Statistics For Business and Economics: Hypothesis Testing

Statistics for
Business and Economics

6th Edition
Chapter 10
Hypothesis Testing
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc. Chap 10-1
Chapter Goals
After completing this chapter, you should be
able to:
Formulate null and alternative hypotheses for
applications involving
a single population mean from a normal distribution
a single population proportion (large samples)
Formulate a decision rule for testing a hypothesis
Know how to use the critical value and p-value
approaches to test the null hypothesis (for both mean
and proportion problems)
Know what Type I and Type II errors are
Assess the power of a test
What is a Hypothesis?
A hypothesis is a claim
(assumption) about a
population parameter:
population mean
Example: The mean monthly cell phone bill
of this city is = $42
population proportion
Example: The proportion of adults in this
city with cell phones is p = .68
The Null Hypothesis, H0
States the assumption (numerical) to be

tested
Example: The average number of TV sets in
U.S. Homes is equal to three ( H0 : 3 )
Is always about a population parameter,
not about a sample statistic
H0 : 3 H0 : X 3
The Null Hypothesis, H0
(continued)
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
The Alternative Hypothesis, H1
Is the opposite of the null hypothesis
e.g., The average number of TV sets in U.S.
homes is not equal to 3 ( H1: 3 )
Challenges the status quo
Never contains the = , or sign
May or may not be supported
Is generally the hypothesis that the
researcher is trying to support
Hypothesis Testing Process
Claim: the
population
mean age is 50.
(Null Hypothesis:
Population
H0: = 50 )
Now select a
random sample
Is X 20 likely if = 50?
If not likely, Suppose
the sample
REJECT mean age Sample
Null Hypothesis is 20: X = 20
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.
Reason for Rejecting H0
Sampling Distribution of X
X
20 = 50
If H0 is true
... then we
If it is unlikely that
reject the null
we would get a
... if in fact this were hypothesis that
sample mean of
the population mean = 50.
this value ...
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 .01, .05, or .10
Is selected by the researcher at the beginning
Provides the critical value(s) of the test
Level of Significance
and the Rejection Region
Level of significance = Represents
critical value
H0: = 3 /2 /2
Rejection
H1: 3 Two-tail test region is
0
shaded
H0: 3
H1: > 3
Upper-tail test 0
H0: 3

H1: < 3
Lower-tail test 0
Errors in Making Decisions
Type I Error
Reject a true null hypothesis
Considered a serious type of error
The probability of Type I Error is

Called level of significance of the test
Set by researcher in advance
Errors in Making Decisions
(continued)
Type II Error
Fail to reject a false null hypothesis
The probability of Type II Error is
Outcomes and Probabilities
Possible Hypothesis Test Outcomes
Actual
Situation
Decision H0 True H0 False
Do Not
No error Type II Error
Key: Reject
(1 - ) ()
Outcome H0
(Probability) Reject Type I Error No Error
H0 () (1-)
Type I & II Error Relationship
Type I and Type II errors can not happen at

the same time
Type I error can only occur if H0 is true
Type II error can only occur if H0 is false
If Type I error probability ( ) , then

Type II error probability ( )
Factors Affecting Type II Error
All else equal,
when the difference between
hypothesized parameter and its true value

when

when

when n
Power of the Test
The power of a test is the probability of rejecting

a null hypothesis that is false
i.e., Power = P(Reject H0 | H1 is true)
Power of the test increases as the sample size

increases
Hypothesis Tests for the Mean
Hypothesis
Tests for
Known Unknown
Test of Hypothesis
for the Mean ( Known)
Convert sample result ( x ) to a z value
Hypothesis
Tests for
Known Unknown
Consider the test

H0 : 0 The decision rule is:
H1 : 0 x 0
Reject H0 if z z

(Assume the population is n
normal)
Decision Rule
H0: = 0
x 0
Reject H0 if z z H1: > 0

n
Alternate rule:
Reject H0 if X 0 Z / n
Do not reject H0 Reject H0

Z 0 z
x 0 0 z

n
Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

Critical valueChap 10-19
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
p-Value Approach to Testing
(continued)
Convert sample result (e.g., x ) to test statistic (e.g., z
statistic )
Obtain the p-value x - 0
For an upper p - value P(Z , given that H0 is true)
/ n
tail test:
x - 0
P(Z | 0 )
/ n
Decision rule: compare the p-value to

