small P- values say 0.001, means that there is a very little likelihood that Ho is true. On the
other hand, a p- value of 0.4 means that Ho is not rejected, and we did not come very close to rejecting
it.
Recall that for the efficiency ratings the computed value of Z was 2.19. The decision was not to reject
Ho because the Z of 2.19 fall in the non-rejection area between 2.58 and + 2.58. The probability of
obtaining a Z values of 2.19 or more is 0.0143 found by 0.5000 – 0.4857. To compute the P – value,
we need to be concerned with values less than -2.19 and values greater than + 2.19. The p- value is
0.0286 found by 2(0.0143). The P – value of 0.0286 is greater than the significance level (0.01)
decided upon initially, so Ho is not rejected.
One –Tail Test
Example: The mean life time of a sample of 16 fluorescent light bulbs produced by a company is
computed to be 1570 hours. The population standard deviation is 120 hours. Suppose the hypothesized
value for the population mean is 1600 hours. Can we conclude that the life time of light bulbs is
decreasing?
α =0 . 05
(Use and assume the normality of the population)
Solution:
μ= Population mean . μ0 =1600
Let ,
Step 1: Identify the appropriate hypothesis
H 0 : μ=1600 vs H 1 : μ<1600

α=0 . 05 ( given)
Step 2: select the level of significance,
Step 3: Select an appropriate test statistics
Z- Statistic is appropriate because population variance is known.
Step 4: identify the critical region.
The critical region is Z cal >−Z 0 .05 =−1. 645
⇒(−1. 645 , ∞ ) is accep tan ce region.
Step 5: Computations Decision & Conclusion
X̄ −μ0 1570−1600
Z cal= = =−1. 0
σ / √n 120 / √ 16
Decision: Accept H0 , since Zcal is in the acceptance region.
Conclusion: At 5% level of significance, we have no evidence to say that that the life time of light
bulbs is decreasing, based on the given sample data.
Example 3.3: Random samples of 200 senior school students produce a mean weight of 58 kg with
stdev. 4 kg. Test the hypothesis that the mean weights of the population is greater than 60 kg. Use 0.05
level of significance
Solution:

i)

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ii)

iii) Test statistics:

iv) Critical region 0.5-0.05=0.45

Implies

v) Since is greater than H0 is rejected in favour of H1, this implies that the
mean weight of the senior school students is greater than 60.

Note: when is unknown, where S is sample standard deviation.

Testing for the population mean: (Population standard deviation unknown)

, . In most cases, however, it is

In the preceding problems, we knew population standard deviation

unlikely that  would be known. Thus it must be estimated using the sample standard deviation, S.
X−μ
S
Then the test statistic Z = √ n

Example:
A department store issues its own credit card. The credit manager wants to find out if the mean
monthly unpaid balance is more than Br. 400. The level of significance is set at 0.05. A random check
of 172 unpaid balances revealed the sample mean to be 407 and the standard deviation of the sample
38. Should the credit manager conclude that the population mean is greater than 400, or is it reasonable
to assume that the difference of 407- 400=7 is due to chance:
Solution
Ho:  =400
Hi:  > 400
Because Hl states a direction, a one tailed test is applied. The critical value of Z is 1.645 for 0.05 level
X−μ 407−400
S 380
Z= √ = n √ 172 = 2.42
A value of this large (2.42) will occur less than 5% of the time. So the credit manager would reject the
null hypothesis, Ho. that the mean unpaid balance is greater than 400, in favor of H 1, which states that
the mean is greater than 400.

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The P – value, in this one – tailed test is the probability that Z is greater than 2.42. Found by 0.5000-
0.4922. 0.4922 is the probability that Z can assume a value of 2.420.
Case 2: When sampling is from a normal distribution with σ unknown and small sample size
X̄−μ
t=
S/ √ n t with n−1 deg rees of freedom .
- The relevant test statistic is ~
α
- After specifying we have the following regions on the student t-distribution corresponding to the
above three hypothesis.
H0 Reject H0 if Accept H0 if Inconclusive if

μ≠ μ 0 |t cal|>t α /2 |t cal|<t α /2 t cal =t α /2 or t cal=−t α /2

μ< μ0 t cal <−t α t cal >−t α t cal =−t α

μ> μ0 t cal >t α t cal <t α t cal =t α

X̄ −μ0
t cal =
S / √n
Where:

Conclusion: At 1% level of significance, we have no evidence to say that the average height content
of containers of the given lubricant is different from 10 litters, based on the given sample data.
Example 3.5: the mean length of a small counter balance bar is 43 mm there is aconcern that the
adjustment the machine changed the bars. The null hypothesis there is no change in the mean length (

) test at 0.02 level of significance. 12 bars are randomly selected and their length in mm 42,
39, 42, 45, 43, 40, 39, 41, 40, 42, 43, 42
Solution:

