13/05/2019

ECON 940 Statistics for Decision

Making
Trimester 2 2019

Statistical Inference: Hypothesis Testing for

Single Population

Associate Professor Nelson Perera

Learning objectives
• Explain the logic involved in hypothesis testing 
and be able to establish null and alternate 
hypotheses
• Implement the 6 step approach to test 
hypotheses
• Perform a hypothesis test about a single 
population mean when σ is known
• Perform a hypothesis test about a single 
population mean when σ is unknown
• Test hypotheses about a single population 
proportion

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What is hypothesis Testing?
Hypothesis testing isn't just for population means and standard
deviations. You can use this procedure to test many different kinds
of propositions. Examples:
• A jury trial can be seen as a hypothesis test with a null hypothesis
of “Not Guilty" and an alternative hypothesis of "guilty."
• Hypothesis testing of the conception that people with obese
parents are likely to become obese themselves. Does genetics
play a part in a person’s weight?
• Do we buy a new machine for our factory or stay with the current
one?
• Are at least 60% of our customers female?

What is a Hypothesis?
A hypothesis is a statement (assumption) about a population 
parameter
population mean
Example:  The mean monthly mobile phone bill of this city is $ 72.
μ = $72

Example:  The mean waiting time for bank service counter  is  more than 5 
minutes.
μ > 5
population proportion
Example:  The proportion of adults in this city with mobile phones is 
89 per cent.
p = 0.89
Example:  The proportion of children overweight in Australia  is more 
than 30 per cent.
4 p > 0.30

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Hypothesis testing fundamentals
• Hypothesis testing
– A process of testing hypotheses about 
parameters by setting up null and alternative 
hypotheses and using statistical techniques to 
reach conclusions about the hypotheses
• Statistical hypotheses
– A formal hypothesis structure consisting of the 
null hypothesis and the alternative hypothesis, 
which together contain all possible outcomes 
of the experiment or study

Hypothesis testing fundamentals
• Null hypothesis
– The hypothesis that assumes the status quo –
that the old theory, method or standard is still 
true; the complement of the alternative 
hypothesis
• Alternative hypothesis
– The hypothesis that complements the null 
hypothesis. Usually it is the hypothesis that the 
researcher is interested in proving

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Null and alternative hypotheses
• The null and alternative hypotheses are 
mutually exclusive. Only one of them can 
be true
• The null and alternative hypotheses are 
collectively exhaustive. They are stated to 
include all possibilities. 
• The null hypothesis is assumed to be true
• The burden of proof falls on the alternative 
hypothesis

Null and alternative hypotheses
The Null Hypothesis, H0
• States the belief or assumption in the current situation 
(status quo)
• Begin with the assumption that the null hypothesis is true
• Similar to the notion of innocent until proven guilty
• Refers to the status quo
• Always contains ‘=‘ , ‘≤’ or ‘’ sign
• May or may not be rejected
• Is always about a population parameter,  eg. μ ,not about 
a sample statistic  X

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The Alternative Hypothesis, Ha

• Is the opposite of the null hypothesis
• e.g. The average number of TV sets in Australia homes 
is not equal to 3  ( Ha: μ ≠ 3 )
• Challenges the status quo
• Can only can contain either the ‘<‘ , ‘>’ or ‘≠’ sign
• May or may not be proven
• Is generally the claim or hypothesis that the 
researcher is trying to prove

Hypothesis Testing Process

Assumption: the
population
mean age is 50.
(Null Hypothesis:
H0: μ = 50 ) Population
Now select a
random sample

If not likely, Suppose

the sample
REJECT mean age
Null Hypothesis is 20: X = 20 Sample
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Reason for Rejecting the Null Hypothesis
Sampling Distribution of X

X
20 μ = 50
If H0 is true ... then we
If it is unlikely
reject the null
that we
would get a hypothesis
sample mean ... if in fact this were that μ = 50
of this value.. the population mean…

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The Level of Significance, 

• Defines the unlikely values of the sample statistic if 
the null hypothesis is true
• Defines rejection region of the sampling distribution
• Is designated by   , (level of significance)
• Typical values are 0.01, 0.05, or 0.10
• Note relationship to 99%, 95% and 90% confidence 
levels
• Is selected by the researcher at the beginning
• Provides the critical value (s) of the test

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One‐tailed and two‐tailed tests
• One‐tailed test – a statistical test wherein 
the researcher is interested in testing 
deviations from the null in one direction 
only
: 0.6
: 0.6

