COMPLETE

BUSINESS
STATISTICS
by
AMIR D. ACZEL
&
JAYAVEL SOUNDERPANDIAN
7th edition.

Prepared by Lloyd Jaisingh, Morehead State

University

Chapter 6
Confidence Intervals

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-2

6 Confidence Intervals
 Using Statistics
 Confidence Interval for the Population Mean When the Population
Standard Deviation is Known
 Confidence Intervals for  When  is Unknown - The t Distribution
 Large-Sample Confidence Intervals for the Population Proportion p
 Confidence Intervals for the Population Variance
 Sample Size Determination
 The Templates
 6-3

6 LEARNING OBJECTIVES
After studying this chapter you should be able to:
 Explain confidence intervals
 Compute confidence intervals for population means
 Compute confidence intervals for population proportions
 Compute confidence intervals for population variances
 Compute minimum sample sizes needed for an estimation
 Compute confidence intervals for special types of sampling methods
 Use templates for all confidence interval and sample size computations
 6-4

6-1 Using Statistics

• Consider the following statements:

x = 550
• A single-valued estimate that conveys little information
about the actual value of the population mean.
We are 99% confident that  is in the interval [449,551]
• An interval estimate which locates the population mean
within a narrow interval, with a high level of confidence.
We are 90% confident that  is in the interval [400,700]
• An interval estimate which locates the population mean
within a broader interval, with a lower level of confidence.
 6-5

Types of Estimators

• Point Estimate
A single-valued estimate.
A single element chosen from a sampling distribution.
Conveys little information about the actual value of the population
parameter, about the accuracy of the estimate.
• Confidence Interval or Interval Estimate
An interval or range of values believed to include the unknown population
parameter.
Associated with the interval is a measure of the confidence we have that the
interval does indeed contain the parameter of interest.
 6-6

Confidence Interval or Interval

Estimate

A confidence interval or interval estimate is a range or interval of

numbers believed to include an unknown population parameter.
Associated with the interval is a measure of the confidence we have
that the interval does indeed contain the parameter of interest.

• A confidence interval or interval estimate has two components:

A range or interval of values
An associated level of confidence
 6-7

6-2 Confidence Interval for 

When  Is Known
 If the population distribution is normal, the sampling distribution of the mean is
normal.
• If the sample is sufficiently large, regardless of the shape of the population
distribution, the sampling distribution is normal (Central Limit Theorem).

In either case: Standard Normal Distribution: 95% Interval

0.4

   
P   196
.  x    196
.   0.95
 n
0.3
n
f(z)
0.2

or 0.1

0.0
   
   x  196
-4 -3 -2 -1 0 1 2 3 4
P x  196
. .   0.95
 n n
z
 6-8

6-2 Confidence Interval for  when

 is Known (Continued)

Before sampling, there is a 0.95probability that the interval


  1.96
n
will include the sample mean (and 5% that it will not).

Conversely, after sampling, approximately 95% of such intervals


x  1.96
n
will include the population mean (and 5% of them will not).


That is, x  1.96 is a 95% confidence interval for  .
n
 6-9

A 95% Interval around the Population

Mean
Sampling Distribution of the Mean
0.4
Approximately 95% of sample means
0.3
95%
can be expected to fall within the
interval   1.96  ,   1.96  .
f(x)

0.2
 n n 
0.1
2.5% 2.5%
Conversely, about 2.5% can be
0.0

  196
.

n
   196
.

n
x
expected to be above   196
.
n
and
2.5% can be expected to be below
x 
  1.96 .
x n
2.5% fall below
the interval x
x So 5% can be expected to fall outside
  
x
x 2.5% fall above the interval   196
. ,   196
. .
x
the interval  n n
x
x

95% fall within

the interval
 6-10

95% Intervals around the Sample

Mean
Sampling Distribution of the Mean
0.4
Approximately 95% of the intervals
x  1.96
 around the sample mean can be
95%
0.3 n
expected to include the actual value of the
population mean, . (When the sample
f(x)

