Interval Estimation

S. Nakale - School of Accounting

ABA 3692 2023

 Learning outcomes
✓ Understand and explain the concept of confidence interval.
✓ Develop and interpret confidence intervals for a population mean, a
population proportion and a population variance.
✓ Identify factors that affect the precision and reliability of confidence
intervals.
✓ Determine sample sizes for desired levels of statistical precision.

ABA 3692 2023

Point Estimation vs. Confidence Interval Estimation

• Inferential statistics uses sample information to estimate population

parameters.

• A point estimate is a single value of a sample statistic which is taken to be

an estimate of the true value of the population parameter.

• A sample point statistic can be an unreliable estimate of a population

parameter because the probability that it will exactly equal the true
population parameter is very small.

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Point Estimation vs. Confidence Interval Estimation

• A confidence interval estimate is a range of values defined around a sample statistic

• The population parameter is expected to lie within this interval with a specified level of

confidence or probability.

• Confidence interval estimates are constructed using their respective sample statistics as

well as knowledge about the respective sample statistics’ sampling distributions.

• A confidence interval estimate is calculated by subtracting and adding a value, called

the margin of error, to the point estimate.

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Interval Estimation: Population mean 𝝁

• Population standard deviation σ or the sample standard deviation s must be

used to compute the margin of error.

• If the population standard deviation σ is not known, the sample standard

deviation s is used to compute the margin of error.

• When large amounts of relevant historical data are available, the population

standard deviation can be calculated – we refer to such cases as σ known.

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Interval Estimation: Population mean 𝝈 known
𝜎
Margin of Error: 𝒛𝜶/𝟐
𝑛
Where:

1 − 𝛼 = 𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
𝛼
𝐳𝛂/𝟐 = 𝑧 𝑣𝑎𝑙𝑢𝑒 𝑝𝑟𝑜𝑣𝑖𝑑𝑖𝑛𝑔 𝑎𝑛 𝑎𝑟𝑒𝑎 𝑖𝑛 𝑡ℎ𝑒 𝑢𝑝𝑝𝑒𝑟 𝑡𝑎𝑖𝑙 𝑜𝑓
2
𝑡ℎ𝑒 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑛𝑜𝑟𝑚𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝜎
= standard error of 𝑥ҧ
𝑛

ABA 3692 2023

Interval Estimation: Population mean 𝝈 known

Interval Estimate:

Point estimate +Margin of Error

𝜎
𝑥ҧ ± 𝑧𝛼/2
𝑛

𝜎 𝜎
𝑥ҧ − 𝑧𝛼/2 ; 𝑥ҧ + 𝑧𝛼/2
𝑛 𝑛

𝑙𝑜𝑤𝑒𝑟 𝑙𝑖𝑚𝑖𝑡; 𝑢𝑝𝑝𝑒𝑟 𝑙𝑖𝑚𝑖𝑡

ABA 3692 2023

Class Exercise 8
Each week Lloyd’s department store selects a random sample of 100 customers in order to learn
about the amount spent per shopping trip. The store has been using the weekly survey for several
years and historical data was used to obtain a population standard deviation of N$ 200. The
historical data suggests that the data follows a normal distribution.

During the most recent week, Lloyd’s surveyed 100 customers (n=100) and obtained a sample
mean of N$ 820. The sample mean amount spent provides a point estimate of the population
mean amount spent per shopping trip.

Required:
a) Determine and interpret a 90% confidence interval for of the population mean amount spent
per shopping trip.

b) Suppose the sample size is increased, what will happen to the confidence interval estimate in
ABA 3692 2023
Class Exercise 9
Suppose you are given a task to investigate the weights of 100 grams chocolate bars to see if
they are filled correctly. Assume that the weights are normally distributed with a standard
deviation of 0.5 grams. A sample of 49 candy bars are randomly selected and weighed with
sensitive balance scales. The average weight is 99.95 grams.

Required:
a) Determine and interpret a 98% confidence interval for the population mean of the
chocolate bars.

b) Suppose the level of confidence is increased from 98% to 99%, what will happen to the
confidence interval estimate in a)?

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Interval Estimation: Population mean
𝝈 Unknown
• When developing an interval estimate of a population mean we usually do not have
a good estimate of the population standard deviation either.

• This situation represents the σ unknown case.

• The sample standard deviation s is used to estimate the population standard

deviation σ.

• The margin of error and the interval estimate for the population mean are then based
on a probability distribution known as the t distribution.

• t distribution is based on the assumption of a normal distribution for the population.

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t distribution
• A family of similar probability distributions.

• Specific t distribution symmetric with mean equal to zero and shape depending on a
parameter known as the degrees of freedom.

• As the number of degrees of freedom increases, the t distribution exhibits less variability and
the difference between the t distribution and the standard normal distribution becomes smaller
and smaller.