1)

2)

3)

4) Critical value:

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5) Conclusion: computed (-2.92) lies beyond critical level of -2.718, so based on the sample result we
conclude that the machines is out of adjustment.
One tailed taste
Example 3.4: A consumer service agency examined a new automobile for its gasoline performance. A
sample of 12 randomly chosen of kms covered per gallon under normal condition resulted an average
of 60 kms/gallon with stdev 1.8 km. Do this result support manufactures claim that the new automobile
covers more than 50 km/gallon? Use a=0.10
Solution:

1)

2)

3) Test statistics:

Critical region

Case3: When sampling is from a non- normally distributed population or a population whose
functional form is unknown.
- If a sample size is large one can perform a test hypothesis about the mean by using:

X̄−μ0
Z cal= , if σ 2 is known .
σ /√n
X̄−μ0
= , if σ 2 is unknown .
S / √n

- The decision rule is the same as case I.

CHAPTER 4
CHI-SQUARE (X2) DISTRIBUTIONS

The X2 distribution is an asymmetric distribution that has a minimum value of 0, but no maximum
value. The curve reaches a peak to the right of 0, and then gradually declines in height, the larger the
X2 value is. The curve is asymptotic to the horizontal axis, always approaching it, but never quite
touching the axis.
For each degree of freedom there is a different X 2 distribution. The mean of the chi square
distribution is the degree of freedom and the standard deviation is twice the degrees of freedom. This

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implies that the X2 distribution is more spread out, with a peak farther to the right, for larger than for
smaller degrees of freedom.
The following figure shows the shape of the distribution. The X 2 value is on the horizontal axis, with
the probability for each X2 value being represented by the vertical axis. The shaded area in the
diagram represents the level of significanceα
The X2 table gives X2 values for selected levels of significance. All of the levels of significance
represent areas in the right tail of the chi square distribution. For example, if α= 0.05 level of
significance is selected, and there are 7 degrees of freedom, the critical chi square value is 14.067.
This means that for 7 degrees of freedom, there is exactly 0.05 of the area under the chi square
distribution that lies to the right of X2 = 14.067.

Characteristics of the Chi-Square Distribution

1. It is not symmetric.
2. The values of X2 are non-negative (i.e. X2≥ 0).
3. The chi-square distribution is asymptotic to the horizontal axis on the right-hand-side.
4. The shape of the chi-square distribution depends upon the degrees of freedom, just like
Student’s t-distribution and Fisher’s F-distribution.
5. As the number of degrees of freedom increases, the chi-square distribution becomes more
symmetric, as illustrated in Figure 1 below.
6. Total area under the curve is equal to 1.0.

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The Chi Square Statistic.
The X2 statistic appears quite different from the other statistics which have been used in the previous
hypotheses tests. For both the goodness of fit test and the test of independence, the chi square statistic
is the same. For both of these tests, all the categories into which the data have been divided are used.
The data obtained from the sample are referred to as the observed numbers of cases. These are the
frequencies of occurrence for each category into which the data have been grouped. In the chi
square tests, the null hypothesis makes a statement concerning how many cases are to be expected in
each category if this hypothesis is correct. The chi square test is based on the difference between the
observed and the expected values for each category.
The chi square statistic is defined as:
2
(Oi−Ei)
X2 = ∑ i = 1, 2……., K
Ei
Where Oiis the observed number of cases in category i, and Eiis the expected number of cases in
category i, k represent the number of categories. This chi square statistic is obtained by calculating
the difference between the observed number of cases and the expected number of cases in each
category. This difference is squared and divided by the expected number of cases in that category.
These values are then added for all the categories, and the total is referred to as the chi squared value.

Chi Square Calculation

Each entry in the summation can be referred to as “The observed minus the expected, squared, and
divided by the expected." The chi square value for the test as a whole is “The sum of the observed
minus the expected, squared, and divided by the expected."

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The null hypothesis is a particular claim concerning how the data is distributed. More will be said
about the construction of the null hypothesis later. The null and alternative hypotheses for each chi
square test can be stated as
H0: Oi=Ei
H1: Oi≠Ei
If the claim made in the null hypothesis is true, the observed and the expected values are close to
each other and Oi- Eiis small for each category. When the observed data does not conform to what
has been expected on the basis of the null hypothesis, the difference between the observed and
expected values, Oi – Ei is large. The chi square statistic is thus small when the null hypothesis is true
and large when the null hypothesis is not true. Exactly how large the X 2 value must be in order to be
considered large enough to reject the null hypothesis, can be determined from the level of
significance and the chi square table in Appendix??. A general formula for determining the degrees
of freedom is different for the two types of chi square tests. In each type of test though, the degrees of
freedom is based on the number of categories which are used in the calculation of the statistic.
Chi-Square Goodness-of-Fit Test
Definition:A goodness-of-fit test is an inferential procedure used to determine whether frequency
distribution follows a claimed distribution. It is a test of the agreement or conformity between the
observed frequencies (Oi) and the expected frequencies (Ei) for several classes or categories.
Expected Frequencies (or Counts)
Suppose there are n independent trials of an experiment with k ≥3 mutually exclusive possible
outcomes. Let p1 represent the probability of observing the first outcome and E1 represent the
expected frequency of the first outcome; p2 represent the probability of observing the second
outcome and E2 represent the expected frequency of the second outcome; and so on. The expected
frequencies for each possible outcome are given by
Ei = npi for i=1, 2, …, k.