If p-value < , reject H0
If p-value , do not reject H0
Example: Upper-Tail Z Test
for Mean ( Known)
A phone industry manager thinks that
customer monthly cell phone bill have
increased, and now average over $52 per
month. The company wishes to test this
claim. (Assume = 10 is known)
Form hypothesis test:

H0: 52 the average is not over $52 per month
H1: > 52 the average is greater than $52 per month
(i.e., sufficient evidence exists to support the
managers claim)
Example: Find Rejection Region
(continued)
Suppose that = .10 is chosen for this test
Find the rejection region: Reject H0
= .10

0 1.28
x 0
Reject H0 if z 1.28
/ n
Example: Sample Results
(continued)
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)
Using the sample results,
x 0 53.1 52
z 0.88
10
n 64
Example: Decision
(continued)
Reach a decision and interpret the result:
Reject H0
= .10

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
Example: p-Value Solution
(continued)
Calculate the p-value and compare to
(assuming that = 52.0)
p-value = .1894
P(x 53.1| 52.0)
Reject H0
= .10 53.1 52.0

P z
10/ 64
0
Do not reject H0
1.28
Reject H0
P(z 0.88) 1 .8106
Z = .88
.1894
Do not reject H0 since p-value = .1894 > = .10

One-Tail Tests
In many cases, the alternative hypothesis

focuses on one particular direction
H0: 3 This is an upper-tail test since the

alternative hypothesis is focused on
H1: > 3
the upper tail above the mean of 3
H0: 3 This is a lower-tail test since the

alternative hypothesis is focused on
the lower tail below the mean of 3
H1: < 3
Upper-Tail Tests
There is only one H0: 3

critical value, since H1: > 3
the rejection area is
in only one tail

Z 0 z
x
Critical value
Lower-Tail Tests
H0: 3
There is only one
critical value, since H1: < 3
the rejection area is
in only one tail
Reject H0 Do not reject H0

-z 0 Z
x
Critical value
Two-Tail Tests
In some settings, the H0: = 3
alternative hypothesis does
not specify a unique direction H1 :
3
/2 /2
There are two
critical values,
3 x
defining the two
Reject H0 Do not reject H0 Reject H0
regions of
rejection -z/2 0 +z/2 z
Lower Upper
critical value critical value
Hypothesis Testing Example
Test the claim that the true mean # of TV
sets in US homes is equal to 3.
(Assume = 0.8)
State the appropriate null and alternative
hypotheses
H : = 3 , H : 3 (This is a two tailed test)
0 1
Specify the desired level of significance

Suppose that = .05 is chosen for this test
Choose a sample size

Suppose a sample of size n = 100 is selected
(continued)
Determine the appropriate technique

is known so this is a z test
Set up the critical values

For = .05 the critical z values are 1.96
Collect the data and compute the test statistic

Suppose the sample results are
n = 100, x = 2.84 ( = 0.8 is assumed known)
So the test statistic is:
X 0 2.84 3 .16
z 2.0
0.8 .08
n 100
(continued)
Is the test statistic in the rejection region?
Reject H0 if = .05/2 = .05/2

z < -1.96 or
z > 1.96;
otherwise Reject H0 Do not reject H0 Reject H0
do not -z = -1.96 0 +z = +1.96

reject H0
Here, z = -2.0 < -1.96, so the

test statistic is in the rejection
region
(continued)
Reach a decision and interpret the result
= .05/2 = .05/2
Reject H0 Do not reject H0 Reject H0
-z = -1.96 0 +z = +1.96
-2.0
Since z = -2.0 < -1.96, we reject the null hypothesis

and conclude that there is sufficient evidence that the
mean number of TVs in US homes is not equal to 3
Example: p-Value
Example: How likely is it to see a sample mean of
2.84 (or something further from the mean, in either
direction) if the true mean is = 3.0?
x = 2.84 is translated to
a z score of z = -2.0
P(z 2.0) .0228 /2 = .025 /2 = .025
.0228 .0228
P(z 2.0) .0228
p-value
= .0228 + .0228 = .0456 -1.96 0 1.96 Z
-2.0 2.0
Example: p-Value
(continued)
Compare the p-value with
If p-value < , reject H0
If p-value , do not reject H0
Here: p-value = .0456 /2 = .025 /2 = .025

