22001: PROBABILITY AND STATISTICS

Statistical Inference - I

Instructor: Dr. Gaurav Bhatnagar

Confidence Interval
Confidence Intervals

Population Mean

Known
Probability and Statistics: 22001

Unknown
Dr. Gaurav Bhatnagar

Confidence Interval Estimator for

Given: 1) The probability 1 2) known
Usually represented with a plus/minus ( ) sign

is called the confidence level.

upper confidence limit (UCL)

lower confidence limit (LCL)

Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Graphically
the actual location of the population mean

may be here

or here

or possibly even here

The population mean is a fixed but unknown quantity. It is incorrect to interpret the confidence interval estimate as a probability statement about . The interval acts as the lower and upper limits of the interval estimate of the population mean.
Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Four commonly used confidence levels

Confidence Level

cut & keep handy!

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Example 1
A computer company samples demand during lead time over 25 time periods:
235 421 394 261 386 374 361 439 374 316 309 514 348 302 296 499 462 344 466 332 253 369 330 535 334

Its is known that the standard deviation of demand over lead time is 75 computers. We want to estimate the mean demand over lead time with 95% confidence in order to set inventory levels

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Example 1
We want to estimate the mean demand over lead time with 95% confidence in order to set inventory levels
IDENTIFY

Thus, the parameter to be estimated is the popn mean: And so our confidence interval estimator will be:

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Example 1
In order to use our confidence interval estimator, we need the following pieces of data: 370.16 1.96 75 Given Calculated from the data

n
therefore:

25

The lower and upper confidence limits are 340.76 and 399.56.
Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Interval Width
A wide interval provides little information. For example, suppose we estimate with 95% confidence that an accountants average starting salary is between Rs.15,000 and Rs.100,000. Contrast this with: a 95% confidence interval estimate of starting salaries between Rs.42,000 and Rs.45,000. The second estimate is much narrower, providing accounting students more precise information about starting salaries.

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Interval Width
The width of the confidence interval estimate is a function of the confidence level, the population standard deviation, and the sample size

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Interval Width
The width of the confidence interval estimate is a function of the confidence level, the population standard deviation, and the sample size

A larger confidence level produces a w i d e r confidence interval:

Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Interval Width
The width of the confidence interval estimate is a function of the confidence level, the population standard deviation, and the sample size

Larger values of produce w i d e r confidence intervals

Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Interval Width
The width of the confidence interval estimate is a function of the confidence level, the population standard deviation, and the sample size

Increasing the sample size decreases the width of the confidence interval while the confidence level can remain unchanged. Note: this also increases the cost of obtaining additional data
Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Selecting the Sample Size

We can control the width of the interval by determining the sample size necessary to produce narrow intervals. Suppose we want to estimate the mean demand to within 5 units; i.e. we want to the interval estimate to be: Since: It follows that
Solve for n to get requisite sample size!
Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Selecting the Sample Size

Solving the equation

that is, to produce a 95% confidence interval estimate of the mean (5 units), we need to sample 865 lead time periods (vs. the 25 data points we have currently).

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Sample Size to Estimate a Mean

The general formula for the sample size needed to estimate a population mean with an interval estimate of:

Requires a sample size of at least this large:

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Example 2
A lumber company must estimate the mean diameter of trees to determine whether or not there is sufficient lumber to harvest an area of forest. They need to estimate this to within 1 inch at a confidence level of 99%. The tree diameters are normally distributed with a standard deviation of 6 inches. How many trees need to be sampled?

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Example 2
Things we know: Confidence level = 99%, therefore =.01

We want 1 , hence W=1. We are given that = 6.

Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Example 2
We compute

That is, we will need to sample at least 239 trees to have a 99% confidence interval of 1

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Confidence Interval Estimator for

So far we have assumed that the population standard deviation, , was known. Most of the time, this is not the case, so we will not able to use aforementioned confidence interval. Solution is to use the sample standard deviation, s, as a proxy for . .

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Confidence Interval Estimator for

Given: 1) The probability 1 2) unknown
Usually represented with a plus/minus ( ) sign

is called the confidence level.

upper confidence limit (UCL)

lower confidence limit (LCL)

Probability and Statistics: 22001 Dr. Gaurav Bhatnagar

Example 3
A mutual fund is trying to estimate the return on investment in companies that won quality awards last year. A random sample of 20 such companies is selected, and the return on investment is calculated. The mean of the sample is 14.75 and the standard deviation of the sample is 8.18. Construct a 95% confidence interval for the mean return on investment.

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar

Example 4
20 P&S students attend a course to improve their skills. The students take a Language listening test at the beginning of the course and at its end. The maximum possible score on the test is 36. The differences in each participants before and after scores have sample mean 2.5 and sample standard deviation 2.893. Construct a 95% confidence interval for the mean improvement (in the entire population).

Probability and Statistics: 22001

Dr. Gaurav Bhatnagar