Statistics for Business and Economics (13e)

Statistics for
Slides by

Business
Johnand Economics (13e)
Loucks
Anderson, Sweeney, Williams, Camm, Cochran
St. Edward’s
© 2017 Cengage Learning
University

Slides by John Loucks

St. Edwards University

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 Statistics for Business and Economics (13e)

Chapter 8
Interval Estimation
• Population Mean:  Known
• Population Mean:  Unknown
• Determining the Sample Size
• Population Proportion

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 Statistics for Business and Economics (13e)

Margin of error and the Interval Estimate

• A point estimator cannot be expected to provide the exact value of the
population parameter.
• An interval estimate can be computed by adding and subtracting a margin of
error to the point estimate.
Point estimate ± Margin of error
• The purpose of an interval estimate is to provide information about how
close the point estimate, is to the value of the parameter.

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 Statistics for Business and Economics (13e)

Margin of Error and the Interval Estimate

• The general form of an interval estimate of a population mean is

𝑥ҧ + Margin of error

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• 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 sample standard deviation s
•  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.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

There is a 1 -  probability that the value of a sample
mean will provide a margin of error of 𝑧𝛼/2 𝜎𝑥ҧ or less.

Sampling
distribution
of 𝑥ҧ

1 -  of all
/2 𝑥ҧ values /2

𝑥ҧ

՚ 𝑧𝛼/2𝜎𝑥ҧ ՜՚ 𝑧𝛼/2𝜎𝑥ҧ ՜

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

Sampling
distribution
of 𝑥ҧ

1 -  of all
/2 𝑥ҧ values /2

𝑥ҧ

՚ 𝑧𝛼/2𝜎𝑥ҧ ՜ ՚ 𝑧𝛼/2𝜎𝑥ҧ ՜
interval interval
does not −−−− −𝑥ҧ −−−− − includes 
include  −−−− −𝑥ҧ −−−− −

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Interval Estimate of 
𝜎
𝑥ҧ ± 𝑧𝛼/2
𝑛

where: 𝑥ҧ 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

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Values of z/2 for the Most Commonly Used Confidence Levels

Confidence Table
Level  /2 Look-up Area z/2
90% .10 .05 .9500 1.645
95% .05 .025 .9750 1.960
99% .01 .005 .9950 2.576

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 Statistics for Business and Economics (13e)

Meaning of Confidence
• Because 90% of all the intervals constructed using 𝑥ഥ + 1.645𝜎𝑥ҧ will contain
the population mean, we say we are 90% confident that the interval
𝑥ഥ + 1.645𝜎𝑥ҧ includes the population mean .
• We say that this interval has been established at the 90% confidence level.
• The value .90 is referred to as the confidence coefficient.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• 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 $41,100.
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.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Example: Discount Sounds
95% of the sample means that can be observed are within + 1.96 𝜎𝑥ҧ of the
population mean . The margin of error is:

𝜎 4,500
𝑧𝛼/2 = 1.96 = 1,470
𝑛 36

Thus at 95% confidence, the margin of error is $1,470.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Example: Discount Sounds
Interval estimate of  is:
$41,100 + $1,470
or
$39,630 to $42,570

We are 95% confident that the interval contains the population mean.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Example: Discount Sounds
Confidence Margin
level of error Interval estimate
90% 1,234 39,866 to 42,334
95% 1,470 39,630 to 42,570
99% 1,932 39,168 to 43,032

In order to have a higher degree of confidence, the margin of error

and thus the width of the confidence interval must be larger.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Adequate Sample Size
• In most applications, a sample size of n≥ 30 is adequate.
• If the population distribution is highly skewed or contains outliers, a
sample size of 50 or more is recommended.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Known

• Adequate Sample Size (continued)
• If the population is not normally distributed but is roughly symmetric, a
sample size as small as 15 will suffice.
• If the population is believed to be at least approximately normal, a
sample size of less than 15 can be used.

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 Statistics for Business and Economics (13e)

Interval Estimate 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  .
• This is the  unknown case.
• In this case, the interval estimate for  is based on the t distribution.
• (We’ll assume for now that the population is normally distributed.)

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 Statistics for Business and Economics (13e)

t Distribution
• William Gosset, writing under the name “Student”, is the founder of the t
distribution.
• Gosset was an Oxford graduate in mathematics and worked for the
Guinness Brewery in Dublin.
• He developed the t distribution while working on small-scale materials
and temperature experiments.

