Chapter Three: Hypothesis Testing

➢The assumptions we make about the values of population parameters

are called hypotheses.
➢A procedure based on sample evidence and probability theory to
determine whether the hypothesis is a reasonable statement is called
hypothesis testing.
Steps In Hypothesis Testing
Step 1: State out the null hypothesis(Ho) and alternative
Hypothesis(Ha)
Step 2: Specify the level of Significance ( alpha)
Step 3: Compute Test statistics: The value determined from the sample information
Step 4: Formulate Decision Rule and
Step 5: Make Decision
Prepared By: Mekuanint. T(MBA)
Errors in Hypothesis Testing (Type I and Type II)
Decision Ho: True Ho: False

Accept Ho Correct Type II Error

Decision

Reject Ho Type I Error Correct Decision

Prepared By : Mekuanint.T(MBA).
Two Tail and One Tail Test In Hypothesis Testing
Two-tailed test Right-tailed test Left-tailed test
❑ H0: µ = k H0: µ = k H0: µ = k
❑ H1: µ ≠ k H1: µ > k H1: µ < k
❑ H0:  = 0 H0:   0 H0:  0
❑ Ha:   0 Ha:   0 Ha:   0

Prepared By : Mekuanint.T(MBA).
Hypothesis-Testing Common Phrases
> < ≥
Is greater than Is less than Is equals to or
Is above Is below greater than
Is equals to or
Is higher than Is lower than
greater than
Is longer than Is shorter than Is no less than
Is bigger than Is smaller than Is at least
Is increased Is decreased or reduced
from