= .05
.0228 .0228
Since .0456 < .05, we
reject the null
hypothesis
-1.96 0 1.96 Z
-2.0 2.0
t Test of Hypothesis for the Mean
( Unknown)
Convert sample result ( x ) to a t test statistic
Hypothesis
Tests for
Known Unknown
Consider the test

The decision rule is:
H0 : 0
x 0
H1 : 0 Reject H0 if t t n-1,
s
(Assume the population is n
normal)
t Test of Hypothesis for the Mean
( Unknown)
(continued)
For a two-tailed test:
Consider the test
H0 : 0 (Assume the population is normal,
and the population variance is
H1 : 0 unknown)
x 0 x 0
Reject H0 if t t n-1, /2 or if t t n-1, /2
s s
n n
Example: Two-Tail Test
( Unknown)
The average cost of a

hotel room in New York
is said to be $168 per
night. A random sample
of 25 hotels resulted in
x = $172.50 and H0: = 168
s = $15.40. Test at the H1:
= 0.05 level. 168
(Assume the population distribution is normal)
Example Solution:
Two-Tail Test
H0: = 168 /2=.025 /2=.025

H1:
168
= 0.05 Reject H0 Do not reject H0 Reject H0
-t n-1,/2 t n-1,/2
0
n = 25 2.0639
-2.0639 1.46
is unknown, so
x 172.50 168
use a t statistic t n1 1.46
s 15.40
Critical Value: n 25
t24 , .025 = 2.0639 Do not reject H0: not sufficient evidence that
true mean cost is different than $168
Tests of the Population Proportion
Involves categorical variables

Two possible outcomes
Success (a certain characteristic is present)
Failure (the characteristic is not present)
Fraction or proportion of the population in the
success category is denoted by P
Assume sample size is large
Proportions
(continued)
Sample proportion in the success category is
denoted by p

p x number of successes in sample
n sample size
When nP(1 P) > 9, p can be approximated

by a normal distribution with mean and standard
deviation

p P P(1 P)
p
n
Hypothesis Tests for Proportions
The sampling
distribution of p is Hypothesis
approximately Tests for P
normal, so the test
statistic is a z
nP(1 P) > 9 nP(1 P) < 9
value:
p P0 Not discussed
z in this chapter
P0 (1 P0 )
n
Example: Z Test for Proportion
A marketing company
claims that it receives
8% responses from its
mailing. To test this
claim, a random sample
of 500 were surveyed
Check:
with 25 responses. Test
Our approximation for P is
at the = .05 p = 25/500 = .05
significance level.
nP(1 - P) = (500)(.05)(.95)
= 23.75 > 9
Z Test for Proportion: Solution
H0: P = .08 Test Statistic:
p P0 .05 .08
H1: P . z 2.47
P0 (1 P0 ) .08(1 .08)
08= .05
n 500
n = 500, p = .05
Critical Values: 1.96 Decision:
Reject Reject Reject H0 at = .05
Conclusion:
.025 .025
There is sufficient
-1.96 0 1.96 z evidence to reject the
-2.47 companys claim of 8%
response rate.
p-Value Solution
(continued)
Calculate the p-value and compare to
(For a two sided test the p-value is always two sided)
Do not reject H0
Reject H0 Reject H0 p-value = .0136:
/2 = .025 /2 = .025
P(Z 2.47) P(Z 2.47)
.0068 .0068
2(.0068) 0.0136
-1.96 0 1.96
Z = -2.47 Z = 2.47
Reject H0 since p-value = .0136 < = .05
Using PHStat
Options
Sample PHStat Output
Input
Output
Power of the Test
Recall the possible hypothesis test outcomes:
Actual Situation
Key:
Outcome Do Not No error Type II Error
(Probability) Reject H0 (1 - ) ()
Reject H0 Type I Error No Error

( ) (1-)
denotes the probability of Type II Error

1 is defined as the power of the test
Power = 1 = the probability that a false null
hypothesis is rejected
Type II Error
Assume the population is normal and the population
variance is known. Consider the test
H0 : 0
H1 : 0
x 0
Reject H0 if z z or Reject H0 if x x c 0 Z / n
/ n
If the null hypothesis is false and the true mean is *,
then the probability of type II error is
xc *
P(x x c | *) P z