Theorem: Test Statistic for Goodness-of-Fit Tests

Let Oirepresent the observed counts of category i; Ei represent the expected counts of category i; k
represent the number of categories; and n represent the number of independent trials of an
experiment. Then the formula
2
(Oi−Ei)
X2 = ∑ i = 1, 2……., K
Ei
approximately follows the chi-square distribution with k-1 degrees of freedom, provided that

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1. All expected frequencies are greater than or equal to 1 (all Ei≥ 1) and
2. No more than 20% of the expected frequencies are less than 5 (where Ei=npi for i=1, 2, , k).
Note: If Oi=Ei for all i, then X 2= 0 is refers to Perfect agreement between observed and expected
frequencies.
If Oi differs from Ei, then X2> 0 and increases in size as the difference increase.

Steps to Solve a Chi Square Test problem (Goodness-of-Fit Tests)

Assumptions:
 The data are randomly selected.
 All expected frequencies are greater than or equal to 1 (i.e., Ei≥1.)
 No more than 20% of the expected frequencies are less than 5.

Step 1: A claim is made regarding a distribution.

H0: The random variable follows the claimed distribution.
H1: The random variable does not follow the claimed distribution.
Step 2: Select a significance level, α, and find the critical value of chi-square ,Xα2, with df=k-1
Note that chi-square goodness-of-fit tests are right-tailed tests, so the critical value is always on the
right tail.

Step 3: Calculate the X2 test-statistic:

2
(Oi−Ei)
X2 =∑{ } i = 1, 2……., K
Ei
Where Ei=npi for each of the k categories, with n=number of trials and pi=probability of the ith
category. The Ei are derived under the assumption that the null hypothesis is true.
Step 4: Draw a conclusion.
 Compare the test statistic with the critical value. If X 2> Xα2 reject H0.

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  Interpret the conclusion in the context of the problem.
Example and problem of Chi-Square Goodness-of-Fit Test:
Example:A die is tossed 120 times. Test the hypothesis that the die is “fair.”
No. on Face of Die 1 2 3 4 5 6
Oi 13 28 16 10 32 21
Step 1: Null and alternative hypotheses
H0: Die is “fair” (i.e., p1= p2 =…= p6 =1/6)
H1: Die is not fair (i.e., at least one pi ≠ 1/6)
Step 2: Select α = 0.05 and find the critical value of chi-square, X0.05 2 = 11.071 with df = (6 - 1)=5.
Step 3: Toss the die 120 times and record the number of 1’s, 2’s, …, and 6’s. Calculate the expected
frequencies using Ei=npi.
=120(1/6) = 20
2
(Oi−Ei)
X2= ∑ = (13-20)2 + (28-20)2+ (16-20) 2 +(10-20)2 +(32-20)2 +(21-20)2
Ei
20 20 20 20 20 20
= 2.45 +3.20 + 0.80 + 5.00 + 7.20 + 0.05= 18.70
Step 4: Conclusion: Reject H0 at the 0.05 significance level because the X 2-statistic =18.70 > X0.052
=11.071. The sample data imply that the die is not fair.
Problem: 1The market share study conducted by the marketing research group; over the past years
market share have stabilized at 30% for company A, 50% for company B, and 20% for company C.
Recently company C has developed a new and improved product that has replaced its current entry
in the market. The marketing research group has been retained by company C to determine whether
the new product will alter market shares and used a consumer panel of 200 customers for the study.
Each individual has been asked to specify a purchase preference among the three Alternatives;
Company A, company B, and company C’ products. The 200 responses are summarized below. At a
significance level of 5%.
Observed frequency
Company A’s product Company B’s product Company B’s product
48 98 54

Problem: 2Suppose that 60 children were asked as to which ice-cream flavor they liked out of the
three flavors of vanilla, strawberry and chocolate. The answers are recorded as follows;
Observed frequency
Flavours Number
Vanilla 17
Strawberry 24

