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Confidence Interval of µ (σ known)

0.95 = P[−1.96 < Z < 1.96]

X −µ
= P[−1.96 < < 1.96]
σ
Decision Science– I [DS1] n
σ σ
Confidence Interval Estimation = P[−1.96
n
< X − µ < 1.96
n
]

Of population mean (µ) and σ σ

= P[ X − 1.96 < µ < X + 1.96 ]
population proportion (π) n n
So, 100(1-α)% C.I. for µ is : σ Standard
Session XI X ± Zα ×
n
error
2 2
pt. estimate
table-value

Problem
Solution
Chief of Police Kathy Ackert has recently instituted a crack-
-down on drug dealers in her city. Since the crackdown began, Want 90% C.I. for µ based on
750 of the 12,368 drug dealers in the city have been caught. X = 250 K , n = 750 , S = 41 K
The mean dollar value of drugs found on these 750 dealers is So the C . I . is
$250,000. The standard deviation of the dollar value of drugs
41
for these 750 dealers is $41,000. Construct for Chief Ackert a 250 ± 1 . 645
90 percent confidence interval for the mean dollar value of 750
drugs possessed by the city’s drug dealers. Question: Is it o.k. to replace σ by S?

Answer: yes, when the sample size n is large.(because S is a

consistent estimator of σ.
3 4
Strictly speaking, we should be using FPM here!
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Interesting observations about C.I.

Solution
??? P[247.62 < µ < 252.38] = 0.90

Want 90% C.I. for µ based on

Interpretation of the confidence coefficient/level
how should we interpret the probability statement? (confidence coefficient)
X = 250 K , n = 750, N = 12368, S = 41K

Link between
So the C.I . is
confidence coefficient/level

250 ± 1.645
41
×
12368 − 750

accuracy (length of the C.I.)
σ
L = 2 zα

sample size
750 12367
= (247.62, 252.38) 2 n
σ
??? P[247.62 < µ < 252.38] = ??? 0.90
5
H = zα 6
2 n

Correct interpretation of confidence Sampling Distribution of sample

level proportion

For large sample, sampling distribution is (again) approximately NORMAL

Proportion as a special case of mean

Normal approximation to Binomial

Usage in small sample size case is deferred

µ
7
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np = Y ֏ B(n, π ) ≈ Normal (for large n)

E(Y) = nπ; σ (Y) = nπ (1 − π ) Confidence Intervals
for π estimated
π (1 − π ) p(1 − p) standard
σp = σˆ p = error
n n So, 100(1-α)% C.I. for π is : p(1 − p )
p ± Zα ×
n
Y B (n, π ) N ( nπ , nπ (1 − π ) )  π (1 − π )  pt. estimate
2
p= → ≈ = N π ,  table-value
n n n  n 
p −π Valid for large sample size n
≈ N (0,1)
π (1 − π ) / n
for small n, C.I.’s can be found using Binomial distribution

p −π
≈ N (0,1) 9 10
p(1 − p ) / n

XYZ insurance
• Estimate Severity (mean problem)
• Estimate frequency (proportion problem)

Severity frequency
sample mean 52519.46 sample proportion 9.12%

sample SD 97264.19

sample size 456 sample size 5000

std error 4554.81 std error 0.41% Sample Size Determination in

confidence coeff
z-value
95%
1.960
confidence coeff
z-value
90%
1.645
Estimating Mean and proportion
lower limit 43592.19 lower limit 8.45%

upper limit 61446.73 upper 9.79%

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Determine n in estimating π
Determine n in estimating µ
to a given accuracy and confidence
to a given accuracy and confidence
σ ERROR MARGIN
H = zα
2 n π (1 − π )
H = zα

π(1-π)
H=half length of CI = Error margin : is given by the accuracy requirement 2 n
Z-value comes from the confidence requirement
What to do about σ? H is given by the accuracy requirement
0 0.5 1
 Either σ is known, (best case, even if not very plausible scenario) Z-value comes from the confidence requirement
 Or, an estimate of σ is available from the past data What to do about π? π
 Or, conduct a pilot study, to get an estimate of σ
 Or, look for some (possible crude) estimate of σ which may be Use estimate from pilot study, if applicable
conservative, e.g. = Range / 4 14
Otherwise use 0.5 or any appropriate conservative estimate, instead.