• Table for the t distribution:

• Each row in the table corresponds to a specific t distribution with the degrees of freedom
shown.

• If the degrees of freedom is large i.e. greater than 30, the infinite degrees of freedom row can
be used to approximate the actual t value.
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Class Exercise 10

For a t distribution with 16 degrees of freedom, find the area/probability in each

region:

a) To the right of 2.12

b) To the left of 1.337

c) To the left of -1.746

d) To the right of 2.583

e) Between -2.12 and 2.12

f) Between -1.746 and 1.746 ABA 3692 2023

Interval Estimation: Population mean
𝝈 Unknown Point estimate +Margin of Error

𝒔
𝑥ҧ ± 𝒕𝜶/𝟐
𝑛

𝑠 𝑠
𝑥ҧ − 𝑡𝛼/2 ; 𝑥ҧ + 𝑡𝛼/2
𝑛 𝑛

Where:

1 − 𝛼 = 𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡

𝛼
𝑡𝛼/2 = 𝑡 𝑣𝑎𝑙𝑢𝑒 𝑝𝑟𝑜𝑣𝑖𝑑𝑖𝑛𝑔 𝑎𝑛 𝑎𝑟𝑒𝑎 𝑖𝑛 𝑡ℎ𝑒 𝑢𝑝𝑝𝑒𝑟 𝑡𝑎𝑖𝑙 𝑜𝑓
2
𝑡ℎ𝑒 t distribution with 𝐝𝐞𝐠𝐫𝐞𝐞𝐬 𝐨𝐟 𝐟𝐫𝐞𝐞𝐝𝐨𝐦 = (𝒏 − 𝟏)

𝑠
= standard error of 𝑥ҧ
𝑛 ABA 3692 2023
Class Exercise 11
As part of their project aimed at investigating the feasibility of the presumptive tax, the ministry of
finance selected a random sample of 26 local vendors and their sample mean monthly income
and sample variance were found to be N$ 7500 and N$ 1 250 (N$ squared). Assume the
population is approximately normally distributed.

Required:
a) Determine and interpret a 95% confidence interval for the population mean monthly income
of the local vendors.

b) What can be done to improve the precision of the confidence interval estimate in a)?
Motivate.

ABA 3692 2023

Class Exercise 12
Consumption of alcoholic beverages by young women of drinking age is reported to be on an
increase in a certain country. Data (annual consumption in litres) was collected for a sample of
20 girls in that specific country. The mean and standard deviation for the sample were found to
be 130 and 65 litres , respectively. Assume the population is approximately normally distributed.

Required:
a) Construct and interpret a 90% confidence interval for the mean annual consumption of
alcoholic beverages by young women in that country.

ABA 3692 2023

Interval Estimation for the population mean

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Interval Estimation: Population proportion
𝑝(1
ҧ − 𝑝)ҧ
𝑝ҧ ± 𝑧𝛼/2
𝑛

𝑝(1
ҧ − 𝑝)ҧ 𝑝(1
ҧ − 𝑝)ҧ
𝑝ҧ − 𝑧𝛼/2 ; 𝑝ҧ + 𝑧𝛼/2
𝑛 𝑛
Where:

1 − 𝛼 = 𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡

𝛼
𝑧𝛼/2 = z 𝑣𝑎𝑙𝑢𝑒 𝑝𝑟𝑜𝑣𝑖𝑑𝑖𝑛𝑔 𝑎𝑛 𝑎𝑟𝑒𝑎 of 𝑖𝑛 𝑡ℎ𝑒 𝑢𝑝𝑝𝑒𝑟 𝑡𝑎𝑖𝑙 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑡𝑎𝑛𝑑𝑎rd normal distribution
2

ҧ
𝑝(1− 𝑝)ҧ
= standard error of 𝑝ҧ
𝑛

ҧ
𝑝(1− 𝑝)ҧ
Note: since p is what we are trying to estimate, it will not be known, therefore, p is replaced by 𝑝ҧ and 𝜎𝑝ҧ =
𝑛

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Class Exercise 13
Suppose that a recent survey amongst 200 randomly selected street vendors in Katutura showed

that 64 of them felt that the Covid-19 regulations hampered their trading.

Required:

a) Construct and interpret the 96% confidence interval for the true population proportion of

Katutura street vendors who believe that the Covid-19 regulations hampered their trading.

ABA 3692 2023

Determining the Sample Size

• Recall, the confidence interval for any population parameter is given by: 𝑃𝑜𝑖𝑛𝑡 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒 ±
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟

• If a desired 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 is selected prior to sampling, a sample size (n) that satisfy this
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 must be selected.

• To determine the sample size, write the expression/formula of the 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 in terms of
the sample size (n).

