ECON1203/ECON2292

Business and Economic

Statistics
Week 8
2
Week 8 topics
Hypothesis testing
Type I & type II errors
Test about the mean when population variance is
known
p-values
Key references
Keller 11, esp. 11.1-11.2
3
Basic inference problems
Estimation
Process of obtaining reliable information about population
parameters
Could be point or interval estimates
Hypothesis testing: in many applications we want to
answer questions like
On average, does a customer of CCResort spend more than
$255 per day?
Is the earth warming up?
Is the sale increased after the advertising?
i.e., we have a belief/hypothesis about a population parameter of
interest. Need to test if the data support that belief/hypothesis
Hypothesis testing examples
and concepts
The judicial system
Defendant is presumed innocent (hypothesis). Note: not other
way around.
Look for evidence to reject that hypothesis
If enough evidence then reject (defendant found guilty),
otherwise not reject (defendant goes free).
Given evidence defendant is either found not guilty or guilty
Possible for these verdicts to be in error
Sometimes a guilty person goes free
Sometimes a miscarriage of justice innocent person jailed
Concepts are similar in statistical inference when
compared to those in the judicial system
4
Hypothesis testing examples and
concepts
Business example: Quality control at McDonalds
Quarter-pounder with cheese is presumed to comprise 0.25 pounds
(0.11 kg) of precooked meat
Given data (sample of hamburgers), is McDonalds claim correct or not?
Null hypothesis (denote by H
0
)
Some statement about a population parameter
Let X be weight of precooked meat with mean
Then null hypothesis is H
0
: = 0.25
Alternative hypothesis (denote by H
1
)
Will depend on the research objective
Some possibilities here
H
1
: 0.25, two tailed hypothesis (Truth in advertising)
H
1
: <0.25, one (lower) tailed hypothesis (Trading standards
agency)
5
Hypothesis testing examples
and concepts
A statistical test uses information from
the data to make a decision where
there are just TWO possibilities
Do not reject the null hypothesis, or
Reject the null hypothesis (in favour of the
alternative)
Type I errors occur when we reject a
true null hypothesis
Denote P(Type I error) =
Also called the significance level
Type II errors occur when we dont
reject a false null hypothesis
Denote P(Type II error) =
Which of these errors does our criminal
judicial system seek to minimize?
6
7
Hypothesis testing examples
and concepts
Statistical tests are designed such that P(Type I error) is
controlled (made small), but not P(Type II error).
Therefore
When we reject the null, we are confident
When we do not reject the null, it means we dont have sufficient
evidence in the data to refute it
If McDonalds claim is not rejected, does that prove
McDonalds quarter-pounders do contain a quarter
pound of meat? No!
If a defendant is found not guilty, does it prove the
defendant is innocent?
No, it means strictly that evidence is not strong enough to
consider the person to be guilty
8
Hypothesis testing examples
and concepts
How are data used to test the null hypothesis?
Proceed by comparing a test statistic with value specified in H
0
&
decide whether differences are:
Small enough to be attributable to random sampling errors do not
reject H
0
, or
So large that it is more likely that H
0
is not correct reject H
0
Formally define a rejection (or critical) region
Values of the test statistic that are so extreme they lead us to reject
H
0
in favour of H
1
Other values of the test statistic that are not so
extreme lie in the non-critical region
The value that separates the critical region from the
noncritical region is called the critical value
9
Quality control at McDonalds
Consider H
0
: = 0.25, H
1
: <0.25
A sample of 25 hamburgers produces sample
mean weights (in pounds!) of:
(a) 0.24 (b) 0.22 (c) 0.28 (d) 0.21
Which of these represent evidence against H
0
?
Which of these would lead you to reject H
0
?
For which are you most likely to reject H
0
?
10
Quality control at
McDonalds
0
0
05 . 0
1
0
2
of rejection to lead would 23 . (b) But
reject not d then woul 24 . (a) If
2336 . 0 and 645 . 1 then .05, , 25 0.05, Let
25 . 0
Thus
25 . 0
) (
is true, is null when the computed error), I P(type Then,
. if Reject
be ch will region whi rejection the determine to Need
25 . 0 :
25 . 0 :
) , ( ~ is meat hamburger of weight Assume
H X
H X
x z n
n
z x
n
x
Z P x X P
x X
H
H
N X
L
L
L
L
L
=
=
= = = = =
=
=

< = <
<
<
=

Quality control at
McDonalds
The critical region can be written as
Note: Choice of significance level matters!
Suppose =0.01, the new critical region is
Z <-2.33
or in terms of a sample mean, cutoff is 0.2267 rather 0.2336
Does it make sense that the two critical values are less than
before when =0.05?
Thus, case (b) with sample mean of 0.23 would now not lead to
rejection of the null hypothesis
11
n
X
Z z Z
/
25 . 0
where , if H Reject
0

