MEDITERRANEAN SCHOOL OF BUSINESS

C O U R S E : M B M B U S I N E S S S TAT I S T I C S

PROFESSOR: Dr. Dorra Louati and Dr. Houda Boubaker

Fall 2021

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Chapter 4
ESTIMATION AND CONFIDENCE INTERVALS

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Where we have been…

Chapter 3:
Sampling distributions allow us to make probability statements about sample statistics.

We need the population parameters.

For sample mean: µ and σ
For sample proportion: p

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Where we are going…

However, in almost all realistic situations these parameters are unknown.

We will use the sampling distribution to draw inferences about the unknown population
parameters.

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Statistical Inference…
Statistical inference is the process by which we acquire information and draw conclusions
about populations from samples.
Population

Sample

Inference

Statistic
Parameter

In order to do inference, we require the skills and knowledge of descriptive statistics, probability
distributions, and sampling distributions.

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Chapter Outline
1. Introduction
2. Confidence intervals for a population mean, µ
 when population standard deviation σ is known
 when population standard deviation σ is unknown

3. Confidence intervals for a population proportion, p

4. Determining the required sample size

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Estimation…
The objective of estimation is to determine the approximate value of a
population parameter on the basis of a sample statistic.

E.g., the sample mean ( ) is used to estimate the population mean (m).

There are two types of estimators:

oPoint Estimator
oInterval Estimator (Confidence Interval)

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Point and Interval Estimates
A point estimate is a single number, used to estimate an unknown
population parameter
A confidence interval provides additional information about variability

Lower Upper
Confidence Confidence
Point Estimate
Limit Limit
Width of
confidence interval
Margin of Error

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Estimating m when is known…
In this section, we will assume that the population standard deviation is known, and that the population
mean is unknown.

We can produce the folowing general probability statement about Z

From the previous chapter, we know that

We can substitute Z by .
 /2 1   /2

0 z

10.9
Estimating m when is known…
Substituting Z we produce
x 
P(  z  / 2   z / 2 )  1  
/ n
With a little bit of algebra, we can express the following
   
P   z / 2  x    z / 2  1
 n n

With a little bit of different algebra we have

   
P x  z  / 2    x  z / 2  1 
 n n
10.10
General Formula
The general formula for all confidence intervals
is:
Point Estimate  (Critical Value)(Standard Error)

x is the point estimate and the center point of the

confidence interval

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Margin of Error
The product (Critical Value) x (Standard Error) is called the margin of
error
Margin of Error (E): the amount added and subtracted to the point
estimate to form the confidence interval

Margin of error for estimating μ, σ known:

σ
x  z / 2 σ
n E  z / 2
n

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Estimating m when is known…
Recall that the population standard deviation is known, while the population mean
is unknown. We want to estimate the population mean using an interval estimate.

The interval can be expressed as

  
Lower confidence limit =  x  z / 2 
 n 
  
Upper confidence limit =  x  z / 2 
 n 

The probability 1 – α is the confidence level, which is a measure of how frequently

these intervals will actually include µ.

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Interval and Level of Confidence
Sampling Distribution of the Mean

/2 1  /2

Intervals x
μx  μ
extend from
σ x1
x  z / 2 Confidence Intervals
n x2
to 100(1-)%
σ of intervals
x  z / 2
n constructed
contain μ;
100% do not.

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Interpretation of Confidence Interval
Suppose confidence level = 95%
Also written (1 - ) = .95
A relative frequency interpretation:
◦ In the long run, 95% of all the confidence intervals that can
be constructed will contain the unknown true parameter
A specific interval either will contain or will not contain the true parameter

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Finding the Critical Value
Consider a 95% confidence interval:
1    .95 z  1.96

α α
 .025  .025
2 2

z units:   0  

x units: Lower σ Point Estimate Upper σ

Confidence x - z /2 Confidence x  z /2
Limit n x Limit n

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Common Levels of Confidence
Commonly used confidence levels are 90%,
95%, and 99%
Confidence
Confidence Critical
Coefficient,
Level value, z
1 
80% .80 1.28
90% .90 1.645
95% .95 1.96
98% .98 2.33
99% .99 2.58
99.8% .998 3.08
99.9% .999 3.27

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Example 1
To lower costs, the operations manager of a computer company wants to use an inventory
model. He notes demand during lead time is normally distributed and he needs to know the
mean to compute the optimum inventory level.

