1 1 Slide IS 310 – Business Statistics IS 310 Business Statistics CSU Long Beach

2 2 Slide IS 310 – Business Statistics Chapter 8 Interval Estimation Population Mean:  Known Population Mean:  Known Population Mean:  Unknown Population Mean:  Unknown n Determining the Sample Size n Population Proportion

3 3 Slide IS 310 – Business Statistics A point estimator cannot be expected to provide the A point estimator cannot be expected to provide the exact value of the population parameter. exact value of the population parameter. A point estimator cannot be expected to provide the A point estimator cannot be expected to provide the exact value of the population parameter. exact value of the population parameter. An interval estimate can be computed by adding and An interval estimate can be computed by adding and subtracting a margin of error to the point estimate. subtracting a margin of error to the point estimate. An interval estimate can be computed by adding and An interval estimate can be computed by adding and subtracting a margin of error to the point estimate. subtracting a margin of error to the point estimate. Point Estimate +/  Margin of Error The purpose of an interval estimate is to provide The purpose of an interval estimate is to provide information about how close the point estimate is to information about how close the point estimate is to the value of the parameter. the value of the parameter. The purpose of an interval estimate is to provide The purpose of an interval estimate is to provide information about how close the point estimate is to information about how close the point estimate is to the value of the parameter. the value of the parameter. Margin of Error and the Interval Estimate

4 4 Slide IS 310 – Business Statistics The general form of an interval estimate of a The general form of an interval estimate of a population mean is population mean is The general form of an interval estimate of a The general form of an interval estimate of a population mean is population mean is Margin of Error and the Interval Estimate

5 5 Slide IS 310 – Business Statistics Interval Estimation of a Population Mean:  Known n In order to develop an interval estimate of a population mean, the margin of error must be computed using either: the population standard deviation , or the population standard deviation , or the sample standard deviation s the sample standard deviation s  is rarely known exactly, but often a good estimate can be obtained based on historical data or other information.  is rarely known exactly, but often a good estimate can be obtained based on historical data or other information. We refer to such cases as the  known case. We refer to such cases as the  known case.

6 6 Slide IS 310 – Business Statistics There is a 1   probability that the value of a There is a 1   probability that the value of a sample mean will provide a margin of error of or less.    /2 1 -  of all values 1 -  of all values Sampling distribution of Sampling distribution of Interval Estimation of a Population Mean:  Known

7 7 Slide IS 310 – Business Statistics    /2 1 -  of all values 1 -  of all values Sampling distribution of Sampling distribution of [ ] interval does not include  interval includes  interval Interval Estimate of a Population Mean:  Known

8 8 Slide IS 310 – Business Statistics Interval Estimate of  Interval Estimate of  Interval Estimate of a Population Mean:  Known where: is the sample mean 1 -  is the confidence coefficient 1 -  is the confidence coefficient z  /2 is the z value providing an area of z  /2 is the z value providing an area of  /2 in the upper tail of the standard  /2 in the upper tail of the standard normal probability distribution normal probability distribution  is the population standard deviation  is the population standard deviation n is the sample size n is the sample size

9 9 Slide IS 310 – Business Statistics Interval Estimate of a Population Mean:  Known n Adequate Sample Size In most applications, a sample size of n = 30 is In most applications, a sample size of n = 30 is adequate. adequate. In most applications, a sample size of n = 30 is In most applications, a sample size of n = 30 is adequate. adequate. If the population distribution is highly skewed or If the population distribution is highly skewed or contains outliers, a sample size of 50 or more is contains outliers, a sample size of 50 or more is recommended. recommended. If the population distribution is highly skewed or If the population distribution is highly skewed or contains outliers, a sample size of 50 or more is contains outliers, a sample size of 50 or more is recommended. recommended.

10 Slide IS 310 – Business Statistics Interval Estimate of a Population Mean:  Known n Adequate Sample Size (continued) If the population is believed to be at least If the population is believed to be at least approximately normal, a sample size of less than 15 approximately normal, a sample size of less than 15 can be used. can be used. If the population is believed to be at least If the population is believed to be at least approximately normal, a sample size of less than 15 approximately normal, a sample size of less than 15 can be used. can be used. If the population is not normally distributed but is If the population is not normally distributed but is roughly symmetric, a sample size as small as 15 roughly symmetric, a sample size as small as 15 will suffice. will suffice. If the population is not normally distributed but is If the population is not normally distributed but is roughly symmetric, a sample size as small as 15 roughly symmetric, a sample size as small as 15 will suffice. will suffice.

11 Slide IS 310 – Business Statistics S D Interval Estimate of Population Mean:  Known n Example: Discount Sounds Discount Sounds has 260 retail outlets throughout the United States. The firm is evaluating a potential location for a new outlet, based in part, on the mean annual income of the individuals in the marketing area of the new location. A sample of size n = 36 was taken; the sample mean income is $31,100. The population is not believed to be highly skewed. The population standard deviation is estimated to be $4,500, and the confidence coefficient to be used in the interval estimate is.95.

