Probability Tests and Distributions

Business Statistics
Week 18 - Lecture 1 Hypothesis Testing:
Summary of the basics The prob-value approach Significance, effect size and power Tests: proportion, difference between two means
Reference: Quantitative Methods topic 9
Cass Business School
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
One-Tail Test: recall the Franchise Problem

H 0 : = 5,000 H1 : < 5,000 26 random samples : X = 4,900, S = 280 According to the Null : X ~ N ( = 5,000, 2 =
280 2 ) 26
2
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Figure 5.2: The sampling distributions of x under H0 and H1.

One-Tail Test
H1
H0
I xD
II _ x Non-rejection region
P(type I error)
Rejection region
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Five Steps in hypothesis testing (One Tail)

1. Write down the hypotheses:
H H
0 1
: = X
: < X
2. Choose significance level of test, prob. of type I error, (e.g., 0.05). 3. Find the critical value of the test in the statistical table Here z * =1.64 4. Calculate the test statistic according to the null, i.e.
x
Z=
/n
2
5. Decision rule: compare test statistic with critical value. If z < -Z* reject H 0 in favour of H 1
Cass Business School QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10 4
Returning to our problem we have:

Z *= 1.64 (tail area = 0.05) The test statistic is : Z= x = 4,900 5,000 280 2 26 = 100 280 2 26 = 1.82
-1.82<-1.64 Hence we reject the null that the weekly turnover is 5,000 In favour of the alternative hypothesis that it is less than 5,000.
Now suppose, we tested:

Figure 6.1: A two tail hypothesis test
H0 H1 H1
H 0 : = 5,000 H1 : 5,000
Reject H0
Reject H0
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Steps for two-tail test

As for one-tail test except:
: X
(instead of H 1 : < X or H 1 : > X )
Note: Critical value Z* excludes 2.5% below Z* and 2.5% above Z*(instead of 5% below Z*).
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Z*= 1.96 to cut off 2.5% in each tail of the standard Normal distribution. The test statistic is the same as before: z = -1.82>-1.96 So the null hypothesis cannot be rejected in this case.
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
The prob-value approach

Prob-value (P-value) is the significance level of the calculated test statistic
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
The prob-value approach in the franchise

example
x
Test statistic:
100
s /n
2 280 / 26
= -1.82
( H 1 : < 5,000 ), we use a one-tail test
If we test whether the mean is less than 5,000
Z = -1.82 cuts off 3.44% of the standard Normal distribution. So
H 0 can be rejected at the 3.44% significance level (or with 96.56% confidence).
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10 10
The prob-value approach in the franchise

example
If we test whether is different from 5,000 ( H 1 : 5,000 ), we use a two-tail test. Z = 1.82 cuts off 3.44% in each tail of the standard Normal distribution: a total of 6.88%. So H 0 could be rejected at the 6.88% significance level (or with 93.12% confidence), which does not meet the 5% criterion that is usually used. That is, we would not reject.
Usual criterion: reject if p-value 0.05

The production manager of Nwindow Inc. has asked you to evaluate a proposed new procedure for manufacturing one of its line of double-hung windows. The present process has a mean production of 80 units per hour with a population standard deviation of 8. The manager indicates that he does not want a change to a new procedure unless there is strong evidence that the mean production level is higher with the new process. You obtain a random sample of 25 production hours using the new process, which leads to a mean of 83 production hours. What do you conclude based on this sample?
H 0 : = 80 H1 : > 80
= 8; n = 25
test statistic : x 80 83 80 = = 1.875 > 1.645 8/5 / n Reject the null at 5%. But, strong evidence P-value = 0.0304>0.01 better judge at 1% : z= No change
Table A2: P(z>1.87)=0.0307 P(z>1.88)=0.0301