0.2

0.1
2.5% 2.5% mean falls within the 95% interval around
0.0 the population mean.)
   x
  196
.   196
.
n n
x x x

x *5% of such intervals around the sample

x mean can be expected not to include the
x actual value of the population mean.
* x
x (When the sample mean falls outside the
x
95% interval around the population
x
mean.)
x
x
x
x
*
 6-11

The 95% Confidence Interval for 

A 95% confidence interval for  when  is known and sampling is

done from a normal population, or a large sample is used, is:

x  1.96
n

The quantity 1.96 is often called the margin of error or the
n
sampling error.
For example, if: n = 25 A 95% confidence interval:
 = 20  20
x  1.96  122  1.96
x = 122 n 25
 122  (1.96)(4 )
 122  7.84
 114.16,129.84
 6-12

A (1-a )100% Confidence Interval for 

We define za as the z value that cuts off a right-tail area of a under the standard
2
normal curve. (1-a) is called the confidence coefficient. a is called the error
2

probability, and (1-a)100% is called the confidence level.

S tand ard Norm al Distrib ution  
P z > za   a/2
0.4  
(1  a ) 2
 
P z  za   a/2
 
0.3
2
 
f(z)

P  za z za   (1  a)
  
0.2

0.1 a a  2 2

2 2
0.0 (1- a)100% Confidence Interval:
-5 -4 -3 -2 -1 0 1 2 3 4 5 
z a Z za x  za
2 2
2 n
 6-13

Critical Values of z and Levels of

Confidence

(1  a )
a za
Stand ard N o rm al Distrib utio n

0.4
2 2 (1  a )
0.3
0.99 0.005 2.576

f(z)
0.2

0.98 0.010 2.326 0.1 a a

2 2
0.95 0.025 1.960 0.0
-5 -4 -3 -2 -1 0 1 2 3 4 5
z a za
0.90 0.050 1.645 2
Z
2

0.80 0.100 1.282

 6-14

The Level of Confidence and the

Width of the Confidence Interval
When sampling from the same population, using a fixed sample size, the
higher the confidence level, the wider the confidence interval.
St an d ar d N or m al Di s tri b uti o n St an d ar d N or m al Di stri b uti o n

0.4 0.4

0.3 0.3
f(z)

f(z)
0.2 0.2

0.1 0.1

0.0 0.0
-5 -4 -3 -2 -1 0 1 2 3 4 5 -5 -4 -3 -2 -1 0 1 2 3 4 5
Z Z

80% Confidence Interval: 95% Confidence Interval:

 
x  128
. x  196
.
n n
 6-15

The Sample Size and the Width of the

Confidence Interval
When sampling from the same population, using a fixed confidence
level, the larger the sample size, n, the narrower the confidence
interval.
S a m p lin g D is trib utio n o f th e M e an S a m p lin g D is trib utio n o f th e M e an

0 .4 0 .9

0 .8

0 .3 0 .7

0 .6

0 .5

f(x)
f(x)

0 .2
0 .4

0 .3
0 .1
0 .2

0 .1
0 .0 0 .0

x x

95% Confidence Interval: n = 20 95% Confidence Interval: n = 40

 6-16

Example 6-1

• Comcast, the computer services company, is planning to invest heavily in

online television services. As part of the decision, the company wants to
estimate the average number of online shows a family of four would watch per
day. A random sample of n = 100 families is obtained, and in this sample the
average number of shows viewed per day is 6.5 and the population standard
deviation is known to be 3.2. Construct a 95% confidence interval for the
average number of online television shows watched by the entire population of
families of 4.
 6-17

6-3 Confidence Interval or Interval Estimate for

 When  Is Unknown - The t Distribution

If the population standard deviation, , is not known, replace

 with the sample standard deviation, s. If the population is
normal, the resulting statistic: t  X  
s
n
has a t distribution with (n - 1) degrees of freedom.
• The t is a family of bell-shaped and symmetric Standard normal
distributions, one for each number of degree of
freedom. t, df = 20
• The expected value of t is 0.
• For df > 2, the variance of t is df/(df-2). This is
t, df = 10
greater than 1, but approaches 1 as the number
of degrees of freedom increases. The t is flatter
and has fatter tails than does the standard
normal. 
• The t distribution approaches a standard normal 

as the number of degrees of freedom increases

 6-18

The t Distribution Template

 6-19

6-3 Confidence Intervals for  when 

is Unknown- The t Distribution

A (1-a)100% confidence interval for  when  is not known

(assuming a normally distributed population) is given by:
s
x t a
2n
where ta is the value of the t distribution with n-1 degrees of
2 a
freedom that cuts off a tail area of 2 to its right.
 6-20