12 Slide IS 310 – Business Statistics 95% of the sample means that can be observed are within of the population mean . The margin of error is: Thus, at 95% confidence, the margin of error Thus, at 95% confidence, the margin of error is $1,470. is $1,470. S D Interval Estimate of Population Mean:  Known

13 Slide IS 310 – Business Statistics Interval estimate of  is: Interval Estimate of Population Mean:  Known S D We are 95% confident that the interval contains the population mean. $31,100 + $1,470 or $29,630 to $32,570

14 Slide IS 310 – Business Statistics Interval Estimation of a Population Mean:  Unknown If an estimate of the population standard deviation  cannot be developed prior to sampling, we use the sample standard deviation s to estimate . If an estimate of the population standard deviation  cannot be developed prior to sampling, we use the sample standard deviation s to estimate . This is the  unknown case. This is the  unknown case. In this case, the interval estimate for  is based on the t distribution. In this case, the interval estimate for  is based on the t distribution. n (We’ll assume for now that the population is normally distributed.)

15 Slide IS 310 – Business Statistics The t distribution is a family of similar probability The t distribution is a family of similar probability distributions. distributions. The t distribution is a family of similar probability The t distribution is a family of similar probability distributions. distributions. t Distribution A specific t distribution depends on a parameter A specific t distribution depends on a parameter known as the degrees of freedom. known as the degrees of freedom. A specific t distribution depends on a parameter A specific t distribution depends on a parameter known as the degrees of freedom. known as the degrees of freedom. Degrees of freedom refer to the number of Degrees of freedom refer to the number of independent pieces of information that go into the independent pieces of information that go into the computation of s. computation of s. Degrees of freedom refer to the number of Degrees of freedom refer to the number of independent pieces of information that go into the independent pieces of information that go into the computation of s. computation of s.

16 Slide IS 310 – Business Statistics t Distribution A t distribution with more degrees of freedom has A t distribution with more degrees of freedom has less dispersion. less dispersion. A t distribution with more degrees of freedom has A t distribution with more degrees of freedom has less dispersion. less dispersion. As the number of degrees of freedom increases, the As the number of degrees of freedom increases, the difference between the t distribution and the difference between the t distribution and the standard normal probability distribution becomes standard normal probability distribution becomes smaller and smaller. smaller and smaller. As the number of degrees of freedom increases, the As the number of degrees of freedom increases, the difference between the t distribution and the difference between the t distribution and the standard normal probability distribution becomes standard normal probability distribution becomes smaller and smaller. smaller and smaller.

17 Slide IS 310 – Business Statistics t Distribution Standardnormaldistribution t distribution (20 degrees of freedom) t distribution (10 degrees of freedom) of freedom) 0 z, t

18 Slide IS 310 – Business Statistics For more than 100 degrees of freedom, the standard For more than 100 degrees of freedom, the standard normal z value provides a good approximation to normal z value provides a good approximation to the t value. the t value. For more than 100 degrees of freedom, the standard For more than 100 degrees of freedom, the standard normal z value provides a good approximation to normal z value provides a good approximation to the t value. the t value. t Distribution The standard normal z values can be found in the The standard normal z values can be found in the infinite degrees (  ) row of the t distribution table. infinite degrees (  ) row of the t distribution table. The standard normal z values can be found in the The standard normal z values can be found in the infinite degrees (  ) row of the t distribution table. infinite degrees (  ) row of the t distribution table.

19 Slide IS 310 – Business Statistics t Distribution Standard normal z values

20 Slide IS 310 – Business Statistics n Interval Estimate where: 1 -  = the confidence coefficient t  /2 = the t value providing an area of  /2 t  /2 = the t value providing an area of  /2 in the upper tail of a t distribution in the upper tail of a t distribution with n - 1 degrees of freedom with n - 1 degrees of freedom s = the sample standard deviation s = the sample standard deviation Interval Estimation of a Population Mean:  Unknown

21 Slide IS 310 – Business Statistics A reporter for a student newspaper is writing an article on the cost of off-campus housing. A sample of 16 efficiency apartments within a half-mile of campus resulted in a sample mean of $650 per month and a sample standard deviation of $55. Interval Estimation of a Population Mean:  Unknown n Example: Apartment Rents

22 Slide IS 310 – Business Statistics Let us provide a 95% confidence interval estimate of the mean rent per month for the population of efficiency apartments within a half-mile of campus. We will assume this population to be normally distributed. Interval Estimation of a Population Mean:  Unknown n Example: Apartment Rents

23 Slide IS 310 – Business Statistics At 95% confidence,  =.05, and  /2 =.025. In the t distribution table we see that t.025 = t.025 is based on n  1 = 16  1 = 15 degrees of freedom. Interval Estimation of a Population Mean:  Unknown

24 Slide IS 310 – Business Statistics We are 95% confident that the mean rent per month We are 95% confident that the mean rent per month for the population of efficiency apartments within a half-mile of campus is between $ and $ n Interval Estimate Interval Estimation of a Population Mean:  Unknown Margin of Error

25 Slide IS 310 – Business Statistics Summary of Interval Estimation Procedures for a Population Mean Can the population standard deviation  be assumed deviation  be assumed known ? known ? Use the sample standard deviation s to estimate  Use YesNo Use  Known Case  Unknown Case