= ≠ ≤
Is equal to Is not equal to Is equals to or less
Is the same as Is different from than
Has not changed Is not the same as Is no more than
Is at most
from Has changed from
Approaches to formulate Decision rule for hypothesis
Testing
1.P – Value Method
Decision Rule: Reject Ho, if P Value < 𝒂
2. Critical Value Approach
Decision Rule
➢If Zc ≥ 𝒁𝒂(𝑅𝑖𝑔ℎ𝑡 tail ) Reject Ho
➢If Zc ≤ −𝒛𝒂(𝐿𝑒𝑓𝑡 𝑡𝑎𝑖𝑙 ) Reject Ho
➢If Zc ≥ 𝑍𝒂/2 Or Zc ≤- 𝑍𝒂/2 Reject Ho
3. Confidence Interval Method
Accept Ho, If the population mean lies on the specified range
Solving Hypothesis-Testing Problems (P-Value Method)
• Step 1. State the hypotheses and identify the claim.
• Step 2. Compute the test value.
• Step 3. Find the P-value.
• Step 4. Make the decision.
• Step 5. Summarize the results.
Decision Rule When Using a P-Value
If P-value < α, reject the null hypothesis.
If P-value > α, do not reject the null hypothesis.
P-Value Method for One-Tailed Test about a Population Mean: 
Known
Example 1. A researcher wishes to test the claim that the average
salary of employees in XYZ P.L. C is greater than $5700. She selects a
random sample of 36 employees from different units and finds the
mean to be $5950. The population standard deviation is $659. Is there
evidence to support the claim at α= 0.05? Use the P-value method.
Solution
Step 1 State the hypotheses and identify the claim.
H0: µ = $5700 and H1: µ> $5700
Step 2 Compute the test value.
Zc= ẋ- µ = 5950 - 5700 = 2.28
𝛿/√n 659/ √36
Step 3. Find the P-value. Using Z table, find the corresponding
area under the normal distribution for z= 2.28. 0.5- 04887 =
0.0113 , Hence the P-value is 0.0113.
Step 4 Make the decision. Since the P-value is less than 0.05,
the decision is to reject the null hypothesis.
Step 5 Summarize the results. There is enough evidence to
support the claim that the average salary of employees are
greater than $5700.
Note that: Had the researcher chosen α=0.01, the null
hypothesis would not have been rejected since the P-value
(0.0113) is greater than 0.01.
Example 2. Hypothesis testing of µ of two tailed test by p
value method
• A researcher claims that the average wind speed in a certain
city is 8 miles per hour. A sample of 32 days has an average
wind speed of 8.2 miles per hour. The standard deviation of the
population is 0.6 mile per hour. At α= 0.05, is there enough
evidence to reject the claim? Use the P-value method.
Solution
Step 1 State the hypotheses and identify the claim.
H0: µ= 8 (claim) and H1: µ ≠8
Step 2 Compute the test value.
 Zc= ẋ- µ = 8.2- 8 = 1.89
𝛿/√n 0.6/ √32
Step 3. Find the P-value. Using Z table, find the corresponding
area for Prob(1.89) = 0.4706
0.5-0.4706= 0.0294.
Since it is a two-tailed test, the area of 0.0294 must be doubled
to get the P-value. 2(0.0294) = 0.0588
Step 4 Make the decision. The decision is to not reject the null
hypothesis, since the P-value is greater than 0.05.
Step 5 Summarize the results. There is not enough evidence to
reject the claim that the average wind speed is 8 miles per
hour.
2. Critical Value Approach
Example 1. A fertilizer company claims that the use of its
product will result in a yield of at least 35 quintals of wheat per
hectare, on average, Application of the fertilizer to a randomly
selected 36 sample hectares resulted in a yield of 34 quintals per
hectare. Assume the population standard deviation is 5 quintals
and yields per hectare are normally distributed. Test the
company’s claim at 1% level of significance.
Step 1. Develop the null and alternative hypotheses.
Ho: ≥ 35 quintals
Ha:   35 quintals
Step 2. Specify the level of significance ().
 = 0.01 Z= Z0.01 = -2.33
Step 3: compute the test statistic Zc= ẋ- µ = 34-35 = -1.20
𝛿/√n 5/ √36
Step 4. Determine the critical value and the rejection rule.
For  = 0.01 = , Z 0.01 = -2.33
Reject Ho if Zc ≤ -2.33
Step 5. Determine whether to reject H0.
Decision: Do not Reject Ho because -1.20 > -2.33
3. CONFIDENCE INTERVAL METHOD
ẋ±𝐙/2 * 𝜹/√n
Based on the above Example, We can Test the
Hypothesis via CONFIDENCE INTERVAL METHOD.
Therefore,
34 ± 1.96*5/√𝟑𝟔
31.85< < 36.14.
Thus, the population mean lies b/n 31.85 and 36.14. which is 35.
Final Decision. Accept Ho
 Hypothesis Testing of Population Mean When  Unkown
• tc= ẋ- o
s/√𝑛
Example: From the past records it is known that the mean life of over power
battery used in digital clock is at most 305 day. The life of the battery has
normally distributed and recently modified. A sample of 20 modified battery
was taken and yield a mean of 311 days with a standard deviation of 12 days.
At 0.05 level of sig. did the modification of the battery increase its mean life?
Solution
Step 1: State out the Ho and Ha
H0: µ ≤ 305 (claim) and H1: µ > 305
Step 2: Specify the level of sig.  = 0.05, t, n-1d.f = t0.05, 20-1df= 1.73
Step 3: Compute Test Statistics
• tc= ẋ- o = 311-305 = 2.25
s/√𝑛 12/ √20
Step 4: Formulate Decision Rule
Reject Ho: If tc > t, n-1d.f
Step5 : Make Decision : Therefore; Reject the Ho b/c tc(2.25) > t, n-1d.f (1.73)
 Hypothesis Testing of Population Proportion
Example: During a year end audit discrepancies were found in company invoice
ledger. Consequently, the controller checked all invoices for the year. The
proportion of incorrectly recorded invoice was found to be 0.04. the controller
designed a new procedures for processing invoice and a sample of 550 invoice
was checked and 11 of them found as incorrectly recorded. At 0.05 level of sig.
did the proportion of incorrectly recorded accounts are changed from 0.04?
Solution
• Step 1: State out the Ho and Ha
Ho: P= 0.04
H1: P ≠ 0.04
• Step 2: Specify the level of sig.  = 0.05, and Z/2 = -1.96
• Step 3 : Compute Test Statistics.
Zc= p – Po = 0.022- 0.04 = -2.05
√p.q/ √n √[Link]/ √500
• Step 4: Develop Decision Rule
• Reject Ho if Zc ≤ -Z/2
-2.05 ≤ -1.96
• Step 5: Make decision , Thus, We have to Reject the Ho B/C , Zc ≤ -Z/2
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