The t Distribution
df t0.100 t0.050 t0.025 t0.010 t0.005
--- ----- ----- ------ ------ ------
1 3.078 6.314 12.706 31.821 63.657 t D is trib utio n: d f = 1 0
2 1.886 2.920 4.303 6.965 9.925
3 1.638 2.353 3.182 4.541 5.841 0 .4
4 1.533 2.132 2.776 3.747 4.604
5 1.476 2.015 2.571 3.365 4.032
6 1.440 1.943 2.447 3.143 3.707 0 .3
7 1.415 1.895 2.365 2.998 3.499 Area = 0.10 Area = 0.10
8 1.397 1.860 2.306 2.896 3.355

}
f(t)
9 1.383 1.833 2.262 2.821 3.250 0 .2

10 1.372 1.812 2.228 2.764 3.169

11 1.363 1.796 2.201 2.718 3.106
0 .1
12 1.356 1.782 2.179 2.681 3.055
13 1.350 1.771 2.160 2.650 3.012
14 1.345 1.761 2.145 2.624 2.977 0 .0
15 1.341 1.753 2.131 2.602 2.947 -1.372 1.372
-2.228 0 2.228
16 1.337 1.746 2.120 2.583 2.921

}
}
17 1.333 1.740 2.110 2.567 2.898 t
18 1.330 1.734 2.101 2.552 2.878
19 1.328 1.729 2.093 2.539 2.861 Area = 0.025 Area = 0.025
20 1.325 1.725 2.086 2.528 2.845
21 1.323 1.721 2.080 2.518 2.831
22 1.321 1.717 2.074 2.508 2.819
23
24
1.319
1.318
1.714
1.711
2.069
2.064
2.500
2.492
2.807
2.797
Whenever  is not known (and the population is
25 1.316 1.708 2.060 2.485 2.787
26 1.315 1.706 2.056 2.479 2.779
assumed normal), the correct distribution to use is
27 1.314 1.703 2.052 2.473 2.771
28 1.313 1.701 2.048 2.467 2.763
the t distribution with n-1 degrees of freedom.
29 1.311 1.699 2.045 2.462 2.756
30 1.310 1.697 2.042 2.457 2.750
Note, however, that for large degrees of freedom,
40 1.303 1.684 2.021 2.423 2.704
60 1.296 1.671 2.000 2.390 2.660
the t distribution is approximated well by the Z
120 1.289 1.658 1.980 2.358 2.617
 1.282 1.645 1.960 2.326 2.576
distribution.
 6-21

Example 6-2

A stock market analyst wants to estimate the average return on a certain

stock. A random sample of 15 days yields an average (annualized) return of
10.37% and a standard deviation of s = 3.5%. Assuming a normal
population of returns, give a 95% confidence interval for the average return
on this stock.
df t0.100 t0.050 t0.025 t0.010 t0.005
--- ----- ----- ------ ------ ------ The critical value of t for df = (n -1) = (15 -1)
1 3.078 6.314 12.706 31.821 63.657
. . . . . . =14 and a right-tail area of 0.025 is:
. . . . . .

13
. .
1.350
.
1.771
.
2.160
.
2.650
.
3.012
t0.025  2.145
14 1.345 1.761 2.145 2.624 2.977 The corresponding confidence interval or
15 1.341 1.753 2.131 2.602 2.947
s
.
.
.
.
.
.
.
.
.
.
.
. interval estimate is: x  t 0 . 025
. . . . . . n
35
.
 10.37  2.145
15
 10.37  1.94
 8.43,12.31
 6-24

