2002 Prentice-Hall, Inc.

Chap 8-1
Basic Business Statistics
(8
th
Edition)
Chapter 8
Confidence Interval Estimation
2002 Prentice-Hall, Inc.

Chap 8-2
Chapter Topics
Estimation process
Point estimates
Interval estimates
Confidence interval estimation for the mean
( known)
Determining sample size
Confidence interval estimation for the mean
( unknown)
o
o
2002 Prentice-Hall, Inc.

Chap 8-3
Chapter Topics
Confidence interval estimation for the
proportion
Confidence interval estimation for
population total
Confidence interval estimation for total
difference in the population
Estimation and sample size determination
for finite population
Confidence interval estimation and ethical
considerations
(continued)
2002 Prentice-Hall, Inc.

Chap 8-4
Estimation Process
Mean, , is
unknown
Population
Random Sample
Mean
X = 50
Sample
I am 95%
confident that
is between 40
& 60.
2002 Prentice-Hall, Inc.

Chap 8-5
Point Estimates
Estimate Population
Parameters
with Sample
Statistics
Mean
Proportion
Variance
Difference

p
2
o
1 2

X
S
P
2
S
1 2
X X
2002 Prentice-Hall, Inc.

Chap 8-6
Interval Estimates
Provides range of values
Takes into consideration variation in sample
statistics from sample to sample
Is based on observation from one sample
Gives information about closeness to
unknown population parameters
Is stated in terms of level of confidence
Never 100% certain
2002 Prentice-Hall, Inc.

Chap 8-7
Confidence Interval Estimates


Mean
o
Unknown
Confidence
Intervals
Proportion
o
Known
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Chap 8-8
Confidence Interval for
( Known)
Assumptions
Population standard deviation is known
Population is normally distributed
If population is not normal, use large
sample
Confidence interval estimate

o
/ 2 / 2
X Z X Z
n n
o o
o o
s s +
2002 Prentice-Hall, Inc.

Chap 8-9
Elements of
Confidence Interval Estimation
Level of confidence
Confidence in which the interval will contain
the unknown population parameter
Precision (range)
Closeness to the unknown parameter
Cost
Cost required to obtain a sample of size n
2002 Prentice-Hall, Inc.

Chap 8-10
Level of Confidence
Denoted by
A relative frequency interpretation
In the long run, of all the confidence
intervals that can be constructed will contain the
unknown parameter
A specific interval will either contain or not
contain the parameter
No probability involved in a specific interval
( )
100 1 % o
( )
100 1 % o
2002 Prentice-Hall, Inc.

Chap 8-11
Interval and Level of Confidence
Confidence Intervals
Intervals
extend from

to



of intervals
constructed
contain ;
do
not.
_
Sampling Distribution of the Mean
X
X Zo
X
o
/ 2 o
/ 2 o
X
X
=
1 o
X
X Zo +
( )
1 100% o

100 % o
/ 2
X
Z
o
o +
/ 2
X
Z
o
o
2002 Prentice-Hall, Inc.

Chap 8-12
Factors Affecting
Interval Width (Precision)
Data variation
Measured by
Sample size


Level of confidence

Intervals Extend from

1984-1994 T/Maker Co.
X - Zo to X + Z o
x x
o
X
n
o
o =
( )
100 1 % o
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Chap 8-13
Determining Sample Size (Cost)
Too Big:
Requires
too many
resources
Too small:
Wont do
the job
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Chap 8-14
Determining Sample
Size for Mean
What sample size is needed to be 90% confident of
being correct within 5? A pilot study suggested that
the standard deviation is 45.
Round Up
( )
2 2
2 2
2 2
1.645 45
219.2 220
Error 5
Z
n
o
= = = ~
2002 Prentice-Hall, Inc.

Chap 8-15
Determining Sample
Size for Mean in PHStat
PHStat | sample size | determination for the
mean
Example in excel spreadsheet
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Chap 8-16
Assumptions
Population standard deviation is unknown
Population is normally distributed
If population is not normal, use large sample
Use students t distribution
Confidence interval estimate

Confidence Interval for
( Unknown)

o
/ 2, 1 / 2, 1 n n
S S
X t X t
n n
o o

s s +
2002 Prentice-Hall, Inc.

Chap 8-17
Students t Distribution
Z
t
0
t (df = 5)
t (df = 13)
Bell-Shaped
Symmetric
Fatter
Tails
Standard
Normal
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Chap 8-18
Degrees of Freedom (df )
Number of observations that are free to
vary after sample mean has been calculated
Example:
Mean of 3 numbers is 2
degrees of freedom
= n -1
= 3 -1
= 2
1
2
3
1 (or any number)
2 (or any number)
3 (cannot vary)
X
X
X
=
=
=
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Chap 8-19
Students t Table
Upper Tail Area
df .25 .10
.05
1 1.000 3.078 6.314
2
0.817 1.886 2.920
3 0.765 1.638 2.353
t
0
2.920
t Values
Let: n = 3
df = n - 1 = 2
o = .10
o/2 =.05
o / 2 = .05
2002 Prentice-Hall, Inc.

