Contem porary Business

Statistics,3e
by
W illiam s,Sw eeney,and Anderson

Slides by
JOHN
LOUCKS
St. Edward’s
University

© 2009 Cengage South-Western. All Rights Reserved Slide 1

 Chapter 8
Interval Estimation
 Population Mean:  Known
 Population Mean:  Unknown
 Determining the Sample Size
 Population Proportion

© 2009 Cengage South-Western. All Rights Reserved Slide 2

 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.

© 2009 Cengage South-Western. All Rights Reserved Slide 3

 Margin of Error and the Interval Estimate

The general form of an interval estimate of a

population mean is

x  Margin of Error

© 2009 Cengage South-Western. All Rights Reserved Slide 4

 Interval Estimate of a Population Mean:
 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  , or
• the sample standard deviation 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  known case.

© 2009 Cengage South-Western. All Rights Reserved Slide 5

 Interval Estimate of a Population Mean:
 Known
There is a 1   probability that the value of a
sample mean will provide a margin of error of z /2  x
or less.

Sampling
distribution
of x

/2 1 -  of all /2

x values

x

z /2  x z /2  x

© 2009 Cengage South-Western. All Rights Reserved Slide 6

 Interval Estimate of a Population Mean:
 Known

Sampling
distribution
of x
1 -  of all
/2 /2
x values
interval
does not x

include  interval
z /2  x z /2  x
includes 
[------------------------- x -------------------------]
[------------------------- x -------------------------]
[------------------------- x -------------------------]

© 2009 Cengage South-Western. All Rights Reserved Slide 7

 Interval Estimate of a Population Mean:
 Known
 Interval Estimate of 


x  z /2
n

where: x 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
 is the population standard deviation
n is the sample size

© 2009 Cengage South-Western. All Rights Reserved Slide 8

 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.

© 2009 Cengage South-Western. All Rights Reserved Slide 9

 Interval Estimate of a Population Mean:
 Known
 Adequate Sample Size (continued)

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.

© 2009 Cengage South-Western. All Rights Reserved Slide 10

 Interval Estimate of a Population Mean:
 Known
 Example: Discount Sounds
Discount Sounds has 260 retail outlets throughout
the United States. The firm is evaluating a potential
location for a new outlet, based in part, on the mean
annual income of the individuals in the marketing
area of the new location.
A sample of size n = 36 was taken; the sample
mean income is $31,100. The population is not
believed to be highly skewed. The population
standard deviation is estimated to be $4,500, and the
confidence coefficient to be used in the interval
estimate is .95.

© 2009 Cengage South-Western. All Rights Reserved Slide 11

 Interval Estimate of a Population Mean:
 Known
95% of the sample means that can be observed
are within + 1.96  x of the population mean .
The margin of error is:
  4,500 
z /2  1.96    1, 470
n  36 

Thus, at 95% confidence, the margin of error

is $1,470.

© 2009 Cengage South-Western. All Rights Reserved Slide 12

 Interval Estimate of a Population Mean:
 Known

Interval estimate of  is:

$31,100 + $1,470
or
$29,630 to $32,570

We are 95% confident that the interval contains the

population mean.

© 2009 Cengage South-Western. All Rights Reserved Slide 13

 Using Excel to Construct a
Confidence Interval:  Known Case
 Excel Formula Worksheet
A B C
1 Income Sample Size =COUNT(A2:A37)
2 35,600 Sample Mean =AVERAGE(A2:A37)
3 29,601
4 30,035 Population Std. Dev. 4500
5 31,735 Confidence Coeff. 0.95
6 27,600 Lev. of Signif. (alpha) =1-C5
7 36,080
8 38,925 Margin of Error =CONFIDENCE(C6,C4,C1)
9 35,350
Note:
10 25,900 Point Estimate =C2
Rows 13-37
11 27,550 Lower Limit =C10-C8
are not shown.
12 24,745 Upper Limit =C10+C8