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Sample Size for an Interval Estimation of the
population mean 𝜇 : 𝝈 𝒌𝒏𝒐𝒘𝒏
𝜎
• 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 = 𝐸 = 𝑧𝛼/2
𝑛

• For a desired 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 (E), the sample size (n) is defined by:
2
𝑧𝛼/2 𝜎
𝑛=
𝐸

NB: In cases where the computed n is not an integer, we round up to the next integer value.

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Class Exercise 14

Suppose the cost of renting an outside room in Windhoek was found to be approximately

N$2000 per month, on average, a few years ago. A new study has been commissioned in order

to estimate the population mean monthly rental cost for an outside room in Windhoek. In

designing the new study, the project director specifies that the population mean monthly rental

cost be estimated with a margin of error of N$200 and a 95% level of confidence. Suppose the

population standard deviation is equal to N$965.

Determine the sample size required to satisfy the desired margin of error.
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Sample Size for an Interval Estimation of the
population proportion 𝑝
ҧ
𝑝(1− 𝑝)ҧ
• 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 = 𝐸 = 𝑧𝛼/2
𝑛

𝑧𝛼/2 2
• For a desired 𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝐸𝑟𝑟𝑜𝑟 (E), the sample size (n) is defined by: 𝑛= 𝑝(1
ҧ − 𝑝)ҧ
𝐸

NB: In cases where the computed n is not an integer, we round up to the next integer value.

ABA 3692 2023

Class Exercise 15

According to previous records, majority of the Small Medium Enterprises in a certain city do not

comply with the International Financial Reporting standards. A sample of 160 SMEs showed that

20 of them comply with the IFRS and 140 do not comply.

When determining a 99% confidence interval for the proportion of SMEs that do not comply with

the IFS, how large a sample is needed if the desired margin of error is 5%?

ABA 3692 2023

Class Exercise 16

According to previous records, majority of the Small Medium Enterprises in a certain city do not

comply with the International Financial Reporting standards. A sample of 160 SMEs showed that

20 of them comply with the IFRS and 140 do not comply.

When determining a 90% confidence interval for the proportion of SMEs that comply with the IFS,

how large a sample is needed if the desired margin of error is 3%?

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 Inference about a Population Variance
• Recall that the sample variance 𝑠 2 for a given random variable x is given by:
σ (𝑥 − 𝑥)
ҧ 2
𝑖
𝑠2 =
𝑛−1

• The sample variance 𝑠 2 is the point estimator of the population variance 𝜎 2 .

• Whenever a simple random sample of size n is selected from a normal population, the
(𝑛−1)𝑠 2
sampling distribution of 2 has a chi-square distribution 𝜒 2 with n-1 degrees of freedom.
𝜎

• Thus, the chi-square distribution 𝜒 2 is used to develop interval estimates and conduct
hypothesis tests about a population variance.

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 Chi-square 𝝌 distribution 𝟐

• The shape depends on the number of degrees of freedom.

• The notation 𝜒𝛼2 is used to denote the value of the chi-square distribution that provides an
area/probability 𝛼 to the right of the 𝜒𝛼2 value for the specified degrees of freedom.

• Tables for the chi-square distribution are available for some specified degrees of freedom.

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Interval Estimation for the population
variance
The interval estimate of a population variance for a (1 − 𝛼) level of confidence is given by:

(𝑛 − 1)𝑠 2 (𝑛 − 1)𝑠 2
2 ≤ 𝜎2 ≤ 2
𝜒𝜶/𝟐 𝜒(𝟏−𝜶/𝟐)

Where 𝜒𝜶/𝟐
2
and 𝜒(𝟏−𝜶/𝟐)
2
values are based on the chi-square distribution with n -1 degrees of
freedom.

ABA 3692 2023

Class Exercise 17
The daily car rental rates for a sample of five cities is given below:

Required:

a) Construct and interpret the 99% confidence interval estimate of the variance of car rental
rates for the population.
b) Construct and interpret the 99% confidence interval estimate of the standard deviation of
car rental rates for the population.

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 Class Exercise 18
It is known that the statistics marks (%) of students are normally distributed. A random sample of ten
students was selected and their marks are the following:

64 50 62 48 60 45 66 78 25 42

Required:

Calculate and interpret a 99% confidence interval for the population variance for the statistics
marks of students.

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 Tutorial exercises
▪ Exercise 35 page 382
▪ Exercise 49 page 389
▪ Exercise 4 page 500

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 References
❑ Anderson, D. R., Sweeney, D. J., Williams, T. A., Camm, J. D., & Cochran, J.
J. (2020). Essentials of modern business statistics with Microsoft Excel.
Cengage Learning.

❑ Wegner T, 2016. Applied Business Statistics: Methods and Excel-Based

Applications, fourth edition.

ABA 3692 2023