Statistics for Managers

Using Microsoft Excel

Chapter 8
Fundamentals of Hypothesis
Testing: One-Sample Tests

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 Chapter Topics
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 hat is a Hypothesis?
£ hypothesis is an I assume the mean GP£
assumption about the of this class is 3.5!
population parameter.
 £ parameter is a
characteristic of the
population, like its
mean or variance.
 The parameter must be
identified before
analysis.
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 The Null Hypothesis, ›0
½ States the £ssumption (numerical) to be tested
e.g. The grade point average of juniors is at
least 3.0 (›0: †
3.0)
½ egin with the assumption that the null
hypothesis is TRUE.
(Similar to the notion of innocent until proven guilty)

½Refers to the Status Quo

½£lways contains the µ = µ sign
½The Null Hypothesis may or may not be rejected.
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 The £lternative Hypothesis, ›1
½ Is the opposite of the null hypothesis
e.g. The grade point average of juniors is
less than 3.0 (›1: †  3.0)
½ Challenges the Status Quo
½ Never contains the µ=µ sign
½ The £lternative Hypothesis may or may
not be accepted
½ Is generally the hypothesis that is
believed to be true by the researcher
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 Identify the Problem

Steps:
 State the Null Hypothesis (›0: †
3.0)

 State its opposite, the £lternative

Hypothesis (›1: †  3.0)
> Hypotheses are mutually exclusive &
exhaustive
> Sometimes it is easier to form the
alternative hypothesis first.

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 Hypothesis Testing Process

Assume the
population
mean age is 50.
(Null Hypothesis) Population
The Sample
Is ß r  † r ! Mean Is 20
No, not likely!

REJECT
Null Hypothesis Sample

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 Reason for Rejecting ›0

@" # $%&'

It is unlikely
that we would  Therefore, we
get a sample reject the null
mean of this hypothesis that
value ... † = 50.
... if in fact this were
the population mean.

20 † ù 50 Sample Mean
›
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 Level of Significance, O
½ mefines Unlikely Values of Sample
Statistic if Null Hypothesis Is True
 Called Rejection Region of Sampling
mistribution
½ mesignated O (alpha)
 Typical values are 0.01, 0.05, 0.10
½ Selected by the Researcher at the Start
½ Provides the Critical Value(s) of the Test
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 Level of Significance, O and
the Rejection Region
› 0: †
3 O Critical
› 1: †  3 Value(s)
Rejection 0
Regions O
›0: †
3
›1: † Ú 3
0
O
› 0: † r 3
› 1: †  3
0

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 Errors in Making mecisions
½ Type I Error
 Reject True Null Hypothesis (³False Positive´)

 Has Serious Consequences

 Probability of Type I Error Is O

> Called Level of Significance

> Set by researcher

½ Type II Error
 mo Not Reject False Null Hypothesis (³False
Negative´)
 Probability of Type II Error Is ˜ (eta)

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 Result Possibilities
›0: Innocent
Jury Trial Hypothesis Test
Actual Situation £ ' @'
Verdict   (' ) Decision 0 ' 0 * %
$ + Type II
  Correct Error ,-  1-O
Error ( )
H0
Type I
Error Correct ,-  Power
(' ) Error
H0 (1 - )
(O )

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 O & ˜ Have an
Inverse Relationship
Reduce probability of one error
and the other one goes up.

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 Factors £ffecting
Type II Error, ˜
½ True Value of Population Parameter
 Increases hen mifference etween Hypothesized
Parameter & True Value mecreases
½ Significance Level O ˜
 Increases hen O mecreases O
½ Population Standard meviation 
˜ 
 Increases hen  Increases

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 Factors £ffecting
Type II Error, ˜
½ True Value of Population Parameter
 Increases hen mifference etween Hypothesized
Parameter & True Value mecreases
½ Significance Level O ˜
 Increases hen O mecreases O
½ Population Standard meviation 
˜ 
 Increases hen  Increases
½ Sample Size p ˜
 Increases hen p mecreases
n
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 How to choose between Type I and
Type II errors
½ Choice depends on the cost of the error
½ Choose little type I error when the cost of
rejecting the maintained hypothesis is high
 £ criminal trial: convicting an innocent person
 The Exxon Valdise: Causing an oil tanker to sink
½ Choose large type I error when you have
an interest in changing the status quo
 £ decision in a startup company about a new piece of
software
 £ decision about unequal pay for a covered group.
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 Example Hypotheses:
How do you test them?

½ meregulation leads to lower air travel

prices.
½ The university discriminates against
women faculty members
½ Stock prices increase when a firm
announces a layoff.

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 Hiring Policy Hypotheses

£  ' "'% . . /   %

%  0"#  )%% &'
/    .1.' . % 
&  #. " ) £%%'"  
" ) %  #.  
2£ £,3 3 +455 £+$
£53,+£63 783@3@!

