2015, Study Session # 3, Reading # 11

= Level of Significance
TS = Test Statistics
TV = Table Value

HYPOTHESIS TESTING
Hypothesis Testing
Procedure

Hypothesis
Statement about
one or more
populations

Null
Hypothesis H0

Tested for
possible
rejection.

Always
includes =
sign.

It is based on sample
statistics & probability
theory.

It is used to determine
whether a hypothesis is a
reasonable statement or
not.

Two
Types

One Tailed Test

Alternative hypothesis
having one side.

Upper Tail
H0: 0 vs Ha: > 0.

Decision rule
Reject H0 if TS > TV

Lower Tail
H0: 0 vs Ha: < 0.

Decision rule
Reject H0 if TS < TV

Alternative
Hypothesis
Ha
Hypothesis
which is
accepted
should the null
hypothesis be
rejected.

Test Statistics
Hypothesis testing involves
two statistics:

TS calculated from
sample data.

critical values of TS.

(Source: Wayne W. Daniel and James C.

Terrell, Business Statistics, Basic Concepts
and Methodology, Houghton Mifflin,
Boston, 1997.)

Two Types of
Errors
Type I Error
Rejecting a
true null
hypothesis.

Type II Error
Failing to reject a
false null
hypothesis.

Decision Rule

Based on comparison of TS to
specified value(s).
It is specific & quantitative.

Significance
Level ( )

Probability of
making a type I
error.

Denoted by
Greek letter
alpha ( ).

Used to identify
critical values.

Statistical Significance vs
Economical Significance

Statistically significant results
may not necessarily be
economically significant.

A very large sample size may
result in highly statistically
significant results that may be
quite small in absolute terms.

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SS = Sample Statistic
CV = Critical Value
SE = Standard Error

Two Tailed Test

Alternative hypothesis
having two sides.

H0: = 0 vs Ha 0.

Reject H0 if
TS > TV or TS < TV

2015, Study Session # 3, Reading # 11

2 = Population Variance
N.Dist = Normally Distributed
N.N.Dist = Non Normally
Distributed
Relationship b/w Confidence Intervals &
Hypothesis Tests

Related because of critical value.
C.I

[(SS)- (CV)(SE)] parameter [(SS) + (CV)(SE)].

It gives the range within which parameter value
is believed to lie given a level of confidence.
Hypothesis Test

-C V TS + CV.

range within which we fail to reject null
hypothesis of two tailed test given level of
significance.

Testing

Population Mean

2 known
N. dist.

n 30
2 unknown

Decision Rule

x 0

z=

2 unknown
n<30
N. dist.



or 
=
/



x 0

t n1 =

Unknown variances
assumed equal.

n1 n2 2
+

; df = n-1

( x1 x2 ) (1 2 )
1 1
sP
+
n1 n2

( n1 1) s1 + ( n2 1) s 2
n1 + n2 2

t=

Populations based
on Independent
Unequal unknown
variances.

Ho:1 - 2 0 vs Ha: 1 -2 > 0

Reject H0 if TS > TV

df = n1+n2 - 2

Distributed

Ho: = 0 vs Ha: 0
Reject H0 if TS > TV or TS < TV

where;

sP =

Normally

Ho: > 0 vs Ha: <0

Reject H0 if TS < TV

Ho: 0 vs Ha: >0

Reject H0 if TS > TV


= 

 

*(more conservative)

Means of Two

Samples.

Power of a Test

1 P(type II error).

Probability of correctly rejecting
a false null hypothesis.

Test Statistics

t(

Equality of the

p- value

The smallest level of significance
at which null hypothesis can be
rejected.

Reject H0 if p-value < .

Conditions

df = Degree of Freedom
n 30 = Large Sample
n< 30 = Small Sample

n = Sample Size

( x1 x 2 ) ( 1 2 )

Reject H0 if TS < -TV

s12 s 22
+
n1 n2
2

s12 s22
+
n n2
d . f = 12
2
s12
s22


n
1
+ n2
n1
n2

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Ho:1 - 2 > 0 vs Ha: 1 -2 < 0

Ho:1 - 2 = 0 vs Ha: 1 - 2 0
Reject H0 if TS > TV or TS < TV

2015, Study Session # 3, Reading # 11

Paired Comparisons
Test

TS t(n-1 )=






1
 = . 

S =
 = 

S

(  )
1

Testing Variance of a
N.dist. Population
TS

 

 1


Decision Rule
Reject H0 if TS > TS

Chi-Square
Distribution

Asymmetrical.

Bounded from below
by zero.

Chi-Square values
can never be ve.

Testing Equality of
Two Variances from
N.dist. Population
TS


; 



> 

Parametric Test

Specific to population
parameter.

Relies on assumptions
regarding the distribution of
the population.

Non-Parametric Test
Decision Rule
Reject H0 if TS > TV

F- Distribution

Right skewed.

Bounded by zero.

Decision Rule

H0: d d0 vs Ha: d > d0
Reject H0 if TS > TV.

H0: d d0 vs Ha:d < d0
Reject H0 if TS <-TV

H0: d = d0 vs Ha: d d0
Reject H0 if TS > TV.

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Dont consider a particular

population parameter.
Or

Have few assumptions
regarding population.

2015, Study Session # 3, Reading # 11

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