Statistics for Economists (Econ2042) 2023

CHAPTER SEVEN

7. HYPOTHESIS TESTING

7.1. Basic Concepts

This is also one way of making inference about population parameter, where the investigator
has prior notion about the value of the parameter.
`Definitions:
 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.
 Critical region: Set of all values which would cause us to reject H0
 Critical value(s): The value(s) which separate the critical region from the
non-critical region. The critical values are determined independently of the
sample statistics.

There are two types of hypothesis:

Null hypothesis:
 It is the hypothesis to be tested.
 It is the hypothesis of equality or the hypothesis of no difference.
 Usually denoted by H0.
Alternative hypothesis:
 It is the hypothesis available when the null hypothesis has to be rejected.
 It is the hypothesis of difference.
 Usually denoted by H1 or HA.
General steps in hypothesis testing:
1. Specify the null hypothesis (H0) and the alternative hypothesis (H1).
2. Specify the significance level, 
3. Identify the sampling distribution (if it is Z or t) of the estimator.
4. Identify the critical region.
5. Calculate a statistic analogous to the parameter specified by the null hypothesis.
6. Making decision.
7. Summarization of the result.

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 Statistics for Economists (Econ2042) 2023

7.2. Types and Size of Errors

There are two types of errors in Hypothesis testing theses are type I error and type II errors
Type I error: Rejecting the null hypothesis when it is true (saying false when true). Usually
the more serious error and Probability of committing a Type I error is denoted by .

Alpha is also known as Significance level. Alpha = 0.05 and alpha = 0.01 are common. The
level of significance is the complement of the level of confidence in estimation.
Type II error: Failing to reject the null hypothesis when it is false (Saying true when false)
and Probability of committing a Type I error is denoted by

The following table gives a summary of possible results of any hypothesis test
Decision
Truth Reject H0 Don't reject H0
H0 Type I error Right decision
HA Right decision Type I error
 Type I error ( ) and type II error ( ) have inverse relationship and therefore, cannot
be minimized at the same time.
7.3. One tailed / two tailed hypothesis tests
Based on the alternative hypothesis, the type of test can be one tailed (left, right tail) and two-
tail
Suppose the assumed or hypothesized value of is denoted by , then one can formulate
two sided (1) and one sided (2 and 3) hypothesis as follows:

1. H 0 :   0 vs H1 :    0

2.
H 0 :   0 vs H1 :   0
3.
H 0 :   0 vs H1 :   0
7.4. Hypothesis testing of population parameter
7.4.1. Hypothesis testing about the population mean,  :

Suppose the assumed or hypothesized value of  is denoted by  0 , then one can formulate two
sided (1) and one sided (2 and 3) hypothesis as follows:
1. H 0 :   0 vs H1 :    0
2. H 0 :   0 vs H1 :   0
3. H 0 :   0 vs H1 :   0

Case 1: When sampling is from a normal distribution with  2 known

1.The relevant test statistic is

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 Statistics for Economists (Econ2042) 2023

X  0
Z cal 
 n
2.After specifying  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

  0 Z cal  Z 2 Z cal  Z 2
Z cal  Z 2 or Z cal   Z 2

  0 Z cal  Z Z cal  Z Z cal  Z

  0 Z cal  Z Z cal  Z Z cal  Z

Case 2: When sampling is from a normal distribution with 2 unknown and small sample
size
3.The relevant test statistic is
X  0
t cal  ~ t with n  1 deg rees of freedom.
S n
4.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
  0 tcal  t 2 tcal  t 2
tcal  t 2 or tcal  t 2

  0 tcal  t tcal  t tcal  t

  0 tcal  t tcal  t tcal  t

Case 3: When sampling is from a non- normally distributed population or a population

whose functional form is unknown.
5. If a sample size is large one can perform a test hypothesis about the mean by using:
X  0
Z cal  , if  2 is known.
 n
X  0
 , if  2 is unknown.
S n
6.The decision rule is the same as case I.
Examples:
1. Test the hypotheses that the average height content of containers of certain lubricant is 10
liters if the contents of a random sample of 10 containers are 10.2, 9.7, 10.1, 10.3, 10.1,
9.8, 9.9, 10.4, 10.3, and 9.8 liters. Use the 0.01 level of significance and assume that the
distribution of contents is normal.

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 Statistics for Economists (Econ2042) 2023

Solution:
Let   Population mean. ,  0  10
Step 1: Identify the appropriate hypothesis
H 0 :   10 vs H1 :   10
Step 2: select the level of significance,   0.01( given)
Step 3: Select an appropriate test statistics
t- Statistic is appropriate because population variance is not known and the sample size is
also small.
Step 4: identify the critical region.
Here we have two critical regions since we have two tailed hypothesis
The critical region is tcal  t0.005 (9)  3.2498
 (3.2498, 3.2498) is accep tan ce region.
Step 5: Computations:
X  10.06, S  0.25
X   0 10.06  10
 t cal    0.76
S n 0.25 10
Step 6: Decision

Accept H0 , since tcal is in the acceptance region.

Step 7: 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.
2. 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?
(Use   0.05 and assume the normality of the population)
Solution:
Let   Population mean. , 0  1600
Step 1: Identify the appropriate hypothesis
H 0 :   1600 vs H1 :   1600
Step 2: select the level of significance,   0.05 ( given)
Step 3: Select an appropriate test statistics
Z- Statistic is appropriate because population variance is known.
Step 4: identify the critical region.

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 Statistics for Economists (Econ2042) 2023

The critical region is Z cal   Z 0.05  1.645

 (1.645, ) is accep tan ce region.
Step 5: Computations:
X   0 1570  1600
Z cal    1.0
 n 120 16
Step 6: Decision
Accept H0, since Zcal is in the acceptance region.
Step 7: 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.
3.4.2. Hypothesis testing about the population proportion (P)
You are testing p, you are not testing pˆ. If you knew the value of p, then there would be
nothing to test. The population proportion has an approximately normal distribution if np and
nq are both at least 5. Remember that we are approximating the binomial using the normal,
and that the p we're talking about is the probability of success on a single trial. The test
statistic is
̂

√
The critical value is found from the normal table.
The steps involved in the hypothesis testing remain the same. The only thing that changes is
the formula for calculating the test statistic and perhaps the distribution which is used.
Example: A random sample of 262 disciplinary problem cases in a certain organization
shows that 150 are male and 112 are female. Therefore, the observed proportion of cases that
are male = 150 / (150 + 112) = .5725. If there were no gender difference for this case, we
would expect 50% of cases to be male. Is the observed proportion significantly different from
expected at = .05 level?
Solution
Let p represent the population proportion that is male. Observed proportion: pˆ =0.5725
based on n = 262
H0: p =0.50 vs. H1: P = 0.50
Check to see if normal approximation can be used: np = (262)(0.5) =132. And n(1-p)=262(1-
0.5)=132 which is sufficiently large Therefore, the normal approximation is OK.
= 0.05 => Ztab=1.96
̂

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 Statistics for Economists (Econ2042) 2023

 Reject H0, since | Z|

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