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 Chocolate 19
At α=0.05, determine whether children favor any particular flavor compared to other flavours
Problem: 3Suppose that ABC Company requires that college seniors who are seeking position’s with it
be interviewed by three different executives. This enables the company to obtain a consensus
evaluation of each candidate. Each candidate is given by the executive either a positive or negative
rating. The following contains interview results of the last 100 candidate;
Possible positive ratings from three interview Number of candidate receiving each of these rating
0 18
1 47
2 24
3 11
For staffing purpose, the company’s directors of recruitment think that the interview process can be
approximated by a binomial distribution with p=0.4, this at α=0.05, test this hypothesis
Problem: 4At the 0.10 level of significance, can we conclude that the following 400 observations
follow a poisson distribution with λ=3?
Number of arrivals per hour 0 1 2 3 4 5 or more
Number of hours 20 57 98 85 78 62

Chi-Square Test for Independence

Consider the data in the table below that represent the eye color and hair shade of a random sample
of 50 individuals.
Hair Shade
Eye Color Light Hair Dark Hair
Blue Eyes 23 7
Brown Eyes 4 16
This table is referred to as a contingency table or a two-way table because it relates two categories of
data. The row variable is eye color and the column variable is hair shade. Each box in the table is
referred to as a cell. For example, the cell referring to light hair and blue eyes is in the first row, first
column. Each cell contains the frequency of the category.
Definition:The chi-square independence test is used to find out whether there is an association
between a row variable and column variable in a contingency table constructed from sample data.
The null hypothesis is that the variables are not associated: in other words, they are independent. The
alternative hypothesis is that the variables are associated, or dependent.
Expected Frequencies in a Chi-Square Independence Test

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To find the expected frequencies in a cell when performing a chi-square independence test, multiply
the row total of the row containing the cell by the column total of the column containing the cell and
divide this result by the Grand total. That is,
Expected frequency = (row total) (column total)
Grand Total
Theorem: Test Statistic for the Test of Independence
Let Oi represent the observed counts in the ith cell and Ei represent the expected counts in the
ith cell. Then
( Oi−Ei ) 2
X2= ∑
Ei
approximately follows the chi-square distribution with (r-1)(c-1) degrees of freedom, where r is the
number of rows and c is the number of columns in the contingency table, provided that
1. All expected frequencies are greater than or equal to 1 (all Ei≥1) and
2. No more than 20% of the expected frequencies are less than 5.
Steps to Solve a Chi Square Test problem (Test of Independence)
Assumptions:
 The data are randomly selected.
 All expected frequencies are greater than or equal to 1 (i.e., Ei≥1.)
 No more than 20% of the expected frequencies are less than 5.
Step 1: A claim is made regarding the independence (or dependence) of two variables.
H0: The row variable and column variable are independent.
H1: The row variable and column variable are dependent.
Step 2: Select a significance level, α and find the critical value of chi-square. All chi-square
independence tests are right-tailed tests, so the critical value is Xα2 with (r-1) (c-1) degrees of
freedom. The shaded region represents the critical region in the figure below.

Step 3: Compute the expected frequencies using the formula:

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 Expected frequency = (row total) (column total)
Grand Total
Compute the test statistic:
2 ( Oi−Ei ) 2
X=∑
Ei
Step 4: Draw a conclusion.
 Compare the test statistic with the critical value. If X 2> Xα2 reject H0.
 Interpret the conclusion in the context of the problem.
Example of Chi-Square Independence Test:
Example:Is eye color and shade of hair related in individuals? Can we conclude from the data shown
below that there is a significant connection between eye color and hair shade?

Observed Frequencies: Hair Shade

Eye Color Light Hair Dark Hair
Row Total

Blue Eyes 23 7 30
Brown Eyes 4 16 20
Column Total 27 23 50

Step 1: Null and alternative hypotheses

H0: Eye color and hair shade are independent.
H1: Eye color and hair shade are dependent.
Step 2: Select α =0.05 and find the critical value of Xα2 = 3.841 with df= (2-1) (2-1) =1.
Step 3: A random sample of 50 individuals was selected and classified according to eye color and
shade of hair. Expected frequencies were calculated using the formula:

Cell 1.Blue Eyes/ Light Hair (30) (27) = 16.2

50
Cell 2.Blue Eye /Dark Hair s (30) (23) = 13.8
50
Cell 3.Brown Eyes/ Light Hair (20) (27) = 10.8
50
Cell 4. Brown Eyes/ Dark Hair (20) (23) = 9.2
50
X2= ∑ ¿ ¿ ¿= (23-16.2)2 + (7-13.8)2+ (4-10.8) 2 + (16-9.2)2 = 15.521
16.2 13.8 10.8 9.2

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Step 4: Conclusion: Reject H0 at the 0.05 significance level because the calculated X 2 =15.521 > the
critical Xα2 = 3.841, A significant relation exists between eye color and hair shade (i.e., eye color and
hair shade are dependent).

============================= END=======================================

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