26 Slide IS 310 – Business Statistics Let E = the desired margin of error. Let E = the desired margin of error. E is the amount added to and subtracted from the E is the amount added to and subtracted from the point estimate to obtain an interval estimate. point estimate to obtain an interval estimate. E is the amount added to and subtracted from the E is the amount added to and subtracted from the point estimate to obtain an interval estimate. point estimate to obtain an interval estimate. Sample Size for an Interval Estimate of a Population Mean

27 Slide IS 310 – Business Statistics Sample Size for an Interval Estimate of a Population Mean n Margin of Error n Necessary Sample Size

28 Slide IS 310 – Business Statistics Recall that Discount Sounds is evaluating a potential location for a new retail outlet, based in part, on the mean annual income of the individuals in Recall that Discount Sounds is evaluating a potential location for a new retail outlet, based in part, on the mean annual income of the individuals in the marketing area of the new location. Suppose that Discount Sounds’ 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? S D Sample Size for an Interval Estimate of a Population Mean

29 Slide IS 310 – Business Statistics At 95% confidence, z.025 = Recall that  = 4,500. Sample Size for an Interval Estimate of a Population Mean S D A sample of size 312 is needed to reach a desired A sample of size 312 is needed to reach a desired precision of + $500 at 95% confidence. precision of + $500 at 95% confidence.

30 Slide IS 310 – Business Statistics The general form of an interval estimate of a The general form of an interval estimate of a population proportion is population proportion is The general form of an interval estimate of a The general form of an interval estimate of a population proportion is population proportion is Interval Estimation of a Population Proportion

31 Slide IS 310 – Business Statistics Interval Estimation of a Population Proportion The sampling distribution of plays a key role in The sampling distribution of plays a key role in computing the margin of error for this interval computing the margin of error for this interval estimate. estimate. The sampling distribution of plays a key role in The sampling distribution of plays a key role in computing the margin of error for this interval computing the margin of error for this interval estimate. estimate. The sampling distribution of can be approximated The sampling distribution of can be approximated by a normal distribution whenever np > 5 and by a normal distribution whenever np > 5 and n (1 – p ) > 5. n (1 – p ) > 5. The sampling distribution of can be approximated The sampling distribution of can be approximated by a normal distribution whenever np > 5 and by a normal distribution whenever np > 5 and n (1 – p ) > 5. n (1 – p ) > 5.

32 Slide IS 310 – Business Statistics  /2 Interval Estimation of a Population Proportion n Normal Approximation of Sampling Distribution of Sampling distribution of Sampling distribution of p p 1 -  of all values 1 -  of all values

33 Slide IS 310 – Business Statistics n Interval Estimate Interval Estimation of a Population Proportion where: 1 -  is the confidence coefficient z  /2 is the z value providing an area of z  /2 is the z value providing an area of  /2 in the upper tail of the standard  /2 in the upper tail of the standard normal probability distribution normal probability distribution is the sample proportion is the sample proportion

34 Slide IS 310 – Business Statistics 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, PSI interviewers ask registered voters who they would vote for if the election were held that day. Interval Estimation of a Population Proportion n Example: Political Science, Inc.

35 Slide IS 310 – Business Statistics In a current election campaign, PSI has just found that 220 registered voters, out of 500 contacted, favor a particular candidate. candidate. PSI wants to develop a 95% confidence interval estimate for the proportion of the population of registered voters that favor the candidate. Interval Estimation of a Population Proportion n Example: Political Science, Inc.

36 Slide IS 310 – Business Statistics where: n = 500, = 220/500 =.44, z  /2 = 1.96 Interval Estimation of a Population Proportion PSI is 95% confident that the proportion of all voters that favor the candidate is between.3965 and PSI is 95% confident that the proportion of all voters that favor the candidate is between.3965 and =

37 Slide IS 310 – Business Statistics Solving for the necessary sample size, we get n Margin of Error Sample Size for an Interval Estimate of a Population Proportion However, will not be known until after we have selected the sample. We will use the planning value p * for.

38 Slide IS 310 – Business Statistics Sample Size for an Interval Estimate of a Population Proportion The planning value p * can be chosen by: 1. Using the sample proportion from a previous sample of the same or similar units, or 2. Selecting a preliminary sample and using the sample proportion from this sample. n Necessary Sample Size

39 Slide IS 310 – Business Statistics 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? (A previous sample of similar units yielded.44 for the sample proportion.) Sample Size for an Interval Estimate of a Population Proportion

40 Slide IS 310 – Business Statistics At 99% confidence, z.005 = Recall that  =.44. A sample of size 1817 is needed to reach a desired A sample of size 1817 is needed to reach a desired precision of +.03 at 99% confidence. precision of +.03 at 99% confidence. Sample Size for an Interval Estimate of a Population Proportion

41 Slide IS 310 – Business Statistics Note: We used.44 as the best estimate of p in the preceding 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 Sample Size for an Interval Estimate of a Population Proportion

42 Slide IS 310 – Business Statistics End of Chapter 8