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 Hiring Policy Hypotheses

+4559 3 +$6$4£5 $83@ +8

33 3 @£+$£,$@ :3£+;<=>
£53,+£639 3 +$6$4£5 $83@
33 3 @£+$£,$@ :3£+?=>

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 Hiring Policy Hypotheses

2£ £,3 3 8@@@53 3,,8,@

£ 3 ,3,43, £+ £ 3!
82 $8 3@3 ,35£3 8 73 
£+$ 73  3,,8,@!

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 Hiring Policy Hypotheses

*£54,3 8 ,3 £ (88$ 358733

:0 '  -   0 % ' <) 
>
*£54,3 8 ,3A3 £ 88,
358733:- #  ' /  %
 ) ' % )  >

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 Hiring Policy Hypotheses

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 Hiring Policy Hypotheses

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 Critical Value of the test statistic

½ Convert Sample Statistic (e.g., ß ) to test

statistic, for example a Z, t or F-statistic
½ Compare to Critical value obtained from
a table.
 If the test statistic falls in the Critical
Region, Reject ›0; Otherwise mo Not Reject
›0

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 O Value Test

½ Probability of Obtaining a Test Statistic

More Extreme È
or
) than £ctual
Sample Value Given H0 Is True
½ Called Observed Level of Significance
 Smallest Value of a H0 Can e Rejected
½ Used to Make Rejection mecision
 If O value
O
mo Not Reject H0
 If O value  O, Reject H0
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 Hypothesis Testing: Steps

Test the £ssumption that the true mean

grade point average of juniors is at least 3.
1. State ›0 ›0 : †
Ñ

. State ›1 ›1 : †  
3. Choose O O = .05
4. Choose p n = 100
5. Choose Test:  O
 

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 Hypothesis Testing: Steps
pp 

Test the £ssumption that grade point average of

juniors is at least 3.

'. Set Up Critical Value(s)  

l. Collect mata 

 pO
8. Compute Test Statistic O   
O  

9. Make Statistical mecision  ›
O!
10. Express mecision ! p" Op
!pÑ

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 Rejection Region

›0: †
 ›0: † 


›#† $
›#† %

Reject ›0 Reject › 0

O O

Ô Ô
Must e "p&p
Small values don¶t contradict ›0
elow † = 0 mon¶t Reject ›0!
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 t-Test:  Unknown
£ssumptions
 Population is normally distributed
 If not normal, only slightly skewed & a large
sample taken (Central limit theorem applies)
Parametric test procedure
t test statistic, with n-1 degrees of freedom
†



p
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 megrees of Freedom
½ € in sample - number of parameters that must be
estimated before test statistic can be computed.
 For a single sample t-test, we must first estimate the
mean before we can estimate
R
the standard deviation.
 Once the mean is estimated, n-1 of the values are left

since we know that the nth value is equal to

p 
p
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 Example: One Tail t-Test

m   $%  

 more than 3'8 !
 &  ! ! 
3' $%  = 3l.5'
  r 

   Or0.01
Ñ
gm.


 is not given, ›0: †  3'8

›1: †  3'8

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 PH Stat Entries

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 %! () "


ß  † 3l . 5  3'8

r r r 1 . 80
15
p 3'

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 Proportions
½ Involves categorical variables
½ Fraction or % of population in a category
½ If two categorical outcomes, binomial
distribution
 Either possesses or doesn¶t possess the characteristic
½ Sample proportion (O)
p
áááá
á


p á á

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 Z test for proportions
½ The null hypothesis for the proportion also implies we
know the variance, since the variance is just P times (1-
P).
½ This is a good approximation when the sample size is
large.
½ If the sample size is small, we could use the binomial
distribution to compute the exact p value that a sample
of size n would yield a sample proportion O given the
population proportion P. Using the normal
approximation is much easier.
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 Example:Z Test for Proportion

½Problem: £ marketing company claims

that it receives 4% responses from its
Mailing.
½£pproach: To test this claim, a random
sample of 500 were surveyed with 5
responses.
½Solution: Test at the O = .05 significance
level.
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 PH ST£T Entries

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 Z Test for Proportion:
Solution

= 1.14
Critical Values: á 1.9'
mecision:
,-  ,- 
    Conclusion:
e do not have sufficient
evidence to reject the company¶s
Ô claim of 4% response rate.
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 Chapter Summary
½£ddressed Hypothesis Testing Methodology
½Performed t- Test for the Mean ( unknown)
½ miscussed p-Value £pproach to Hypothesis Testing
½Performed One Tail and Two Tail Tests
½Performed Z Test of Hypothesis for the Proportion

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