Essentials of Modern Business Statistics (7e)

Essentials of Modern
Business Statistics (7e)
Anderson, Sweeney, Williams, Camm, Cochran
© 2018 Cengage Learning

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Essentials of Modern Business Statistics (7e)

Chapter 8
Interval Estimation

 Population Mean: s Known

 Population Mean: s Unknown
 Determining the Sample Size
 Population Proportion
 Big data and Interval estimation

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Essentials of Modern Business Statistics (7e)

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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 Essentials of Modern Business Statistics (7e)

Margin of Error and the Interval Estimate

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

+ Margin of Error

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s 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 s , or
• the sample standard deviation s

 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 s known case.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s

Known
   There is a 1 -  probability that the value of a sample
mean will provide a margin of error of or less.

/2 /2

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s

Known

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Known

  
Interval Estimate of m

where: 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
s is the population standard deviation
n is the sample size

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Known

Values of za/2 for the Most Commonly Used Confidence Levels

Confidence a a/2 Look-up Area za/2

level
90% .1 .05 .9500 1.645
95% .05 .025 .9750 1.960
99% .01 .005 .9950 2.576

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 Essentials of Modern Business Statistics (7e)

Meaning of Confidence
  
 Because 90% of all the intervals constructed using + will contain the
population mean, we say we are 90% confident that the interval
+includes the population mean m.

 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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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean:  Known

  
Example: Lloyds Department store

Each week Lloyds department store selects a simple random sample of

100 customers in order to learn about the amount spent per shopping
trip. The historical data indicates that the population follows a normal
distribution.
During most recent week, Lloyd’s surveyed 100 customers (n = 100)
and obtained a sample mean of = $82. Based on historical data, Lloyd’s
now assumes a known value of = $20. The confidence coefficient to be
used in the interval estimate is .95.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: 

Known
  
Example: Lloyds Department store

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

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: 

Known
Example: Lloyds Department store

Interval estimate of  is:

$82 + $ 3.92
or
$78.08 to $85.29

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

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Essentials of Modern Business Statistics (7e)

Using Excel to construct a confidence interval -  Known

 Excel Formula Worksheet

Note: Rows 18-99

are not shown.
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 Essentials of Modern Business Statistics (7e)

Using Excel to construct a confidence interval -  Known

 Excel Value Worksheet

Note: Rows 18-99

are not shown.
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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean:  Known

Example: Lloyds Department store

Confidence level Margin of Error Interval estimate

90% 3.29 78.71 – 85.29

95% 3.92 78.08 – 85.92

99% 5.15 76.85 – 87.15

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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 Essentials of Modern Business Statistics (7e)

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.

 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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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean:  Unknown

 If an estimate of the population standard deviation s cannot be

developed prior to sampling, we use the sample standard deviation
s to estimate s .
 This is the s unknown case.
 In this case, the interval estimate for m is based on the t distribution.
 (We’ll assume for now that the population is normally distributed.)

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 Essentials of Modern Business Statistics (7e)

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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 Essentials of Modern Business Statistics (7e)

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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 Essentials of Modern Business Statistics (7e)

t Distribution

 A t distribution with more degrees of freedom has less dispersion.

 As the degrees of freedom increase, the difference between the t

distribution and the standard normal probability distribution
becomes smaller and smaller.

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 Essentials of Modern Business Statistics (7e)

t Distribution
Comparison of the standard normal distribution with t distributions
having 10 and 20 degrees of freedom.

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 Essentials of Modern Business Statistics (7e)

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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 Essentials of Modern Business Statistics (7e)

t Distribution
Selected values
from the t
distribution table

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Unknown

  

where: = 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

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Unknown

Example: Credit card debt for the population of US households

The credit card balances of a sample of 70 households provided a mean

credit card debt of $9312 with a sample standard deviation of $4007.
Let us provide a 95% confidence interval estimate of the mean credit
card debt for the population of US households. We will assume this
population to be normally distributed.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Unknown

 At 95% confidence,  = .05, and /2 = .025.
 t.025 is based on n - 1 = 70 - 1 = 69 degrees of freedom.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Unknown

  
Example: Credit card debt for the population of US households

9312 + 1.995 = 9312 + 955

We are 95% confident that the mean credit card debt for the
population of US households is between $8357 and $10267.