© 2009 Cengage South-Western. All Rights Reserved Slide 14

 Using Excel to Construct a
Confidence Interval:  Known Case
 Excel Value Worksheet
A B C
1 Income Sample Size 36
2 35,600 Sample Mean 31,100.00
3 29,601
4 30,035 Population Std. Dev. 4500.08
5 31,735 Confidence Coeff. 0.95
6 27,600 Lev. of Signif. (alpha) 0.05
7 36,080
8 38,925 Margin of Error 1470.000442
9 35,350
Note:
10 25,900 Point Estimate 31,100.00
Rows 13-37
11 27,550 Lower Limit 29,630.00
are not shown.
12 24,745 Upper Limit 32,570.00

© 2009 Cengage South-Western. All Rights Reserved Slide 15

 Interval Estimate of a Population Mean:
 Unknown
 If an estimate of the population standard deviation 
cannot be developed prior to sampling, we use the
sample standard deviation s to estimate  .
 This is the  unknown case.
 In this case, the interval estimate for  is based on the
t distribution.
 (We’ll assume for now that the population is
normally distributed.)

© 2009 Cengage South-Western. All Rights Reserved Slide 16

 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.

© 2009 Cengage South-Western. All Rights Reserved Slide 17

 t Distribution

A t distribution with more degrees of freedom has

less dispersion.

As the number of degrees of freedom increases, the

difference between the t distribution and the
standard normal probability distribution becomes
smaller and smaller.

© 2009 Cengage South-Western. All Rights Reserved Slide 18

 t Distribution

t distribution
Standard (20 degrees
normal of freedom)
distribution

t distribution
(10 degrees
of freedom)

z, t
0

© 2009 Cengage South-Western. All Rights Reserved Slide 19

 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.

© 2009 Cengage South-Western. All Rights Reserved Slide 20

 t Distribution

Degrees Area in Upper Tail

of Freedom .20 .10 .05 .025 .01 .005
. . . . . . .
50 .849 1.299 1.676 2.009 2.403 2.678
60 .848 1.296 1.671 2.000 2.390 2.660
80 .846 1.292 1.664 1.990 2.374 2.639
100 .845 1.290 1.660 1.984 2.364 2.626
 .842 1.282 1.645 1.960 2.326 2.576

Standard normal
z values

© 2009 Cengage South-Western. All Rights Reserved Slide 21

 Interval Estimate of a Population Mean:
 Unknown
 Interval Estimate

s
x  t /2
n

where: 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

© 2009 Cengage South-Western. All Rights Reserved Slide 22

 Interval Estimate of a Population Mean:
 Unknown
 Example: Apartment Rents
A reporter for a student newspaper is writing an
article on the cost of off-campus housing. A sample
of 16 efficiency apartments within a half-mile of
campus resulted in a sample mean of $650 per month
and a sample standard deviation of $55.
Let us provide a 95% confidence interval estimate
of the mean rent per month for the population of
efficiency apartments within a half-mile of campus.
We will assume this population to be normally
distributed.

© 2009 Cengage South-Western. All Rights Reserved Slide 23

 Interval Estimate of a Population Mean:
 Unknown
At 95% confidence,  = .05, and /2 = .025.
t.025 is based on n  1 = 16  1 = 15 degrees of freedom.
In the t distribution table we see that t.025 = 2.131.
Degrees Area in Upper Tail
of Freedom .20 .100 .050 .025 .010 .005
15 .866 1.341 1.753 2.131 2.602 2.947
16 .865 1.337 1.746 2.120 2.583 2.921
17 .863 1.333 1.740 2.110 2.567 2.898
18 .862 1.330 1.734 2.101 2.520 2.878
19 .861 1.328 1.729 2.093 2.539 2.861
. . . . . . .

© 2009 Cengage South-Western. All Rights Reserved Slide 24

 Interval Estimate of a Population Mean:
 Unknown
 Interval Estimate
s
x  t.025 Margin
n of Error

55
650  2.131  650  29.30
16
We are 95% confident that the mean rent per month
for the population of efficiency apartments within a
half-mile of campus is between $620.70 and $679.30.

