Essentials of Business Statistics: Communicating

with Numbers

By Sanjiv Jaggia and Alison Kelly

Copyright © 2014 by McGraw-Hill Higher Education. All rights reserved.

 Chapter 8 Learning Objectives

LO 8.1 Explain an interval estimator.

LO 8.2 Calculate a confidence interval for the population mean when the population standard deviation is known.
LO 8.3 Describe the factors that influence the width of a confidence interval.
LO 8.4 Discuss features of the t distribution.
LO 8.5 Calculate a confidence interval for the population mean when the population standard deviation is not
known.
LO 8.6 Calculate a confidence interval for the population proportion.
LO 8.7 Select a sample size to estimate the population mean and the population proportion.

Estimation 8-2
8.1 Interval Estimators
LO 8.1 Explain an interval estimator.

 Confidence Interval—provides a range of values that,

with a certain level of confidence, contains the
population parameter of interest.
 Also referred to as an interval estimate.
 Construct a confidence interval as:
Point estimate ± Margin of error.
 Margin of error accounts for the variability of the estimator
and the desired confidence level of the interval.

Estimation 8-3
8.1 Interval Estimators
LO 8.2 Calculate a confidence interval for the population mean
when the population standard deviation is known.

 Constructing a Confidence Interval for  When

 is Known
 Consider a standard normal random variable Z.
P  1.96  Z  1.96   0.95
as illustrated here.

Estimation 8-4
 LO 8.2 8.1 Interval Estimators

 Constructing a Confidence Interval for  When  is

Known
X 
 Since Z
 n

 X  
 We get P  1.96   1.96   0.95
  n 

 Which, after algebraically manipulating, is

equal to P    1.96  n  X    1.96  n   0.95

Estimation 8-5
 LO 8.2 8.1 Interval Estimators

 Constructing a Confidence Interval for  When 

is Known
Note that 
P   1.96  
n  X    1.96  n  0.95

implies there is a 95% probability that the sample

mean X will fall within the interval   1.96  n
 Thus, if samples of size n are drawn repeatedly

from a given population, 95% of the computed

sample means, x 's , will fall within the interval
and the remaining 5% will fall outside the
interval.
Estimation 8-6
 LO 8.2 8.1 Interval Estimators

 Constructing a Confidence Interval for  When 

is Known
 Since we do not know , we cannot determine if a
particular x falls within the interval or not.
 However, we do know that x will fall within the

interval   1.96  n if and only if  falls within the

interval x  1.96  .n
 This will happen 95% of the time given the interval
construction. Thus, this is a 95% confidence interval for the
population mean.
Estimation 8-7
 LO 8.2 8.1 Interval Estimators

 Constructing a Confidence Interval for  When 

is Known
 Level of significance (i.e., probability of error) = .
 Confidence coefficient = (1 )
 Confidence level = 100(1 )%
 A 100(1-)% confidence interval of the population

mean  when the standard deviation  is known

is computed as x  z 2  n
or equivalently,  x  z 2  n , x  z 2 . n
 
Estimation 8-8
 LO 8.2 8.1 Interval Estimators

 Constructing a Confidence Interval for  When 

is Known
 z/2 is the z value associated
with the probability of /2
in the upper-tail.
 x  z 2  n , x  z 2  n 

 Confidence Intervals:
 90%,  = 0.10, /2 = 0.05, z/2 = z = 1.645.
 95%,  = 0.05, /2 = 0.025, z/2 = z = 1.96.
 99%,  = 0.01, /2 = 0.005, z/2 = z = 2.575.
Estimation 8-9
LO 8.2 8.1 Interval Estimators

 Interpreting a Confidence Interval

 Interpreting a confidence interval requires care.
 Incorrect: The probability that  falls in the interval is
0.95.
 Correct: If numerous samples of size n are drawn from

a given population, then 95% of the intervals formed

by the formula x  z 2  n will contain .
 Since there are many possible samples, we will be
right 95% of the time, thus giving us 95%
confidence.
Estimation 8-10
8.1 Interval Estimators
LO 8.3 Describe the factors that influence the width of a confidence
interval.

 The Width of a Confidence Interval

 Margin of Error Confidence Interval Width
z 2  n 
2 z 2  n 
 The width of the confidence interval is
influenced by the:
 Sample size n.
 Standard deviation .
 Confidence level 100(1  )%.

Estimation 8-11
LO 8.3 8.1 Interval Estimators

 The Width of a Confidence Interval is influenced by:

I. For a given confidence level 100(1  )% and sample size n,
the width of the interval is wider, the greater the population
standard deviation .
 Example: Let the standard deviation of the population of

cereal boxes of Granola Crunch be 0.05 instead of 0.03.