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 Essentials of Modern Business Statistics (7e)

Using Excel’s Descriptive Statistics Tool

Steps

Step 1: Click the Data tab on the Ribbon

Step 2: In the Analysis group click Data Analysis

Step 3: Choose Descriptive Statistics from the list of Analysis

tools

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 Essentials of Modern Business Statistics (7e)

Using Excel’s Descriptive Statistics Tool

Step 4: When the Descriptive statistics dialog box appears
• Enter Input Range
• Select Grouped by columns
• Select Labels in the first row
• Select Output range:
• Enter C1 in the output range box
• Select summary statistics
• Select confidence level for mean
• Enter 95 in the confidence level for mean box
• Click OK

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 Essentials of Modern Business Statistics (7e)

Using Excel’s Descriptive Statistics Tool

 Excel Worksheets

95% confidence interval

for credit card balances.

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Mean: s Unknown

  
Adequate Sample Size
 Usually, a sample size of n ≥ 30 is adequate when using the
expression 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.
 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.

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Essentials of Modern Business Statistics (7e)

Summary of Interval Estimation Procedures

for a Population Mean

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 Essentials of Modern Business Statistics (7e)

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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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of a Population Mean

  Margin of Error

 Necessary Sample Size

n=

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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of a Population Mean

 The Necessary Sample Size equation requires a value for the
population standard deviation s .
 If s is unknown, a preliminary or planning value for s 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 study and use the
sample standard deviation from the study.
3. Use judgment or a “best guess” for the value of s .

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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of a Population Mean

Example: Cost of renting Automobiles in United States
A previous study that investigated the cost of renting automobiles in
the United States found a mean cost of approximately $55 per day for
renting a midsize automobile with a standard deviation of $9.65.
Suppose the project director wants an estimate of the population mean
daily rental cost such that there is a .95 probability that the sampling
error is $2 or less.
How large a sample size is needed to meet the required precision?

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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of a Population Mean

  
Example: Cost of renting Automobiles in United States

At 95% confidence, z.025 = 1.96. Recall that  = 9.65.

The sample size needs to be at least 90 mid size automobile rentals in

order to satisfy the project director’s $2 margin-of-error requirement.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Proportion

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

+ Margin of Error

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Proportion

  
 The sampling distribution of plays a key role in computing the
margin of error for this interval estimate.

 The sampling distribution of can be approximated by a normal

distribution whenever np > 5 and n(1 – p) > 5.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Proportion

  Normal Approximation of Sampling Distribution of

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Proportion

  

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
is the sample proportion

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Proportion

Example: Survey of women golfers

A national survey of 900 women golfers was conducted to learn how

women golfers view their treatment at golf courses in United States.
The survey found that 396 of the women golfers were satisfied with the
availability of tee times.
Suppose one wants to develop a 95% confidence interval estimate for
the proportion of the population of women golfers satisfied with the
availability of tee times.

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 Essentials of Modern Business Statistics (7e)

Interval Estimate of a Population Proportion

  
Example: Survey of women golfers

where: n = 900, = 396/900 = .44, z/2 = 1.96

1.96 = .44 ± .0324

Survey results enable us to state with 95% confidence that between 40.76%
and 47.24% of all women golfers are satisfied with the availability of tee
times.

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 Essentials of Modern Business Statistics (7e)

Using Excel to construct a confidence interval

 Excel Formula and Value Worksheet

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of

a Population Proportion
  
Margin of Error
E=
Solving for the necessary sample size n, we get

However, will not be known until after we have selected the sample.
We will use the planning value p* for .

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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of

a Population Proportion
  
Necessary Sample Size

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.

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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of

a Population Proportion
Example: Survey of women golfers

Suppose the survey director wants to estimate the population

proportion with a margin of error of .025 at 95% confidence.

How large a sample size is needed to meet the required precision? (A

previous sample of similar units yielded .44 for the sample proportion.)

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 Essentials of Modern Business Statistics (7e)

Sample Size for an Interval Estimate of

a Population Proportion
  
Example: Survey of women golfers

E=

At 95% confidence, z.0125 = 1.96. Recall that p* = .44.

A sample of size 1515 is needed to reach a desired precision of + .025

at 95% confidence.

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 Essentials of Modern Business Statistics (7e)

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 1537.

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 Essentials of Modern Business Statistics (7e)

Implications of Big Data

 As the sample size becomes extremely large, the margin of error

becomes extremely small and resulting confidence intervals become
extremely narrow.
 No interval estimate will accurately reflect the parameter being
estimated unless the sample is relatively free of nonsampling error.
 Statistical inference along with information collected from other
sources can help in making the most informed decision.

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 Essentials of Modern Business Statistics (7e)

End of Chapter 8

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