/ n
Type II Error Example
Type II error is the probability of failing
to reject a false H0
Suppose we fail to reject H0: 52
when in fact the true
xc mean is * = 50
50 52
Reject Do not reject
H0: 52 xc H0 : 52
(continued)
Suppose we do not reject H0: 52 when in fact

the true mean is * = 50
This is the range of x where
This is the true H0 is not rejected
distribution of x if = 50
50 52
H0: 52 H0 : 52
xc
(continued)
Suppose we do not reject H0: 52 when

in fact the true mean is * = 50
Here, = P( x x c ) if * = 50
50 52
H0: 52 H0 : 52
xc
Calculating
Suppose n = 64 , = 6 , and = .05
6
x c 0 z 52 1.645 50.766
n 64
(for H0 : 52)
So = P( x 50.766 ) if * = 50
50 50.766 52
H0: 52 H0 : 52
xc
Calculating
(continued)
Suppose n = 64 , = 6 , and = .05

50.766 50
P( x 50.766 | * 50) P z P(z 1.02) .5 .3461 .1539
6
64
Probability of
type II error:
= .1539
50 52
H0: 52 H0 : 52
xc
Power of the Test Example
If the true mean is * = 50,
The probability of Type II Error = = 0.1539
The power of the test = 1 = 1 0.1539 = 0.8461
Actual Situation
Key:
Outcome Do Not No error Type II Error
(Probability) Reject H0 1 - = 0.95 = 0.1539
Reject H0 Type I Error No Error

= 0.05 1 - = 0.8461
(The value of and the power will be different for each *)

Chapter Summary
Addressed hypothesis testing methodology
Performed Z Test for the mean ( known)
Discussed critical value and p-value approaches to
hypothesis testing
Performed one-tail and two-tail tests
Performed t test for the mean ( unknown)
Performed Z test for the proportion
Discussed type II error and power of the test

Statistics For Business and Economics: Hypothesis Testing

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Statistics for

Business and Economics

States the assumption (numerical) to be

Begin with the assumption that the null

Considered a serious type of error

The probability of Type I Error is

The probability of Type II Error is

Possible Hypothesis Test Outcomes

Type I and Type II errors can not happen at

If Type I error probability ( ) , then

The power of a test is the probability of rejecting

i.e., Power = P(Reject H0 | H1 is true)

Power of the test increases as the sample size

Consider the test

Do not reject H0 Reject H0

Statistics for Business and Economics, 6e 2007 Pearson Education, Inc.

p-value: Probability of obtaining a test

Decision rule: compare the p-value to

Form hypothesis test:

Find the rejection region: Reject H0

Do not reject H0 Reject H0

Obtain sample and compute the test statistic

Suppose a sample is taken with the following

Do not reject H0 Reject H0

Do not reject H0 since z = 0.88 < 1.28

Do not reject H0 since p-value = .1894 > = .10

In many cases, the alternative hypothesis

H0: 3 This is an upper-tail test since the

H0: 3 This is a lower-tail test since the

There is only one H0: 3

Do not reject H0 Reject H0

Reject H0 Do not reject H0

Specify the desired level of significance

Choose a sample size

Determine the appropriate technique

Set up the critical values

Collect the data and compute the test statistic

Reject H0 if = .05/2 = .05/2

do not -z = -1.96 0 +z = +1.96

Here, z = -2.0 < -1.96, so the

Reject H0 Do not reject H0 Reject H0

Since z = -2.0 < -1.96, we reject the null hypothesis

Here: p-value = .0456 /2 = .025 /2 = .025

Consider the test

The decision rule is:

The average cost of a

H0: = 168 /2=.025 /2=.025

Involves categorical variables

When nP(1 P) > 9, p can be approximated

Reject H0 since p-value = .0136 < = .05

Reject H0 Type I Error No Error

denotes the probability of Type II Error

Suppose we do not reject H0: 52 when in fact

Suppose we do not reject H0: 52 when

Suppose n = 64 , = 6 , and = .05

Reject H0 Type I Error No Error

(The value of and the power will be different for each *)

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