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 Statistics for Business and Economics (13e)

t Distribution
• The t distribution is a family of similar probability distributions.
• A specific t distribution depends on a parameter known as the degrees of
freedom.

• Degrees of freedom refer to the number of independent pieces of

information that go into the computation of s.

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 Statistics for Business and Economics (13e)

t Distribution
• A t distribution with more degrees of freedom has less dispersion.
• As the degrees of freedom increases, the difference between the t
distribution and the standard normal probability distribution becomes
smaller and smaller.

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 Statistics for Business and Economics (13e)

t Distribution
Standard t distribution
normal (20 degrees
distribution of freedom)

t distribution
(10 degrees
of freedom)

z, t
0

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 Statistics for Business and Economics (13e)

t Distribution
• For more than 100 degrees of freedom, the standard normal z value
provides a good approximation to the t value.
• The standard normal z values can be found in the infinite degrees (∞ ) row
of the t distribution table.

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 Statistics for Business and Economics (13e)

t Distribution
Degrees Area in Upper Tail
of Freedom .20 .10 .05 .025 .01 .005
. . . . . . .
50 .849 1.299 1.676 2.009 2.403 2.678
60 .848 1.296 1.671 2.000 2.390 2.660
80 .846 1.292 1.664 1.990 2.374 2.639
100 .845 1.290 1.660 1.984 2.364 2.626
∞ .842 1.282 1.645 1.960 2.326 2.576

(bottom row is standard normal z values)

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Unknown

• Interval Estimate
𝑠
𝑥ҧ ± 𝑡𝛼/2
𝑛

where: 𝑥ҧ = the sample mean

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
n = the sample size

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Unknown

• Example: Apartment Rents
A reporter for a student newspaper is writing an article on the cost of off-
campus housing. A sample of 16 one-bedroom apartments within a half-mile
of campus resulted in a sample mean of $750 per month and a sample
standard deviation of $55.
Let us provide a 95% confidence interval estimate of the mean rent per
month for the population of one-bedroom apartments within a half-mile of
campus. We will assume this population to be normally distributed.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Unknown

• At 95% confidence,  = .05, and /2 = .025.
• t.025 is based on n - 1 = 16 - 1 = 15 degrees of freedom.

Degrees Area in Upper Tail

of Freedom .20 .10 .05 .025 .01 .005

15 .866 1.341 1.753 2.131 2.602 2.947

16 .865 1.337 1.746 2.120 2.583 2.921
17 .863 1.333 1.740 2.110 2.567 2.898
18 .862 1.330 1.734 2.101 2.520 2.878
19 .861 1.328 1.729 2.093 2.539 2.861
. . . . . . .

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Unknown

• Interval Estimate
𝑠
𝑥ҧ ± 𝑡.025
𝑛
55
750 + 2.131 = 750 + 29.30
16

We are 95% confident that the mean rent per month

for the population of one-bedroom apartments within
a half-mile of campus is between $720.70 and $779.30.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Unknown

• Adequate Sample Size
• Usually, a sample size of n ≥ 30 is adequate when using the
expression 𝑥ҧ ± 𝑡𝛼/2𝑠/ 𝑛 to develop an interval estimate of a
population mean.
• If the population distribution is highly skewed or contains outliers,
a sample size of 50 or more is recommended.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Mean:  Unknown

• Adequate Sample Size (continued)
• If the population is not normally distributed but is roughly symmetric, a
sample size as small as 15 will suffice.
• If the population is believed to be at least approximately normal, a
sample size of less than 15 can be used.

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 Statistics for Business and Economics (13e)

Summary of Interval Estimation Procedures

for a Population Mean
Can the
Yes population standard No
deviation  be assumed
known ?
Use the sample
standard deviation
s to estimate 

Use Use
𝜎  Known  Unknown 𝑠
𝑥ҧ ± 𝑧𝛼/2 Case Case 𝑥ҧ ± 𝑡𝛼/2
𝑛 𝑛

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population Mean

• Let E = the desired margin of error.
• E is the amount added to and subtracted from the point estimate to obtain
an interval estimate.
• If a desired margin of error is selected prior to sampling, the sample size
necessary to satisfy the margin of error can be determined.

