Statistics for Business and Economics (14e)

Chapter 8 - Interval Estimation

8.3 – Determining the Sample Size

8.4 – Population Proportion
8.5 – Big Data and Confidence Intervals

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 Statistics for Business and Economics (14e)

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.

• 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 (14e)

Interval Estimate of a Population Mean: σ Known (1 of 4)

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

• In order to develop an interval estimate of a population mean, the margin of error

must be computed using either:

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Known (2 of 4)

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Known (3 of 4)

Interval Estimate of μ:

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 Statistics for Business and Economics (14e)

Why Zα/2​ is Used:

• Symmetry of the Normal Distribution: The normal distribution is symmetric,
so the area under the curve to the left of −zα/2 and to the right of zα/2 is
equal to α/2.
• Critical Value: zα/2 is the critical value that cuts off the upper α/2 portion of
the distribution. For example, for a 95% confidence interval (where α=0.05),
zα/2​ is approximately 1.96, meaning 95% of the area under the standard
normal curve lies between -1.96 and +1.96.
• Margin of Error: In constructing a confidence interval, zα/2​ is multiplied by the
standard error of the sample mean to create the margin of error. This margin
of error determines the width of the confidence interval around the sample
mean.

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 Statistics for Business and Economics (14e)

Confidence Alpha Alpha divided by Table Look-up Area 2 subscript alpha divided by 2
Level 2 baseline
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 (14e)

Meaning of C% Confidence

• We say that this interval has been established at the 90% confidence level.
• The value 0.90 is referred to as the confidence coefficient.

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Known (1 of 5)

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 0.95.

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Known (2 of 5)

Example: Discount Sounds

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

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Known (3 of 5)

Example: Discount Sounds

$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 (14e)

Interval Estimate of a Population Mean: σ Known (4 of 5)

Example: Discount Sounds

Confidence Margin of Interval estimate

level error
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 (14e)

Interval Estimate of a Population Mean: σ Known (5 of 5)

Adequate Sample Size

• If the population distribution is highly skewed or contains outliers, a sample size of

50 or more is recommended.
• 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 (14e)

Sample problems
1. A simple random sample of 40 items resulted in a sample mean of 25.
The population standard deviation is 𝜎. = 5.
a) What is the standard error of the mean, 𝜎𝑥 ?
b) At 95% confidence, what is the margin of error?

2. A simple random sample of 50 items from a population with σ= 6 resulted in

a sample mean of 32.
a. Provide a 90% confidence interval for the population mean.
b. Provide a 95% confidence interval for the population mean.
c. Provide a 99% confidence interval for the population mean.

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ unknown

• We’ll assume for now that the population is normally distributed.

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 Statistics for Business and Economics (14e)

t Distribution (1 of 4)
• 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 (14e)

t Distribution (2 of 4)
• 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.
• 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 (14e)

t Distribution (3 of 4)

• 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 (14e)

t Distribution (4 of 4)

Degrees of .20 area in .10 area in .05 area in .025 area in .01 area in .005 area in
Freedom upper tail upper tail upper tail upper tail upper tail upper tail

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 2374 2.639
100 .845 1.290 1.660 1.984 2.364 2.626
Infinite .842 1.282 1.645 1.960 2.326 2.576

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Unknown (1 of 5)

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 Statistics for Business and Economics (14e)

Interval Estimate of a Population Mean: σ Unknown (2 of 5)

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 (14e)

Interval Estimate of a Population Mean: σ Unknown (3 of 5)

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

Freedom

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 (14e)

Interval Estimate of a Population Mean: σ Unknown (4 of 5)

Interval Estimate

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 (14e)

Interval Estimate of a Population Mean: σ Unknown (5 of 5)

Adequate Sample Size
• Usually, a sample size of at least 30 is adequate when using a t interval to
estimate a population mean.
• If the population distribution is highly skewed or contains outliers, a sample
size of 50 or more is recommended.
• 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.

24
 Statistics for Business and Economics (14e)

Summary of Interval Estimation Procedures for a Population Mean

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 Statistics for Business and Economics (14e)

Normal vs t distribution
1. Normal Distribution:
Large Sample Size (n > 30): When you have a large sample size, the Central Limit Theorem states that
the sampling distribution of the sample mean will be approximately normal, regardless of the population
distribution. Therefore, the normal distribution is appropriate.
Known Population Standard Deviation (σ): If the population standard deviation is known, even with a
small sample size, the normal distribution is often used.

2. t-Distribution:
•Small Sample Size (n ≤ 30): When the sample size is small, the sampling distribution of the sample
mean is not perfectly normal, so the t-distribution, which has heavier tails, is more appropriate.
•Unknown Population Standard Deviation (σ): If the population standard deviation is unknown, you
should use the t-distribution, regardless of the sample size,

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 Statistics for Business and Economics (14e)

Sample Size for an Interval Estimate of a Population Mean (1 of 4)

• 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.
• Margin of error

• Necessary sample size

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 Statistics for Business and Economics (14e)

Sample Size for an Interval Estimate of a Population Mean (3 of 4)

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 0.95 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 (14e)

Sample Size for an Interval Estimate of a Population Mean (4 of 4)

E is the desired margin of error

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 Statistics for Business and Economics (14e)

End of Chapter 8

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