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10 13
Another example:
It is claimed that an average child spends 15 hours per week watching television. A survey of 100 children finds an average of 14.5 hours per week, with standard deviation 8 hours. Is the claim justified?
The claim would be wrong if children spend either more or less than 15 hours watching TV. The rejection region is split across the two tails of the distribution. This is a two tailed test.
A two tailed test diagram

H1 H0 H1
2.5%
2.5%
Reject H0
Cass Business School QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Reject H0
16
Solution
1. H0: = 15 H1: 15 2. Calculate the test statistic:
z= x s2 n = 14.5 15 82 100 = 0.625
3. Decision: we do not reject H0 since 0.625 < 1.96 and does not fall into the rejection region or P-value= 2 (0.266) ~0.52 >0.05 4. The claim is acceptable, no reason to be rejected.
Significance and effect size

If the sample is large, the result of a test may be statistically significant (have a low significance level) even if the difference is small. Example We have data for 100 franchises, giving an average weekly turnover of 4,975 with standard deviation 143. Can we reject the hypothesis that the average weekly turnover is 5,000?
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
18
Significance and effect size

4,975 5,000
Z=
143 /100
= 1.75
Since this value of z is less than Z*= -1.64 the null hypothesis is rejected with 95% confidence. We conclude that the true weekly turnover is less than 5,000. But the difference of 25 may be unimportant even if it is statistically significant. We should look at the size of the difference (the effect size) and ask whether it is important or not. While statistically significant, a difference of 25 in 5,000 is not economically significant.
Power
Power of a test = 1 Pr (Type II error) = 1 -
is the probability of not rejecting false
when it is
The power of a test is the probability of rejecting H 0 when it is false.
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
20
The power of a test
H1
H0
xD
Maximising the power of a test

is desirable, provided it does not increase prob(Type I error). Three possible ways: 1. Avoid situations where the effect size is small (the difference between the means under H 0 and H 1 is
small). 2. Use a large sample size, so that the sampling variance of x under both H 0 and H 1 is reduced and the distributions under the two hypothesis are more distinct. 3. Use sampling methods that have small sampling variances (same effect as increasing the sample size).
Testing a proportion
A car manufacturer claims that no more than 10% of its cars should need repairs in the first three years of their life. A random sample of 50 three-year-old cars found that 8 had required attention. Does this contradict the makers claim?
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
23
The sampling distribution of the sample proportion in large samples is given by:
p ~ N ( ,
(1 )
n
Under the null hypothesis (the makers claim): = 0.10 The sample data are: p = 8/50 = 0.16 n = 50
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
24
Solution
H H
0
: 1
= 0.10 > 0.10
Significance level: = 0.05 Critical value of a one-tail test at the 5% level is Z*= 1.64
z=
p
n
(1 )
0.16 0.10
0.10.9 50
= 1.41
The test statistic is less than the critical value. It falls in the nonrejection region. We do not reject the null hypothesis. We accept the manufacturers claim.
It is claimed that 5% of adults fall asleep while watching TV. In a recent survey of 60 adults, 16.4% indicated that they had fallen asleep in front of the television in the past month. Do we have support for the claim?
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
26
H 0 : = 0.05 H1 : 0.05 p = 0.164; n = 60 z= 0.164 0.05 = 4.05 0.05 0.95 60

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Two-tail
P-value~0
We reject the claim.

Cass Business School 27
Testing the difference of two means

The random variable to examine is x1 x2 , the difference between the average output, whose distribution for large samples is:
2 2 1 + 2 ~ , N x1 x2 2 1 n n 1 2
The population variances 1 and

2
2 which are not known

2
2 2
may be replaced by their sample estimates s1 and s 2 H0: = 0
H
2 2
0
28
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

H0: 1 = 2 or H0: 1 - 2 = 0 H1: 1 2 or H0: 1 - 2 0 The test statistic is
z=
Assumption: independent samples future lecture
(x1 x2 ) (1 2 )
2 s12 s2 + n1 n2
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10 29

A car company wishes to compare the performance of its two factories producing an identical car model. Is there any difference between the two factories at a confidence level of 99%? Output is monitored for 30 days, chosen at random, with the following results: Factory 1 Factory 2 Average daily output 420 408 Standard deviation of daily output 25 20 Do these provide evidence of difference between the two means?