• Two‐tailed test ‐ a statistical test wherein 
the researcher is interested in testing 
deviations from the null in two directions
: 1.5
: 1.5

Rejection and nonrejection regions

Figure 9.1

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Rejection and nonrejection regions
• Rejection region – if a computed statistic 
lies in this portion of the distribution, the 
null hypothesis will be rejected
• Nonrejection region – any portion of the 
distribution that is not in the rejection 
region. If the observed statistic falls in this 
region the decision is to fail to reject the 
null hypothesis
• Critical value – the value that divides the 
nonrejection region from the rejection 
region

Type I and Type II errors
• Type I Error
– Rejecting a true null hypothesis 
– The probability of committing a Type I error is 
called , the level of significance

• Type II Error
– Failing to reject a false null hypothesis
– The probability of committing a Type II error is 
called .
– The power of a test is the probability of rejecting 
a false null hypothesis (1‐ )

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Decision table for hypothesis testing

Table 9.1

Decision Rule
Decision Rules
H0 : Not Guilty
HA : Guilty This is what police want to prove

Trial by Jury “It is better to set free 100

guilty men than to convict
Actual Situation an innocent person.”

Verdict Not Guilty Guilty

Guilty Type I Correct

Error
Type II Type one error is more
Not Guilty Correct
Error serious than Type two error.

In hypothesis testing, we should know the value of the

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Type one error.

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Six‐step approach to hypothesis 
testing
• Set up  and 
• Decide on the type and direction of the test
• Decide on level of significance and 
determine the critical value(s) and region(s)
• Write down the decision rule
• Select a random sample and do relevant 
calculations
• Draw a conclusion

Example
• Do the average income of country CPA is 
different now?
• Last year average income was $ 74, 914.
• In order to test the claim the data from 
sample of 112 country CPAs to get a sample 
mean of $78695.
• Assume the population standard deviation 
is $14, 530

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Tests for a population mean(σ known):
CPA net income example
• Step 1
• Step 2 – determine 
appropriate test – large 
sample, testing the mean, 
and have population 
standard deviation – z test
• Step 3 – specify a – 0.05
• Step 4 – decision rule – if 
we calculate a z statistic 
greater than 1.96 or less  Figure 9.5
than ‐1.96 the decision will 
be to reject the null 
hypothesis

Tests for a population mean: CPA net income example
• Step 5 – gather the data from sample of 112 CPAs to get 
a sample mean of $78695 and calculate the test statistic
x  78695  74914
z   2.75
 14530 z = 2.75 > 1.96
n 112

• Step 6  – state the statistical conclusion. Reject the null 
hypothesis
Make a decision. Even though the test was simply whether 
the average income was different to the old average, 
sample evidence indicated that this average may now be 
higher. 
Test the claim that average income of country CPA are 
higher than last year value of $74, 914. 

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The critical value method
• Critical value method – a method of testing 
hypotheses in which the sample statistic is 
compared to a critical value in order to 
reach a conclusion about rejecting or failing 
to reject the null hypothesis

The p‐value method
• p-value – the probability of getting a test statistic at
least as extreme as the observed test statistic
computed under the assumption that the null
hypothesis is true. It is the smallest level of a for
which the null hypothesis can be rejected
• Observed significance level – another name for the
p-value method of testing hypotheses
• E.g. – an observed test statistic of z=2.04. the
probability of obtaining a value this great or greater
is 0.5000-0.4793 = 0.0207. the researcher would
reject the null hypothesis for a = 0.05 or 0.10 but
not reject for a ≤ 0.0207 (such as a = 0.01)

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p‐Value Approach to Testing

• p‐value: Probability of obtaining a test statistic 
more extreme ( ≤ or  ) than the observed sample 
value given H0 is true
– Also called observed level of significance

– Smallest value of  for which H0 can be rejected 

– Obtain the p‐value from a table or computer

• If   p‐value  <   ,  reject H0

• If   p‐value    ,  do not reject H0

Upper‐tail Z Test for Mean  ( Known) Example
A phone industry manager claims that customer 
monthly mobile phone bills have increased (in other 
words the status quo has changed), and now average 
over $52 per month. The company wishes to test this 
claim 
(Assume  = 10 is known)
Step 1: State Ho and Ha

H0: μ ≤ 52      the average is not over $52 per month
Ha: μ > 52      the average is greater than $52 per month (i.e. sufficient 
evidence exists to support the manager’s claim)

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Upper‐tail Z Test for Mean  ( Known) 
Suppose that  = 0.10Example
is chosen for this test. What is Z
given a = 0.10?