Inference Exercises Estimating Total Tax Refunds

Customer Refund
1 $70
The Internal Revenue Service would like to estimate the total net amount of refund due to 2 $1,190

Estimating Mean Accounts Receivable for a Furniture 3 $220
a particular set of 1,000,000 taxpayers. Each taxpayers will either receive a refund, in
Retail Merchant which case the net refund is positive, or will have to pay an amount due, in which case 4 -$280
the net refund is negative. Therefore the total net amount of refund is a natural quantity 5 $260

Estimating Total Tax Refunds of interest: it is the net amount the IRS will have to pay out (or receive, if negative). Find 6 $370

Reliability of Treadmill Motors at the SureStep Company a 95% confidence interval for this total using the refunds from a random sample of 500 7 $450
taxpayers in the file/worksheet IRS Refunds. 8 $210

Husband and Wife Reactions to Sales Presentations at 9 $1,150
Stevens Honda–Buick 10 $270
11 $470

Sales Response to Coupons for Discounts on Appliances 12 -$10

Sample Size Requirement for Analyzing Customer 13 -$160
14 $2,430
Complaints About Poor Service … …

Sample Size Selection for Analyzing Proportions of Out–
of –Spec Products

Sample Size Selection for Analyzing
Proportions of Out–of –Spec Products
A manufacturing company has two plants that produce identical products. The
production supervisor wants to know how much the proportion of out-of-spec
products differs across the two plants. He suspects that the proportion of out-of-
spec products in each plant is in the range of 3% to 5%, and he wants a 99%
confidence interval to have approximate half –length 0.005 (or 0.5%). How many
items should he sample from each plant?
More Practice problem
Twelve bank tellers were randomly sampled and it was
determined they made an average of 3.6 errors per day with a
standard deviation of 0.42 error. Construct a 90 percent
confidence interval for the population mean of errors per day.
Do you require to make any assumption about the number of
errors bank tellers make?
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Sample Size Requirement for Analyzing
Customer Complaints About Poor Service

A computer company has a customer service centre that responds to customers’ questions
and complaints. The centre employs two types of people: those who have had a recent
course in dealing with customers (but little actual experience) and those with a lot of
experience dealing with customers (but no formal course). The company wants to estimate
the difference between these two types of employees in terms of the average number of
customer complaints regarding poor service in the last six months. The company plans to
obtain information on a randomly selected sample of each type of employee, using equal
samples sizes. How many employees should be in each sample to achieve a 95% confidence
interval with approximate half-length 2?

Based on past experience, the manager believes that some employees receive as few as 6
complaints over a six-month period, while some receive as many as 36 (during a six-month
period).
If sample size is small?

C.I. is valid only if the sampling is done from a (approximately)
Normal population

σ known? No further change

σ unknown? Use S as an estimate for σ, and use t-distribution with
n-1 degrees of freedom (d.f.)
X −µ X −µ
֏ N ( 0 ,1) ֏ T n −1
σ S
n n
20
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Solution to Practice problem Confidence Interval of µ

(σ unknown)
X −µ
1 − α = P[−tα <
< tα ]
S
,( n −1) , ( n −1)
S=0.42, n=12, X = 3.6 2
n
2

S S
Want 90% C.I. for µ. = P[ X − tα < µ < X + tα ]
,( n −1) n , ( n −1) n
Need to assume the no. of errors made in a day has a Normal distribution 2 2
So, 100(1-α)% C.I. for µ is : S Standard
X ± tα × error
,( n −1) n
2
The required C.I. is 3.6 ± 1.796 ×0.42/√12=(3.383,3.817) errors per day pt. estimate
table-value

Valid for sampling from a Normal population;

From Student’s t distribution with 11 d.f. if sample size n is small
21 22
Area in both tails combined = 0.10 If n is large, using z-value instead of t –value is ok

Student’s t-distribution
Chi-square (χ2)Distribution

Distribution of a continuous (skewed) random variable with range

Distribution of a cont. symmetric random variable with range (- ∞,∞).
(0,∞)
Similar appearance to Z except fat-tailed
has a parameter, ν, known as degrees of freedom(d.f.)

has a parameter, ν, known as degrees of freedom(d.f.)
mean = ν; variance = 2 ν
N (0,1)
If X1, X2,…,Xn are SRSWR from N(0, 1), then
→ t with the d . f .of the denominator
χ2 X 12 + X 22 + ⋯ + X n2 → χ 2 with n d . f .
df

If X1, X2,…,Xn are SRSWR from N(µ, σ2), then
If X1, X2,…,Xn are SRSWR from N(µ, σ2), then
n

(n − 1) S 2 ∑(X i − X )2
= i =1
→ χ 2 with( n − 1) d . f .
(X − µ) σ2 σ2
σ
Ex.: check that S2 is unbiased for σ2 and find S.E. of S2.
n (X − µ) n
= → t with( n − 1)d . f .
S (n − 1) S 2 23 24

σ 2 (n − 1)