This is a two-tail test: there is no a priori reason to believe that the output of one factory is higher than that of the other.
Significance level: = 0.01 Lower than normal: the management does not want to interfere, unless it is really confident of some difference between the factories.
z* = 2.57. This cuts off 0.5% in each tail of the standard Normal distribution.
The critical value of the test is

The test statistic is:
( x x ) ( ) = (420 408) 0 = 2.05 25 + 20 s1 + s 2 30 30 n n

1 2 1 2 2 2 2 2 1 2
Decision rule: Z <Z* The test statistic falls in the non-rejection region. => No significant difference between the two factories.
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
32
Exercises (prepare for Fridays lecture) - 1

An employment opportunities committee suspects that females are not as well paid as their male counterparts in comparable jobs. A random sample of 75 males and 64 females in junior academic positions are selected and the following annual salary data is obtained: Male Female Mean 32,530 31,250 Standard Deviation 780 810 What do you conclude?
Exercises (prepare for tutorial) - 2

Quantitative Methods:
Exercise 5.5 (page 696) Problems 5.10 to 5.14 (page 712)
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
34
Business Statistics
Week18 - Lecture 2
Hypothesis Testing (cont.)

Testing the difference between 2 means Testing the difference of two proportions
Reference: Quantitative Methods, topic 9
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
35
Testing Difference of Two Means

z=
2 s12 s2 + n1 n2
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10 36
Assumption: independent samples future lecture
(x1 x2 ) (1 2 )
Recall the example from the last lecture

A car company wishes to compare the performance of its two factories producing an identical car model. Is there any difference between the two factories? Output is monitored for 30 days, chosen at random, with the following results: Factory 1 420 25 Factory 2 408 20
Average daily output Stand. Dev. (daily output)
Is there evidence of difference between the two means?

Two tail-test: Z*=1.96 The test statistic is:
( x x ) ( ) = (420 408) 0 = 2.05 25 + 20 s1 + s 2 30 30 n n

1 2 1 2 2 2 2 2 1 2
Hence, difference between the two factories
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
38
An employment opportunities committee suspects that females are not as well paid as their male counterparts in comparable jobs. A random sample of 75 males and 64 females in junior academic positions are selected and the following annual salary data is obtained: Male Female Mean 32,530 31,250 Standard Deviation 780 810 What do you conclude?
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
39
Hypotheses:
H 0 : M F = 0 H1 : M F > 0
Sample Info:
Mean S N Male 32,530 780 75 Female 31,250 810 64
The test statistic is

z=
(xM
x F ) ( M F ) s s + nM nF
2 M 2 F
32 ,530 31, 250 780 2 810 2 + 75 64
= 9 .45!!
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
40
A union claims that the average income for its members in the UK is below that of employees of the same company in Spain. A survey of 60 employees in the UK showed an average income of 895/week with a standard deviation of 120. A survey of 100 workers in Spain, after making adjustments for various differences between the two countries and converting to sterling, gave an average income of 914 with a standard deviation of 90. Test at the 1% level if Spanish workers earn more than their British counterparts.
H 0 : B S = 0 H1 : B S < 0 = 0.01 z* = 2.33 z= (895 914) 120 2 90 2 60 + 100 = 1.06 > 2.33
No evidence that the Spanish earn more than their British counterparts
Testing the difference of two proportions - 1

In a comparison of two holiday companies customers, of the 75 who went with Happy Days Tours, 45 said they were satisfied, while 48 of the 90 who went with Fly by Night Holidays said they were satisfied. Is there a significant difference between the two companies? The sample evidence is: p1 = 45/75 n1 = 75
p = 48/90
2
n = 90
2
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
43