Large Sample Confidence Intervals for

the Population Mean

df t0.100 t0.050 t0.025 t0.010 t0.005

--- ----- ----- ------ ------ ------ Whenever  is not known (and the population is
1 3.078 6.314 12.706 31.821 63.657
. . . . . . assumed normal), the correct distribution to use is
. . . . . .
. . . . . . the t distribution with n-1 degrees of freedom.
120 1.289 1.658 1.980 2.358 2.617
 1.282 1.645 1.960 2.326 2.576 Note, however, that for large degrees of freedom,
the t distribution is approximated well by the Z
distribution.
 6-25

Large Sample Confidence Intervals for

the Population Mean

A large - sample (1 - a )100% confidence interval for :

s
x  za
2 n

Example 6-3: An economist wants to estimate the average

amount in checking accounts at banks in a given region. A
random sample of 100 accounts gives x-bar = $357.60 and
s = $140.00. Give a 95% confidence interval for , the
average amount in any checking account at a bank in the
given region.
 s 140.00
x  z 0.025  357.60  1.96  357.60  27.44   33016,385
. .04
n 100
Practice

A real estate agent needs to estimate the average value of a

residential property of a given size in a certain area. The real estate
agent believes that the standard deviation of the property values is
$ δ = 5,500.00 and that property values are approximately normally
distributed. A random sample of 16 units gives a sample mean of
$89,673.12. Give a 95% confidence interval for the average value
of all properties of this kind
 6-34

6-4 Large-Sample Confidence Intervals

for the Population Proportion, p

The estimator of the population proportion, p , is the sample proportion, p . If the

sample size is large, p has an approximately normal distribution, with E( p ) = p and
pq
V( p ) = , where q = (1 - p). When the population proportion is unknown, use the
n
estimated value, p , to estimate the standard deviation of p .

For estimating p , a sample is considered large enough when both n  p an n  q are greater
than 5.
 6-35

6-4 Large-Sample Confidence Intervals

for the Population Proportion, p

A large - sample (1-a )100% confidence interval for the population proportion, p :

pˆ  z pˆ qˆ
a /2 n
where the sample proportion, p̂, is equal to the number of successes in the sample, x,
divided by the number of trials (the sample size), n, and q̂ = 1- p̂.
 6-36

Example 6-4

A marketing research firm wants to estimate the share that foreign companies
have in the American market for certain products. A random sample of 100
consumers is obtained, and it is found that 34 people in the sample are users
of foreign-made products; the rest are users of domestic products. Give a
95% confidence interval for the share of foreign products in this market.


pq ( 0.34 )( 0.66)
p  za  0.34  1.96
2
n 100
 0.34  (1.96)( 0.04737 )
 0.34  0.0928
  0.2472 ,0.4328

Thus, the firm may be 95% confident that foreign manufacturers control
anywhere from 24.72% to 43.28% of the market.
A maker of portable exercise equipment, designed for health-
conscious people who travel too frequently to use a regular athletic
club, wants to estimate the proportion of traveling business people
who may be interested in the product. A random sample of 120
traveling business people indicates that 28 may be interested in
purchasing the portable fitness equipment. Give a 95% confidence
interval for the proportion of
all traveling business people who may be interested in the product
 6-41

Reducing the Width of Confidence

Intervals - The Value of Information
The width of a confidence interval can be reduced only at the
price of:
• a lower level of confidence (see the previous slide), or
• a larger sample.

Lower Level of Confidence Larger Sample Size

90% Confidence Interval Sample Size, n = 200

pq (0.34)(0.66) 
pq (0.34)(0.66)
p  z a  0.34  1645
. p  za  0.34  196
.
2
n 100 2
n 200
 0.34  (1645
. )(0.04737)  0.34  (196
. )(0.03350)
 0.34  0.07792  0.34  0.0657
 0.2621,0.4197  0.2743,0.4057
 6-42

6-5 Confidence Intervals for the Population

Variance: The Chi-Square (2) Distribution

• The sample variance, s2, is an unbiased estimator of the population

variance, 2.
• Confidence intervals for the population variance are based on the chi-
square (2) distribution.
The chi-square distribution is the probability distribution of the sum of
several independent, squared standard normal random variables.
The mean of the chi-square distribution is equal to the degrees of
freedom parameter, (E[2] = df). The variance of a chi-square is equal
to twice the number of degrees of freedom, (V[2] = 2df).
 6-43

