8.

Confidence Intervals

MACT 2222, Statistics for business

MACT 2222: Statistics for Business 8.1

8.2

Outline

• Sampling Distributions
• Confidence Interval for the Population Mean µ
• Confidence Interval for Proportion π

MACT 2222: Statistics for Business 8.2

8.3

Estimation

MACT 2222: Statistics for Business 8.3

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Confidence Interval for the Population Mean

with Known σ2
• A confidence level is a degree of certainty expressed as percentage, that an
interval includes the population parameter (for example, a 95% confidence
level)
• If a statistic is used to estimate a population parameter then its numerical
value is called a point estimate and its formula is called an estimator.
• An interval estimate (or confidence interval) is a range of values within
which we can declare, with some level of confidence, the population
parameter lies.
• If the standard deviation, σ , is known and sampling is done from a normal
population then the (1-α) 100% confidence interval for µ is the interval
bounded by

• α is called the significance level and we will talk about it later in the testing
of hypotheses.

MACT 2222: Statistics for Business 8.4

8.5

Confidence Interval for the Population Mean

with Known σ2
• There is always a difference between the true value in  
the population and the estimated one from the
sample. This difference is called the sampling error. We
can estimate it by calculating margin of error.
• is called the margin of error. It shows how much we
expect the sample statistic to vary from one sample to
another. It also helps in calculating the sample size.
• The class width which is defined to be the upper limit
minus the lower limit of the CI. Accordingly, it is twice
the margin of error .

MACT 2222: Statistics for Business 8.5

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Confidence Interval for the Population Mean with Known σ2

Figure: Confidence Interval for µ for Known

σ

MACT 2222: Statistics for Business 8.6

8.7

Confidence Interval for the Population Mean with Known σ2

Figure: A 95% Confidence Interval for µ for Known σ

MACT 2222: Statistics for Business 8.7

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Example 1
Dr Abbas from the university of Baghdad selects a sample
of 16 grades from a population that he assumes to be
normally distributed with a standard deviation 3. The
sample mean turns out to be 76. Construct a 95%
confidence interval for the population mean µ.
Sol:

76±1.96 (3/4)
76±1.47
We are 95% confident that the population mean µ ranges
from 74.53 to 77.47.

MACT 2222: Statistics for Business 8.8

8.9

Confidence Interval for the Population Mean

with Unknown σ
• If σ is unknown, then S, the sample standard
deviation, can replace σ.
• A (1-α) 100% confidence interval for μ when σ is
unknown and the sample size is large (n≥30) is
the interval bounded by

MACT 2222: Statistics for Business 8.9

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Example 2
Assume that a sample of 49 accounts of credit card holders from
Gulf International Bank yields a monthly mean balance of $ 675 and
a standard deviation of $ 121. Construct a 90%, a 95%, and a 99%
confidence intervals for the population mean μ.
Sol:

MACT 2222: Statistics for Business 8.10

8.11

Calculating the sample size using the margin of

error
 

What sample size is needed to be 90% confident of being

correct within 5?
A pilot study suggested that the standard deviation is 45.
Solution

solve for n
we round up here

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Remarks

• To interpret the CI of (1 − α)% confidence level we say that we

are (1 − α )% confident that our population parameter (mean or
proportion) lies within the lower and upper limits of the
interval. The narrow CI is preferred over the wide CI.
• If the sample size increases then the CI gets narrower.
• If the standard deviation decreases then the CI gets narrower.
• A 90% CI is narrower than a 95% CI but the 95% CI is more
accurate.
• A 100% CI cannot be obtained because we don’t have the whole
population.

MACT 2222: Statistics for Business 8.12

8.13

Common Confidence levels and common

values of Z
Confidence Level Z
90% 1.645
95% 1.96
99% 2.58

MACT 2222: Statistics for Business 8.13