He observes 25 lead time periods and records the demand during each period.
The manager would like a 95% confidence interval estimate of the mean demand during
lead time. Assume that the manager knows that the standard deviation is 75 computers.

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Example 1
235 374 309 499 253
421 361 514 462 369
394 439 348 344 330
261 374 302 466 535
386 316 296 332 334

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Example 1 COMPUTE

In order to use our confidence interval estimator, we need the

following pieces of data:
370.16 Calculated from the data…
1.96
75
Given
n 25

The lower and upper confidence limits are 340.76 and 399.56. 20
Example 1 INTERPRET

We estimated that the mean demand during lead time falls

between 340.76 and 399.56.

Although the true mean may or may not be in this interval,

95% of intervals formed in this manner will contain the true
mean.

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Interval Width…
A wide interval provides little information.
For example, suppose we estimate with 99% confidence that an accountant’s
average starting salary is between $15,000 and $100,000.

Contrast this with: a 95% confidence interval estimate of average starting

salaries between $42,000 and $45,000.

The second estimate is much narrower, providing accounting students more

precise information about starting salaries.

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Exercise
If it was decided to increase the confidence level from 95% to 99% for
the same data what would happen to the margin of error?
A)The margin of error gets smaller.
B)The margin of error gets larger.
C)The margin of error stays the same.


Recall the margin of error is given by Z / 2
n
(one-half the width of the confidence interval)

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Interval Width…
The width of the confidence interval estimate is a function of the confidence level, the
population standard deviation, and the sample size…

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Interval Width…
The width of the confidence interval estimate is a function of the confidence level, the population standard
deviation, and the sample size…

A larger confidence level

produces a w i d e r
confidence interval:

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Interval Width…
The width of the confidence interval estimate is a function of the confidence level, the population standard
deviation, and the sample size…

Larger values of σ
produce w i d e r
confidence intervals

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Interval Width…
The width of the confidence interval estimate is a function of the confidence level,
the population standard deviation, and the sample size…

Increasing the sample size decreases the width of the confidence interval while the
confidence level can remain unchanged.

Note: this also increases the cost of obtaining additional data

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Example 2
A sample of 11 circuits from a large normal
population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is 0.35 ohms.
Determine a 95% confidence
interval for the true mean
resistance of the population.

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 Example 2 (continued)
A sample of 11 circuits from a large normal population has a mean resistance
of 2.20 ohms. We know from past testing that the population standard
deviation is 0.35 ohms.

Solution: σ
X  Z α/2
n
 2.20  1.96 (0.35/ 11 )
 2.20  0.2068
1.9932  μ  2.4068

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Example 2 (continued)
We are 95% confident that the true mean
resistance is between 1.9932 and 2.4068 ohms
Although the true mean may or may not be in
this interval, 95% of intervals formed in this
manner will contain the true mean.

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Inference about μ (σ Unknown)
Assumptions
◦ Population standard deviation is unknown
◦ Population is normally distributed

» Use Student t Distribution for inferences about population mean m.

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Inference about μ (σ Unknown)
When s is unknown, we use its point estimator s

σ s
x  z/2 x  t /2
n n

and the critical point is replaced by the critical point .

The t is a family of distributions
The t value depends on the degrees of freedom (df or n)
◦ The degrees of freedom is the number of observations that
are free to vary after sample mean has been calculated
n=n-1 where n is the sample size
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Student t Distribution
Note: t z as n increases
Standard
Normal
(t with df = )

t (df = 13)
t-distributions are bell-
shaped and symmetric, but
have ‘fatter’ tails than the t (df = 5)
normal

0 t
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Example 3
The owner of a large equipment rental company wants to
make a rather quick estimate of the average number of
days a piece of ditch digging equipment is rented out per
person per time. The company has records of all rentals,
but the amount of time required to conduct an audit of all
accounts would be prohibitive.