The Chi-Square (2) Distribution

C hi-S q uare D is trib utio n: d f=1 0 , d f=3 0 , df =5 0

 The chi-square random variable cannot
be negative, so it is bound by zero on 0 .1 0
0 .0 9 df = 10

the left. 0 .0 8
0 .0 7
0 .0 6
The chi-square distribution is skewed to

f( )
 df = 30

2
0 .0 5

the right. 0 .0 4
0 .0 3 df = 50
0 .0 2
 The chi-square distribution approaches a 0 .0 1
0 .0 0
normal as the degrees of freedom 0 50 100

2
increase.
In sampling from a normal population, the random variable:

( n  1) s 2
 
2

2
has a chi - square distribution with (n - 1) degrees of freedom.
 6-44

Values and Probabilities of Chi-Square

Distributions
Area in Right Tail

.995 .990 .975 .950 .900 .100 .050 .025 .010 .005

Area in Left Tail

df .005 .010 .025 .050 .100 .900 .950 .975 .990 .995

1 0.0000393 0.000157 0.000982 0.000393 0.0158 2.71 3.84 5.02 6.63 7.88
2 0.0100 0.0201 0.0506 0.103 0.211 4.61 5.99 7.38 9.21 10.60
3 0.0717 0.115 0.216 0.352 0.584 6.25 7.81 9.35 11.34 12.84
4 0.207 0.297 0.484 0.711 1.06 7.78 9.49 11.14 13.28 14.86
5 0.412 0.554 0.831 1.15 1.61 9.24 11.07 12.83 15.09 16.75
6 0.676 0.872 1.24 1.64 2.20 10.64 12.59 14.45 16.81 18.55
7 0.989 1.24 1.69 2.17 2.83 12.02 14.07 16.01 18.48 20.28
8 1.34 1.65 2.18 2.73 3.49 13.36 15.51 17.53 20.09 21.95
9 1.73 2.09 2.70 3.33 4.17 14.68 16.92 19.02 21.67 23.59
10 2.16 2.56 3.25 3.94 4.87 15.99 18.31 20.48 23.21 25.19
11 2.60 3.05 3.82 4.57 5.58 17.28 19.68 21.92 24.72 26.76
12 3.07 3.57 4.40 5.23 6.30 18.55 21.03 23.34 26.22 28.30
13 3.57 4.11 5.01 5.89 7.04 19.81 22.36 24.74 27.69 29.82
14 4.07 4.66 5.63 6.57 7.79 21.06 23.68 26.12 29.14 31.32
15 4.60 5.23 6.26 7.26 8.55 22.31 25.00 27.49 30.58 32.80
16 5.14 5.81 6.91 7.96 9.31 23.54 26.30 28.85 32.00 34.27
17 5.70 6.41 7.56 8.67 10.09 24.77 27.59 30.19 33.41 35.72
18 6.26 7.01 8.23 9.39 10.86 25.99 28.87 31.53 34.81 37.16
19 6.84 7.63 8.91 10.12 11.65 27.20 30.14 32.85 36.19 38.58
20 7.43 8.26 9.59 10.85 12.44 28.41 31.41 34.17 37.57 40.00
21 8.03 8.90 10.28 11.59 13.24 29.62 32.67 35.48 38.93 41.40
22 8.64 9.54 10.98 12.34 14.04 30.81 33.92 36.78 40.29 42.80
23 9.26 10.20 11.69 13.09 14.85 32.01 35.17 38.08 41.64 44.18
24 9.89 10.86 12.40 13.85 15.66 33.20 36.42 39.36 42.98 45.56
25 10.52 11.52 13.12 14.61 16.47 34.38 37.65 40.65 44.31 46.93
26 11.16 12.20 13.84 15.38 17.29 35.56 38.89 41.92 45.64 48.29
27 11.81 12.88 14.57 16.15 18.11 36.74 40.11 43.19 46.96 49.65
28 12.46 13.56 15.31 16.93 18.94 37.92 41.34 44.46 48.28 50.99
29 13.12 14.26 16.05 17.71 19.77 39.09 42.56 45.72 49.59 52.34
30 13.79 14.95 16.79 18.49 20.60 40.26 43.77 46.98 50.89 53.67
 6-45