Compute a 95% confidence interval based on the same
sample information.
x  z 2  
n  1.02  1.96 0.05 
25  1.02  0.20

 This confidence interval width has increased from 0.024 to

2(0.020) = 0.040.
Estimation 8-12
LO 8.3 8.1 Interval Estimators

 The Width of a Confidence Interval is influenced by:

II. For a given confidence level 100(1 )% and population
standard deviation , the width of the interval is wider, the
smaller the sample size n.
 Example: Instead of 25 observations, let the sample be based

on 16 cereal boxes of Granola Crunch. Compute a 95%

confidence interval using a sample mean of 1.02 pounds and
a population standard deviation of 0.03.
x  z 2  
n  1.02  1.96 0.03 
16  1.02  0.015

 This confidence interval width has increased from 0.024 to

2(0.015) = 0.030.
Estimation 8-13
LO 8.3 8.1 Interval Estimators

 The Width of a Confidence Interval is influenced by:

III. For a given sample size n and population standard deviation
, the width of the interval is wider, the greater the
confidence level 100(1  )%.
 Example: Instead of a 95% confidence interval, compute a

99% confidence interval based on the information from the

sample of Granola Crunch cereal boxes.
x  z 2  
n  1.02  2.575 0.03 
25  1.02  0.015

 This confidence interval width has increased from 0.024 to

2(0.015) = 0.030.

Estimation 8-14
 8.2 Confidence Interval of the
Population Mean When  Is Unknown
LO 8.4 Discuss features of the t distribution.

 The t Distribution
 If repeated samples of size n are taken from a normal
population with a finite variance, then the
statistic T follows the t distribution
with (n  1) degrees of freedom, df. X 
T 
 Degrees of freedom determine S n
the extent of the broadness of the tails of the distribution;
the fewer the degrees of freedom,
the broader the tails.

Estimation 8-15
LO 8.4 8.2 Confidence Interval of the
Population Mean When  Is
Unknown
 Summary of the tdf Distribution
 Bell-shaped and symmetric around 0 with asymptotic tails
(the tails get closer and closer to the horizontal axis, but
never touch it).
 Has slightly broader tails than the z distribution.
 Consists of a family of distributions where the actual shape
of each one depends on the df. As df increases, the tdf
distribution becomes similar to the z distribution; it is
identical to the z distribution when df approaches infinity.

Estimation 8-16
LO 8.4 8.2 Confidence Interval of the
Population Mean When  Is
Unknown
 The tdf Distribution with Various Degrees of
Freedom

Estimation 8-17
 8.2 Confidence Interval for the Population
Mean When  Is Unknown
LO 8.5 Calculate a confidence interval for the population mean
when the population standard deviation is not known.

 Constructing a Confidence Interval for  When  is

Unknown
 A 100(1  )% confidence interval of the population mean
 when the population standard deviation  is not known
is computed as x  t 2,df s n

or equivalently,  x  t 2,df s n , x  t 2,df s n

 

where s is the sample standard deviation.

Estimation 8-18
8.3 Confidence Interval for the Population
Proportion
LO 8.6 Calculate a confidence interval for the population proportion.

 Let the parameter p represent the proportion of

successes in the population, where success is defined
by a particular outcome.
 P is the point estimator of the population proportion
p.
 By the central limit theorem, P can be approximated
by a normal distribution for large samples (i.e., np > 5
and n(1  p) > 5).

Estimation 8-19
LO 8.6 8.3 Confidence Interval for the
Population Proportion

 Thus, a 100(1)% confidence interval of the

population proportion is
p  1 p   p  1 p  p  1 p  
p  z 2  p  z 2 , p  z 2 
n or  n n 

where p is used to estimate the population

parameter p.

Estimation 8-20
8.4 Selecting the Required Sample Size
LO 8.7 Select a sample size to estimate the population mean and the
population proportion.

 Precision in interval estimates is implied by a

low margin of error.
 A larger n reduces the margin of error for the
interval estimates.
 How large should the sample size be for a given
margin of error?

Estimation 8-21
LO 8.7 8.4 Selecting the Required Sample
Size
 Selecting n to estimate 
 Consider a confidence interval for  with a
known and let E denote the desired margin of
error.
 Since E  zα 2 σ n
2
we may rearrange to get  zα 2 σ 
n   
 E 
 If  is unknown, estimate it with ˆ .
Estimation 8-22
LO 8.7 8.4 Selecting the Required Sample
Size
 Selecting n to estimate 
 For a desired margin of error E, the minimum
sample size n required to estimate a 100(1 )%
confidence interval of the population mean  is
2
 zα 2 σˆ 
n   
 E 
Where ˆ is a reasonable estimate of  in the
planning stage.
Estimation 8-23
LO 8.7 8.4 Selecting the Required Sample
Size
 Selecting n to estimate p
 Consider a confidence interval for p and let E
denote the desired margin of error.
 Since p1  p  where p is the
E  zα 2 sample proportion
n
2
 zα 2 
n    p  1  p 
we may rearrange to get  E 
 Since p comes from a sample, we must use a
reasonable estimate of p, that is, p̂.
Estimation 8-24
LO 8.7 8.4 Selecting the Required Sample
Size
 Selecting n to estimate p
 For a desired margin of error E, the minimum
sample size n required to estimate a 100(1  )%
confidence interval of the population proportion
p is z 
2

n  
α 2
 pˆ  1  pˆ 
 E 
Where p̂ is a reasonable estimate of p in the
planning stage.

Estimation 8-25