Chap 8-20
Example
/ 2, 1 / 2, 1
8 8
50 2.0639 50 2.0639
25 25
46.69 53.30
n n
S S
X t X t
n n
o o

s s +
s s +
s s
A random sample of 25 has 50 and 8.
Set up a 95% confidence interval estimate for
n X S

= = =
2002 Prentice-Hall, Inc.

Chap 8-21
PHStat | confidence interval | estimate for the
mean, sigma unknown
Example in excel spreadsheet
Confidence Interval for
( Unknown) in PHStat

o
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Chap 8-22
Confidence Interval
Estimate for Proportion
Assumptions
Two categorical outcomes
Population follows binomial distribution
Normal approximation can be used if
and
Confidence interval estimate

5 np >
( )
1 5 n p >
( ) ( )
/ 2 / 2
1 1
S S S S
S S
p p p p
p Z p p Z
n n
o o

s s +
2002 Prentice-Hall, Inc.

Chap 8-23
Example
A random sample of 400 voters showed 32
preferred candidate A. Set up a 95% confidence
interval estimate for p.
( ) ( )
( ) ( )
/ /
1 1
.08 1 .08 .08 1 .08
.08 1.96 .08 1.96
400 400
.053 .107
s s s s
s s
p p p p
p Z p p Z
n n
p
p
o o 2 2

s s +

s s +
s s
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Chap 8-24
Confidence Interval Estimate for
Proportion in PHStat
PHStat | confidence interval | estimate for the
proportion
Example in excel spreadsheet

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Chap 8-25
Determining Sample Size for
Proportion
Out of a population of 1,000, we randomly
selected 100, of which 30 were defective. What
sample size is needed to be within 5% with
90% confidence?
Round Up
( ) ( )( )
2 2
2 2
1 1.645 0.3 0.7
Error 0.05
227.3 228
Z p p
n

= =
= ~
2002 Prentice-Hall, Inc.

Chap 8-26
Determining Sample Size for
Proportion in PHStat
PHStat | sample size | determination for the
proportion
Example in excel spreadsheet
2002 Prentice-Hall, Inc.

Chap 8-27
Confidence Interval for
Population Total Amount
Point estimate

Confidence interval estimate


NX
( )
( )
( )
/ 2, 1
1
n
N n
S
NX N t
N
n
o

2002 Prentice-Hall, Inc.

Chap 8-28
Confidence Interval for
Population Total: Example
An auditor is faced with a
population of 1000 vouchers
and wants to estimate the
total value of the population.
A sample of 50 vouchers is
selected with average
voucher amount of
$1076.39, standard deviation
of $273.62. Set up the 95%
confidence interval estimate
of the total amount for the
population of vouchers.
2002 Prentice-Hall, Inc.

Chap 8-29
Example Solution
( )
( )
( )
( )( ) ( )( )
/ 2, 1
1000 50 $1076.39 $273.62
1
273.62 1000 50
1000 1076.39 1000 2.0096
1000 1
100
1, 076, 390 75,830.85
n
N n X S
N n
S
NX N t
N
n
o
= = = =

=
The 95% confidence interval for the population total
amount of the vouchers is between 1,000,559.15, and
1,152,220.85
2002 Prentice-Hall, Inc.

Chap 8-30
Example Solution in PHStat
PHStat | confidence intervals | estimate for
the population total

Excel spreadsheet for the voucher example
2002 Prentice-Hall, Inc.

Chap 8-31
Confidence Interval for Total
Difference in the Population
Point estimate
Where is the sample average
difference
Confidence interval estimate



Where
ND
1
n
i
i
D
D
n
=
=

( )
( )
( )
/ 2, 1
1
D
n
N n
S
ND N t
N
n
o

( )
2
1
1
n
i
i
D
D D
S
n
=

=

2002 Prentice-Hall, Inc.

Chap 8-32
Estimation for Finite Population
Samples are selected without replacement
Confidence interval for the mean ( unknown)




Confidence interval for proportion


o
( )
( )
/ 2, 1
1
n
N n
S
X t
N
n
o

( ) ( )
( )
/ 2
1
1
S S
S
p p N n
p Z
n N
o

2002 Prentice-Hall, Inc.

Chap 8-33
Sample Size Determination
for Finite Population
Samples are selected without replacement
When estimating the mean



When estimating the proportion


2 2
/ 2
0
2
Z
n
e
o
o
=
( )
2
/ 2
0
2
1 Z p p
n
e
o

=
2002 Prentice-Hall, Inc.

Chap 8-34
Ethical Considerations
Report confidence interval (reflect sampling
error) along with the point estimate
Report the level of confidence
Report the sample size
Provide an interpretation
of the confidence interval estimate
2002 Prentice-Hall, Inc.

Chap 8-35
Chapter Summary
Illustrated estimation process
Discussed point estimates
Addressed interval estimates
Discussed confidence interval estimation
for the mean ( known)
Addressed determining sample size
Discussed confidence interval estimation
for the mean ( unknown)
o
o
2002 Prentice-Hall, Inc.

Chap 8-36
Chapter Summary
Discussed confidence interval estimation for
the proportion
Addressed confidence interval estimation for
population total
Discussed confidence interval estimation for
total difference in the population
Addressed estimation and sample size
determination for finite population
Addressed confidence interval estimation and
ethical issues

(continued)