© 2009 Cengage South-Western. All Rights Reserved Slide 25

 Using Excel’s
Descriptive Statistics Tool
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
Step 4 When the Descriptive Statistics dialog box appears:
(see details on next slide)

© 2009 Cengage South-Western. All Rights Reserved Slide 26

 Using Excel’s
Descriptive Statistics Tool

© 2009 Cengage South-Western. All Rights Reserved Slide 27

 Using Excel’s
Descriptive Statistics Tool
 Excel Value Worksheet
A B C D
1 Rent Rent
2 675
Point
3 710 Mean 650 Estimate
4 620 Standard Error 13.75348
5 600 Median 664
6 570 Mode #N/A
7 695 Standard Deviation 55.01394
8 668 Sample Variance 3026.533
9 560 Kurtosis -0.62925
10 650 Skewness -0.77274
11 545 Range 170
12 705 Minimum 545
13 680 Maximum 715
14 690 Sum 10400 Margin
15 715 Count 16 of Error
16 657 Confidence Level(95.0%) 29.31488

© 2009 Cengage South-Western. All Rights Reserved Slide 28

 Summary of Interval Estimation Procedures
for a Population Mean

Can the
Yes No
population standard
deviation  be assumed
known ?
Use the sample
standard deviation
s to estimate 
 Known
Case
Use Use
  Unknown s
x  z /2 Case x  t /2
n n

© 2009 Cengage South-Western. All Rights Reserved Slide 29

 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.

© 2009 Cengage South-Western. All Rights Reserved Slide 30

 Sample Size for an Interval Estimate
of a Population Mean
 Margin of Error


E  z /2
n

 Necessary Sample Size

( z / 2 ) 2  2
n
E2

© 2009 Cengage South-Western. All Rights Reserved Slide 31

 Sample Size for an Interval Estimate
of a Population Mean
 Example: Discount Sounds
Recall that Discount Sounds is evaluating a
potential location for a new retail outlet, based in
part, on the mean annual income of the individuals in
the marketing area of the new location.
Suppose that Discount Sounds’ management team
wants an estimate of the population mean such that
there is a .95 probability that the sampling error is
$500 or less.
How large a sample size is needed to meet the
required precision?

© 2009 Cengage South-Western. All Rights Reserved Slide 32

 Sample Size for an Interval Estimate
of a Population Mean

z /2  500
n
At 95% confidence, z.025 = 1.96. Recall that = 4,500.
(1.96)2 (4, 500)2
n 2
 311.17  312
(500)

A sample of size 312 is needed to reach a desired

precision of + $500 at 95% confidence.

© 2009 Cengage South-Western. All Rights Reserved Slide 33

 Interval Estimate
of a Population Proportion
The general form of an interval estimate of a
population proportion is

p  Margin of Error

© 2009 Cengage South-Western. All Rights Reserved Slide 34

 Interval Estimate
of a Population Proportion

The sampling distribution of p plays a key role in

computing the margin of error for this interval
estimate.

The sampling distribution of p can be approximated

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

© 2009 Cengage South-Western. All Rights Reserved Slide 35

 Interval Estimate
of a Population Proportion
 Normal Approximation of Sampling Distribution of p

Sampling
p(1  p)
distribution p 
of p n

/2 1 -  of all /2

p values
p
p
z /2 p z /2 p

© 2009 Cengage South-Western. All Rights Reserved Slide 36

 Interval Estimate
of a Population Proportion
 Interval Estimate

p (1  p )
p  z / 2
n

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
p is the sample proportion

© 2009 Cengage South-Western. All Rights Reserved Slide 37

 Interval Estimate
of a Population Proportion
 Example: Political Science, Inc.
Political Science, Inc. (PSI) specializes in voter polls
and surveys designed to keep political office seekers
informed of their position in a race.
Using telephone surveys, PSI interviewers ask
registered voters who they would vote for if the
election were held that day.