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population Mean

• Margin of error
𝜎
𝐸 = 𝑧𝛼/2
𝑛

• Necessary Sample Size

(𝑧𝛼/2 )2 𝜎 2
n=
𝐸2

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population Mean

• The Necessary Sample Size equation requires a value for the population
standard deviation  .
• If  is unknown, a preliminary or planning value for  can be used in the
equation.
1. Use the estimate of the population standard deviation computed in a
previous study.
2. Use a pilot study to select a preliminary sample and use the sample
standard deviation from the study.
3. Use judgment or a “best guess” for the value of .

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population Mean

• Example: Discount Sounds
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?

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population Mean

𝜎
𝐸 = 𝑧𝛼/2 = 500
𝑛
At 95% confidence, z.025 = 1.96. Recall that  = 4,500.

(1.96)2(4,500)2
𝑛= 2 = 311.17 ⋍ 312
(500)

A sample of size 312 is needed to reach a desired

precision of + $500 at 95% confidence.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

• The general form of an interval estimate of a population proportion is:

𝑝ҧ + Margin of error

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

• The sampling distribution of 𝑝ҧ plays a key role in computing the margin of
error for this interval estimate.
• The sampling distribution of 𝑝ҧ can be approximated by a normal
distribution whenever np > 5 and n(1 – p) > 5.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

• Normal Approximation of Sampling Distribution of 𝑝ҧ

𝑝(1 − 𝑝)
𝜎𝑝ҧ =
𝑛

 /2 1 -  of all  /2
𝑝ҧ values
𝑝ҧ
p
՚ 𝑧𝛼/2 𝜎𝑝ҧ ՜՚ 𝑧𝛼/2 𝜎𝑝ҧ ՜

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

• Interval Estimate
𝑝(1
ҧ − 𝑝)ҧ
𝑝ҧ ± 𝑧𝛼/2
𝑛

where: 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, and
𝑝ҧ is the sample proportion

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

• Example: Political Science, Inc.
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.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

• Example: Political Science Inc.
In a current election campaign, PSI has just found that 220
registered voters, out of 500 contacted, favor a particular candidate.
PSI wants to develop a 95% confidence interval estimate for the
proportion of the population of registered voters that favor the
candidate.

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 Statistics for Business and Economics (13e)

Interval Estimate of a Population Proportion

𝑝(1
ҧ − 𝑝)ҧ
𝑝ҧ ± 𝑧𝛼/2
𝑛

where: n = 500, 𝑝ҧ = 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 favor the candidate is between .3965 and .4835.

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population

Proportion
• Margin of error
𝑝(1−
ҧ 𝑝)ҧ
E = 𝑧𝛼/2
𝑛

Solving for the necessary sample size n, we get

2
𝑧𝛼/2 𝑝ҧ 1 − 𝑝ҧ
𝑛=
𝐸2

However, 𝑝ҧ will not be known until after we have selected

the sample. We will use the planning value p* for 𝑝.ҧ

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 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population

Proportion
• Necessary Sample Size
2 ∗
𝑧𝛼/2 𝑝 1 − 𝑝 ∗
𝑛=
𝐸2
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.
3. Using judgment or a “best guess” for a p* value.
4. Otherwise, using .50 as the p* value.

© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or i n part, except for use as permitted in a license distributed with a certain product or service or 44
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of a Population

Proportion
• Example: Political Science, Inc.
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.)

© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or i n part, except for use as permitted in a license distributed with a certain product or service or 45
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of

a Population Proportion
𝑝∗ (1 − 𝑝 ∗)
𝑧𝛼/2 = .03
𝑛

At 99% confidence, z.005 = 2.576. Recall that p* = .44.

2 ∗
𝑧𝛼/2 𝑝 1 − 𝑝∗ 2.576 2(.44) .56
𝑛= 2 = 2 = 1817
𝐸 (.03)

A sample of size 1817 is needed to reach a

desired precision of + .03 at 99% confidence.

© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or i n part, except for use as permitted in a license distributed with a certain product or service or 46
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Statistics for Business and Economics (13e)

Sample Size for an Interval Estimate of

a Population Proportion
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 1843.

© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or i n part, except for use as permitted in a license distributed with a certain product or service or 47
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Statistics for Business and Economics (13e)

End of Chapter 8

© 2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or i n part, except for use as permitted in a license distributed with a certain product or service or 48
otherwise on a password-protected website or school-approved learning management system for classroom use.