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Example 3
The owner decides to take a random sample of rental
invoices. Fourteen different rentals of ditch diggers are
selected randomly from the files, yielding the following
data
3 1 3 2 5 1 2 1 4 2 1 3 1 1

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Example 3
Use these data to construct a 99% confidence interval to
estimate the average number of days that a ditch digger is
rented and assumes that the number of days per rental is
normally distributed in the population.

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Example 3
s
x  t / 2
n
or
s s
x  t / 2    x  t / 2
n n
df  n  1
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Solution of Example 3
x  2.14, s  1.29, n  14, df  n  1  13
 1  .99
  0.005
2 2
t .005,13  3.012
s s
x  t / 2    x  t / 2
n n
1.29 1.29
2.14  3.012    2.14  3.012
14 14
2.14  1.04    2.14  1.04
1.10    3.18
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Example 4
A random sample of n = 25 has 50 and
S = 8. Form a 95% confidence interval for μ.

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Example 4
◦ d.f. = n – 1 = 24, so t α/2  t 0.025  2.0639

The confidence interval is

S 8
X  t α/2  50  (2.0639)
n 25

46.698 ≤ μ ≤ 53.302

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Example of t distribution confidence interval
Interpreting this interval requires the assumption that the population you are sampling from is
approximately a normal distribution (especially since n is only 25).
This condition can be checked by creating a histogram

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Confidence intervals for a
population proportion, p
Objective: Estimate a population proportion (e.g.,
market share, proportion of defective products)
An interval estimate for the population proportion ( p )
can be calculated by adding an allowance for
uncertainty to the sample proportion ( )

p̂

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Confidence intervals for a
population proportion, p
Recall that the distribution of the sample proportion
p̂ normal if the sample size is large
is approximately
(np>5 and n(1-p)>5), with standard deviation

p(1  p )
σp 
n
We will estimate this with sample data

 
p(1  p)
n
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Confidence intervals for a
population proportion, p
(np>5 and n(1-p)>5)

z (p - p)  N (0,1)
p.(1 - p) n

For confidence interval purposes only and for large

p̂ for p in the denominator
sample size, is substituted


z (p - p)
 
p.(1 - p) n
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Confidence intervals for a
population proportion, p
Upper and lower confidence limits for the population proportion are calculated with the
formula

 
 p(1  p)
p  Z/2
n
where
◦ Zα/2 is the standard normal value for the level of confidence desired
◦ p̂ is the sample proportion
◦ n is the sample size

Note: must have n > p̂5 and n(1- )> 5 p̂

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Example: Clothing company
A clothing company produces men’s jeans. The jeans are
made and sold with either a regular cut or a boot cut. In an
effort to estimate the proportion of their men’s jeans market in
Oklahoma City that prefers boot-cut jeans, the analyst takes a
random sample
of 212 jeans sales from the company’s two Oklahoma City
retail outlets. Only 34 of the sales were for
boot-cut jeans. Construct a 90% confidence interval to
estimate the proportion of the population in Oklahoma City
who prefer boot-cut jeans.

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Example: Clothing company
x 34
n  212, x  34, pˆ    0.16
n 212
1 - pˆ  1  0.16  0.84
90% Confidence  z  1.645
pˆ (1  pˆ ) pˆ (1  pˆ )
pˆ  z / 2 ˆ
 p  p  z / 2
n n
(0.16)(0.84) (0.16)(0.84)
0.16  1.645  p  0.16  1.645
212 212
0.16  0.04  p  0.16  0.04
0.12  p  0.20

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Example: Clothing company
We are 90% confident that the true percentage of boot-cut jeans in the population is between
0.12 and 0.20