H H
0
: 1

1 1
2 2
=0 0
Significance level:
= 0.05 Critical value: Z*= 1.96
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
44

The distribution of p1 p2 is: (1 1) 2 (1 2) , 1 + p1 p2 ~ N 1 2 n1 n2 so the test statistic is:
z=
1 (1 1)
n
1
( p p ) (
1 2 1
2 (1 2)
n
2
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
45
The null hypothesis states that the proportions are the same. Hence, a reasonable estimate for the common value is the overall proportion...
1 = 2 = =
n1 p1 + n2 p2 n1 + n2
46
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
Summary: Testing Difference in Proportion

z=
( p1 p2 ) ( 1 2 ) (1 ) (1 ) +
n1 n2
n1 p1 + n2 p2 n1 + n2
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
47
Hence, in our example:

The test statistic becomes:
0.6 0.533 0
0.564 (1 0.564) 0.564 (1 0.564) + 75 90
= 0.86
The test statistic is less than the critical value, so the null hypothesis cannot be rejected. There is not sufficient evidence to demonstrate a difference between the performance of the two companies.
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
48
Exercises (prepare for next Mondays lecture) - 1

A market research company wants to know if shoppers are sensitive to the prices of items sold in a supermarket. A random sample of 802 shoppers was obtained and 387 were able to state the correct price of an item immediately after placing it in the trolley. Test at the 7% level the null hypothesis that at least 50% of all shoppers can state the correct price.
Exercises (prepare for next Mondays lecture) - 2

A manufacturer believes that a new promotional campaign will increase favourable perception of the product by 10%. Before the campaign, a random sample of 500 consumers showed that 20% had favourable reactions to the product. After the campaign, a second random sample of 400 consumers found favourable reactions among 28%. Test at the 5% significance level whether there has been a 10% improvement in favourable perceptions.
Exercises (prepare for tutorial) - 3

Quantitative Methods:
Exercises 5.6 and 5.8 (page 701) Problems 5.15 to 5.18 (page 713)
QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10
51

Probability Tests and Distributions

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Probability Tests and Distributions

Uploaded by

Copyright:

Available Formats

Business Statistics

Week 18 - Lecture 1 Hypothesis Testing:

Reference: Quantitative Methods topic 9

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

One-Tail Test: recall the Franchise Problem

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Figure 5.2: The sampling distributions of x under H0 and H1.

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Five Steps in hypothesis testing (One Tail)

Returning to our problem we have:

Now suppose, we tested:

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Steps for two-tail test

(instead of H 1 : < X or H 1 : > X )

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

The prob-value approach

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

The prob-value approach in the franchise

( H 1 : < 5,000 ), we use a one-tail test

If we test whether the mean is less than 5,000

Z = -1.82 cuts off 3.44% of the standard Normal distribution. So

Cass Business School

The prob-value approach in the franchise

Usual criterion: reject if p-value 0.05

Table A2: P(z>1.87)=0.0307 P(z>1.88)=0.0301

A two tailed test diagram

Significance and effect size

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Significance and effect size

is the probability of not rejecting false

The power of a test is the probability of rejecting H 0 when it is false.

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

The power of a test

Maximising the power of a test

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

= 0.10 > 0.10

Cass Business School

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

H 0 : = 0.05 H1 : 0.05 p = 0.164; n = 60 z= 0.164 0.05 = 4.05 0.05 0.95 60

We reject the claim.

Testing the difference of two means

The population variances 1 and

2 which are not known

may be replaced by their sample estimates s1 and s 2 H0: = 0

QM Sem. 2 - Week 7 28/02/11 & 04/03/11 - CR10

Testing the difference of two means

Cass Business School

Testing the difference of two means

Testing the difference of two means

Testing the difference of two means

( x x ) ( ) = (420 408) 0 = 2.05 25 + 20 s1 + s 2 30 30 n n