© 2009 Cengage South-Western. All Rights Reserved Slide 38

 Interval Estimate
of a Population Proportion
 Example: Political Science, Inc.
In a current election campaign, PSI has just found
that 220 registered voters, out of 500 contacted, favor
a particular candidate. PSI wants to develop a 95%
confidence interval estimate for the proportion of the
population of registered voters that favor the
candidate.

© 2009 Cengage South-Western. All Rights Reserved Slide 39

 Interval Estimate
of a Population Proportion

p (1  p )
p  z / 2
n
where: n = 500, p = 220/500 = .44, z/2 = 1.96

.44(1  .44)
.44  1.96 = .44 + .0435
500

PSI is 95% confident that the proportion of all voters

that favor the candidate is between .3965 and .4835.

© 2009 Cengage South-Western. All Rights Reserved Slide 40

 Using Excel to Construct
a Confidence Interval
 Excel Formula Worksheet
A B C
1 Favor Sample Size 500
2 Yes Total Yes =COUNTIF(A2:A501,"Yes")
3 Yes Sample Proportion =C2/C1
4 No
5 Yes Confid. Coefficient 0.95
6 No Lev. of Signif. (alpha) =1-C5
7 No z Value =NORMSINV(1-C6/2)
8 No
9 No Standard Error =SQRT(C3*(1-C3)/C1)
10 Yes Margin of Error =C7*C9
11 No Note:
12 Yes Point Estimate =C3 Rows 15-501
are not shown.
13 No Lower Limit =C12-C10
14 No Upper Limit =C12+C10
© 2009 Cengage South-Western. All Rights Reserved Slide 41
 Using Excel to Construct
a Confidence Interval
 Excel Value Worksheet
A B C
1 Favor Sample Size 500
2 Yes Total Yes 220
3 Yes Sample Proportion 0.4400
4 No
5 Yes Confid. Coefficient 0.95
6 No Lev. of Signif. (alpha) 0.05
7 No z Value 1.9600
8 No
9 No Standard Error 0.02220
10 Yes Margin of Error 0.04351
11 No Note:
12 Yes Point Estimate 0.4400 Rows 15-501
are not shown.
13 No Lower Limit 0.3965
14 No Upper Limit 0.4835
© 2009 Cengage South-Western. All Rights Reserved Slide 42
 Sample Size for an Interval Estimate
of a Population Proportion
 Margin of Error

p (1  p )
E  z / 2
n
Solving for the necessary sample size, we get
( z / 2 ) 2 p (1  p )
n
E2
However, p will not be known until after we have
selected the sample. We will use the planning value
p* for p.

© 2009 Cengage South-Western. All Rights Reserved Slide 43

 Sample Size for an Interval Estimate
of a Population Proportion
 Necessary Sample Size

( z / 2 ) 2 p* (1  p* )
n
E2

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.

© 2009 Cengage South-Western. All Rights Reserved Slide 44

 Sample Size for an Interval Estimate
of a Population Proportion
 Example: Political Science, Inc.
Suppose that PSI would like a .99 probability that
the sample proportion is within + .03 of the
population proportion.
How large a sample size is needed to meet the
required precision? (A previous sample of similar
units yielded .44 for the sample proportion.)

© 2009 Cengage South-Western. All Rights Reserved Slide 45

 Sample Size for an Interval Estimate
of a Population Proportion

p(1  p )
z /2  .03
n
At 99% confidence, z.005 = 2.576. Recall that p = .44.
( z /2 )2 p(1  p ) (2.576)2 (.44)(.56)
n   1817
E2 (.03) 2

A sample of size 1817 is needed to reach a desired

precision of + .03 at 99% confidence.

© 2009 Cengage South-Western. All Rights Reserved Slide 46

 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 1843.

© 2009 Cengage South-Western. All Rights Reserved Slide 47

 End of Chapter 8

© 2009 Cengage South-Western. All Rights Reserved Slide 48