Although the interval from 0.12 to 0.20 may or may not contain the true proportion, 90%
of intervals formed from samples of size 100 in this manner will contain the true proportion

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Example: Left-handed
A random sample of 100 people shows that 25 are left-handed
Form a 95% confidence interval for the true proportion of left-handers

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Example: Left-handed
np = 100 * 0.25 = 25 > 5 & n(1-p) = 100 * 0.75 = 75 > 5

Make sure
the sample
is big enough
  
p  Z/2 p(1  p)/n
 25/100  1.96 0.25(0.75)/100
 0.25  1.96 (0.0433)
0.1651  p  0.3349

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Example: Left-handed
We are 95% confident that the true percentage of left-handers in the population is between
16.51% and 33.49%
Although the interval from 0.1651 to 0.3349 may or may not contain the true proportion, 95%
of intervals formed from samples of size 100 in this manner will contain the true proportion

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Determining Sample Size

Determining
Sample Size

For the For the

Mean Proportion

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Determining the sample size: Estimating
the mean
It may be necessary to estimate the sample size when working on a project
In studies where µ is being estimated, the size of the sample can be determined by using the z
formula for sample means to solve for n
Difference between andxµ is the error of estimation
Error of estimation (tolerable error) = x

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Sampling error
The required sample size can be found to obtain a desired margin of error (E) with a specified
level of confidence (1 - )

The margin of error is also called sampling error

◦ the amount of imprecision in the estimate of the population parameter
◦ the amount added and subtracted to the point estimate to form the confidence interval

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Determining sample size
Determining
Sample Size

For the
Mean
Sampling error (margin
of error)

σ σ
X  Zα / 2 E  Z / 2
n n

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Determining Sample Size
σ σ
E  Z / 2 E  Z / 2
n n

Lower Upper
Confidence Confidence
Point Estimate Limit
Limit
Width of
confidence interval

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Determining Sample Size
Determining
Sample Size

For the
Mean

2 2
σ Now solve for n Z / 2 σ
E  Z / 2 to get n 2
n e

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Determining sample size
To determine the required sample size for the mean, you must know:
◦ The desired level of confidence (1 - ), which determines the critical value,
Zα/2
◦ The acceptable sampling error, E
◦ The standard deviation, σ

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Example
If  = 45, what sample size is needed to estimate the mean within ±
5 with 90% confidence?

2
Z / 2 σ 2 (1.645)2 (45) 2
n 2
 2
 219.19
E 5

(Always round up)

So the required sample size is n = 220

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If σ is unknown
If unknown, σ can be estimated when determining the required
sample size
 Use a value for σ that is expected to be at least as large as the true σ

 Select a pilot sample and estimate σ with the sample standard deviation, s

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Determining sample size: Estimating p
Determining
Sample Size

For the
Proportion

E  Z/2
p (1  p ) Now solve for n Z2 /2 p (1  p )
n to get n
E2

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Determining sample size: Estimating p
To determine the required sample size for the proportion, you must know:

 The desired level of confidence (1 - ), which determines the critical value, Z α/2
 The acceptable sampling error, E
 The true proportion of events of interest, p. p can be estimated with a pilot sample if necessary (or
conservatively use 0.5 as an estimate of p)

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Example
How large a sample would be necessary to estimate the true proportion defective in a large
population within ±3%, with 95% confidence?
Assume a pilot sample yields pˆ  0.12

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Example
For 95% confidence, use Zα/2 = 1.96
E = 0.03
p̂ = 0.12, so use this to estimate p

2
Z/2 p (1  p) (1.96)2 (0.12)(1  0.12)
n 2
 2
 450.74
e (0.03)
So use n = 451

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Chapter summary
Introduced the concept of confidence intervals
Discussed point estimates
Developed confidence interval estimates
Created confidence interval estimates for the mean (σ
known)
Determined confidence interval estimates for the mean (σ
unknown)
Created confidence interval estimates for the proportion
Determined required sample size for mean and proportion
confidence interval estimates with a desired margin of error
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