 = 0.10
0.90

Do not reject H0 rejection reg

Using the Standardised 0 Z = 1.28

Normal Distribution Table,
P(Z>1.28) ≈
1-P(Z<1.28) = 0.10 Reject H0 if Z > 1.28

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Upper‐tail Z Test for Mean  ( Known) Example

Obtain sample and compute the test statistic 
• Suppose a sample is taken with the following results:   
n = 64,  X = 53.1 (=10 was assumed known)
• Then the test statistic is

X μ 53.1  52
Z    0.88
σ 10
n 64

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Upper‐tail Z Test for Mean  ( Known) Example

Reach a decision and interpret the result

 = 0.10
Do not reject H0

Reject H0

1.28
0
Z = 0.88
Do not reject H0 since Z = 0.88 ≤ 1.28
i.e.  there is not sufficient evidence that the mean bill is 
over $52

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p‐value Solution

Calculate the p‐value and compare to  (assuming that μ = 52.0)

P( X  53.1) p-value = 0.1894

 53.1  52.0 
 P Z   Reject H0
 10/ 64   = 0.10

 P(Z  0.88) Do not reject H0

Re
0
 1  0.8106
1.28
 0.1894 Z = 0.88

Do not reject H0 since p-value = 0.1894 >  = 0.10

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Testing hypotheses about a population
mean using the t statistic (σ unknown)
• The t distribution is used to analyse 
hypotheses about a single population mean 
when σ is unknown if the population is 
normally distributed for the measurement 
being analysed. 
• The formula for testing such hypotheses is:

Two‐Tail Test ( Unknown) Example
The average cost of a hotel room in New York is said to 
be $168 per night. 
In order to test the claim of the average cost of a hotel 
room is different to $160,  a random sample of 25 
hotels resulted in an average of $172.50 and standard 
deviation of $15.40 
Test at the  = 0.05  level.
(Assume the population distribution is normal)
H0: μ = 168   
H1: μ ≠ 168

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Two‐Tail Test ( Unknown) Example
H0: μ = 168  
H1: μ ≠ 168

 = 0.05  n = 25  / 2=.025  /2=.025

Do not 
 is unknown, so use Reject  reject H0
Reject 
a t statistic H0 H0
Critical value:                
‐t n‐1,  /2 t n‐1,α/2
t24 = ± 2.0639 0
‐2.0639 2.0639
1.46
X μ 172.50  168
t n1    1.46
S 15.40
n 25

Do not reject H0: not sufficient evidence that true mean cost is different 
than $168
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z test of population proportion

pˆ  p
Z  n  20
pq
n n  p  5, and
where : pˆ = sample proportion nq  5
p = population proportion
q  1 - p

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Testing hypotheses about 
a proportion: manufacturer example
• A Manufacturer 
believes exactly 8% of 
its products contain at 
least 1 minor flaw
H o : p  .08
H a : p  .08
If z  1.645, reject H o
If z  1.645, do not reject H o
33 Figure 9.10
pˆ   .165
200
pˆ  p .165  .08
z   4.43
pq (.08)(.92)
n 200 Since z  4.43  1.645, reject H o

Applied Activity

• A courier service advertises that its average delivery time is

less than six hours for local drivers. A random sample of times
for 50 deliveries to an address across town indicated that the
mean of the data is 5.87 and s = 1.02. Is this sufficient
evidence to support the courier advertisement, at the 5%
level of significance?

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In this question we need to test the claim that the mean delivery time is
less than 6 hours. To do this we conduct a hypothesis test using the given
information.

Hypotheses:
Ho:   6
Ha:  < 6

Significance level:  = 0.05, tcritical = t, n-1df = t0.05, 49df = 1.6766.

Decision rule: Reject Ho if tcalc < tcritical (ie. < -1.6766)

Do not reject Ho if tcalc  tcritical (ie.  -1.6766)

x
Test statistic: t 
s
n

Calculations: x = 5.87, s = 1.02,  = 6 and n = 50

5.87  6 0.13
t   0.90
1.02 0.144
50

Conclusion: Since tcalc > tcritical (-0.90 > -1.6766) we do not reject Ho.
There is insufficient evidence at the 5% level of significance to support the
courier’s claim that the mean delivery time is less than 6 hours.

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