= <
12
One or two tail tests?
Quality control at McDonalds
What are null & alternative hypotheses from
McDonalds perspective?
It is expected that you will spend at least ten
hours per week studying this course.
What are null & alternative hypotheses here from
lecturers perspective?
One or two tail tests?
What if we want to test H
0
: =
0
vs H
1
: >
0
13
One or two tail tests?
What if we want to test H
0
: =
0
vs H
1
:

0
14
Procedure for solving
hypothesis testing problems
1. State the hypotheses
The claim that we are looking for evidence in data to
support should be stated as the alternative
hypothesis
2. Find the critical value(s)
Depend on the significant level
3. Compute the test statistic
4. Make the decision to reject or not reject the null
hypothesis
5. Summarize the results
15
16
Skills test
Human Resources (HR) for a company has
conducted skills tests for some time
Past experience indicates test scores (out of 10) for
job applicants are X~N(6.6, 1)
A new skills course is offered to prospective
employees
HR wants to know whether such applicants tend to perform
better than the norm in the test
What is your response given sample of 25 applicants with
such a course if they completed the test with an average score
7.09 & if =0.05?
17
Skills test
course of ess effectiven supports evidence
Reject
: Decision
46 . 2
5 1
6 . 6 09 . 7
: statistic test ed Standardiz
645 . 1
: if reject .05, Given
6 . 6 :
6 . 6 :
course taking those for score mean be Let
0
05 .
1
0

=
= >
=
>
=
H
n
x
z
z z
H
H

18
p-values
How do I choose the significance level ?
No rules
Conventional choices are = 0.1 or 0.05 or 0.01
In McDonalds example we saw it could matter
Why do I have to choose a particular ?
You dont
Calculate the empirical significance level or p-value
p-value is the probability of obtaining a value of
the test statistic more extreme than that
observed, given that the null hypothesis is true
More extreme depends on form of alternative hypothesis
For skills test it would be probability of a statistic larger
than 7.09
19
p-values
0069 . ) 46 . 2 (
5 / 1
60 . 6 09 . 7
) 09 . 7 (
= > =

>

=
> =
Z P
n
X
P
X P value p

Thus very unlikely to find such an extreme value for

mean test scores given H
0
There is strong evidence to reject H
0
Alternatively, for any choice of significance level greater
than .0069 we would reject H
0
20
SIA: Student progress in BES
Student outcomes potentially influenced by
University resources such as IT & library facilities
Quality of teaching staff
Quality of fellow students - peer effects
Take the results from first feedback quiz as an
indicator of student quality
How good is this modelling assumption likely to be?
Past results over several years taken as population
distribution
SIA: Student progress in
BES...
Key features of past
results for FBQ#1
On average students do
well
Median=9, mean=8.5,
only 5.3% with mark <5,
st.dev.=1.88
Distribution is non-
normal as piles up in
right tail (skew to left)
22% with mark of 9 &
41% with 10
21
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0 1 2 3 4 5 6 7 8 9 10
R
e
l
a
t
i
v
e

f
r
e
q
u
e
n
c
y
Mark
Feedback Quiz # 1: Population distribution
22
SIA: Student progress in
BES...
Q1: What if you randomly chose a BES student to
help you with your work
What is the probability that their test mark is at least 9?
Q2: Define a good tutorial to be one where the
mean mark over 20 students is at least 9
What is the probability that youre in a good tutorial?
Q3: Is the 2014 BES cohort any different from past?
Test this hypothesis if a randomly selected tutorial of size
25 has a mean mark of 8.8
SIA: Student progress in
BES...
Let X denote the marks in the quiz
Take relative frequency distribution of X to be population
distribution (non-normal, remember)
Thus =8.5, =1.88
23
117 . 0 ) 19 . 1 (
20 88 . 1
5 . 8 9
) 9 (
) 20 / 88 . 1 , 5 . 8 ( ~ CLT by Assume : 2
63 . 0 41 . 0 22 . 0
) 10 ( ) 9 ( ) 9 (
on distributi population Use : 1
2
= =

=
= + =
= + = =
Z P
n
X
P X P
N X Q
X P X P X P
Q

24
SIA: Student progress in
BES...
( )
0
2
1 0
reject to evidence nt insufficie 0.01 say at
4238 . 0 2119 . 0 2 80 . 0 2
25 88 . 1
5 . 8 8 . 8
2 ) 8 . 8 ( 2
value - calculate now ), 25 / 88 . 1 , 5 . 8 ( ~ CLT By
5 . 8 : 5 . 8 : : 3
H
Z P
n
X
P X P p
p N X
H H Q
=
= = =

= > =
=

25
Progress report #5
Have procedures to test hypotheses in a range
of circumstances
Need to consider situations where population variance
(as well as population mean) are unknown
Leads us to t distribution
Need to recognize that the same concepts apply to
situations other than estimating the mean
Leads us to confidence intervals & hypothesis testing for
the population proportion