Template with Values and Probabilities

of Chi-Square Distributions
 6-46

Confidence Interval for the Population

Variance
A (1-a)100% confidence interval for the population variance * (where the
population is assumed normal) is:
 2
 ( n  1) s , ( n  1) s 
2

  a2 2 a 
 2
1
2 
 2
where a is the value of the chi-square distribution with n - 1 degrees of freedom
2 a  2
that cuts off an area to its right and a is the value of the distribution that
1
a2 2 a
cuts off an area of to its left (equivalently, an area of 1  to its right).
2 2

* Note: Because the chi-square distribution is skewed, the confidence interval for the
population variance is not symmetric
 6-47

Example 6-5

In an automated process, a machine fills cans of coffee. If the average amount

filled is different from what it should be, the machine may be adjusted to
correct the mean. If the variance of the filling process is too high, however, the
machine is out of control and needs to be repaired. Therefore, from time to
time regular checks of the variance of the filling process are made. This is done
by randomly sampling filled cans, measuring their amounts, and computing the
sample variance. A random sample of 30 cans gives an estimate s2 = 18,540.
Give a 95% confidence interval for the population variance, 2.

 2
 ( n  12 ) s , ( n 21) s    ( 30  1)18540 , ( 30  1)18540   11765,33604
2

 a  a   457
. 16.0 
 2
1
2 
 6-48

Example 6-5 (continued)

Area in Right Tail

df .995 .990 .975 .950 .900 .100 .050 .025 .010 .005
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
28 12.46 13.56 15.31 16.93 18.94 37.92 41.34 44.46 48.28 50.99
29 13.12 14.26 16.05 17.71 19.77 39.09 42.56 45.72 49.59 52.34
30 13.79 14.95 16.79 18.49 20.60 40.26 43.77 46.98 50.89 53.67

Chi-Square Distribution: df = 29

0.06

0.05
0.95
0.04
f( )
2

0.03

0.02
0.025
0.01 0.025
0.00
0 10 20 30 40 50 60 70
2
 20.975  16.05  20.025  4572
.
 6-51

6-6 Sample-Size Determination

Before determining the necessary sample size, three questions must

be answered:
• How close do you want your sample estimate to be to the unknown
parameter? (What is the desired bound, B?)
• What do you want the desired confidence level (1-a) to be so that the
distance between your estimate and the parameter is less than or equal to B?
• What is your estimate of the variance (or standard deviation) of the
population in question?


For example: A (1- a ) Confidence Interval for : x  z a
n

}
2

Bound, B
 6-52

Sample Size and Standard Error

The sample size determines the bound of a statistic, since the standard
error of a statistic shrinks as the sample size increases:

Sample size = 2n
Standard error
of statistic

Sample size = n
Standard error
of statistic


 6-53

Minimum Sample Size: Mean and

Proportion
Minimum required sample size in estimating the population
mean, :
za2 2
n 2 2
B
Bound of estimate:

B = za
2 n

Minimum required sample size in estimating the population

proportion, p
za2 pq
n 2 2
B
 6-54

Example 6-6

A marketing research firm wants to conduct a survey to estimate the average

amount spent on entertainment by each person visiting a popular resort. The
people who plan the survey would like to determine the average amount spent by
all people visiting the resort to within $120, with 95% confidence. From past
operation of the resort, an estimate of the population standard deviation is
s = $400. What is the minimum required sample size?

za 
2 2

n 2
2
B

2 2
(1.96) ( 400)
 2
120

 42.684  43
 6-55

Sample-Size for Proportion:

Example 6-7
The manufacturers of a sports car want to estimate the proportion of people in a
given income bracket who are interested in the model. The company wants to
know the population proportion, p, to within 0.01 with 99% confidence. Current
company records indicate that the proportion p may be around 0.25. What is the
minimum required sample size for this survey?

za2 pq
n 2

B2
2.5762 (0.25)(0.75)

. 2
010
 124.42  125
 6-56

6-7 The Templates – Optimizing

Population Mean Estimates
 6-57

6-7 The Templates – Optimizing Population

Proportion Estimates