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# Hypothesis Testing

(Significance Test)
Terms - Definition
• A hypothesis is a statement or assertion or assumption or claim
or belief about the state of nature (about the true value of an
unknown population parameter):

## The accused is innocent

 = 100
p=0.9
Daily sales at a Store is normally distributed
Employee empowerment and customer satisfaction are
independent

1  2  0
Terms-Definition

## A Hypothesis Test is a statistical procedure

that involves formulating a hypothesis and
using sample data to decide on the validity of
the hypothesis (to support or not to support)
Terms-Definition
• A null hypothesis, denoted by H0, is a statement about one or
more population parameters. This is the statement we hold to be
true until we have sufficient statistical evidence to conclude
otherwise.
 H0:  = 100
• The alternative hypothesis, denoted by H1, is the assertion of
all situations not covered by the null hypothesis.
 H1:  100
• H0 and H1 are:
 Mutually exclusive
– Only one can be true.
 The null hypothesis (H0) will always state that the parameter
equals the value specified in the alternative hypothesis (H1)
Example
• Producer of electric bulbs claims that proportion
of defectives in a lot can never be more than 1%.
H0: p = 0.01
H1: p > 0.01
• I believe that on an average a PGP student at
IIMK spends 15 hours per week using library
resources
H0: μ = 15
H1: μ ≠ 15
Example
Suppose a bank knows that their customers are waiting in line an average of
10.2 minutes during the lunch hour. The branch manager has decided
to add an additional teller during the 12-2 p.m. period and wishes to test
the hypothesis that the average wait has decreased due to the additional
teller. Set up the null and alternative hypothesis for the bank manager.
H0: μ = 10.2
H1: μ < 10.2
One-Tailed and Two-Tailed
Tests
The tails of a statistical test are determined by the need for an action. If action
is to be taken if a parameter is greater than some value a, then the alternative
hypothesis is that the parameter is greater than a, and the test is a right-tailed/
upper-tail test.
H0:   50 H1:   50

## If action is to be taken if a parameter is less than some value a, then the

alternative hypothesis is that the parameter is less than a, and the test is a left-
tailed / lower tailed test.
H0:   50 H1:   50

## If action is to be taken if a parameter is either greater than or less than some

value a, then the alternative hypothesis is that the parameter is not equal to a,
and the test is a two-tailed test. H0:   50
H1:   50
The Concepts of Hypothesis Testing

## • Test Statistic : Test statistic is a sample statistic

computed from sample data. The value of the test statistic
is used in determining whether or not we may reject the
null hypothesis.
A test statistic measures how close the point estimate of
the population parameter is to the null hypotheses value (of
the parameter). This “closeness" is measured in terms of
the standard error of the point estimate.
Test statistic can be sample mean, sample variance, sample
proportion etc.
Example – contd..
•Producer of electric bulbs claim that proportion of
defectives in a lot can never be more than 1%.
H0: p = 0.01
H1: p > 0.01
A wholesaler takes a random sample of 100 bulbs from
the lot and found 3 defectives.

## Test Statistic : Sample proportion= pˆ  0.3

The Concepts of Hypothesis Testing

## • The decision rule of a statistical hypothesis test is a rule

that specifies the conditions under which the null
hypothesis may be rejected.
• Critical Region (ω) : The set of values of the test statistic
which cause us to reject the null hypothesis (H0)
• Rejection of null hypothesis implies that the test is
significant, otherwise is insignificant

## Consider H0:  = 15. We may have a decision rule that says:

“Reject H0 if the sample mean is less than 10 or more than 20 hrs.”
Decision Making
There are two possible decisions that can be made:

## Conclude that there is enough evidence to support the

alternative hypothesis
(also stated as: rejecting the null hypothesis in favor of the
alternative)

## Conclude that there is not enough evidence to reject H0

NOTE: we do not say that we accept the null hypothesis…
Decision Making
• A decision may be correct in two ways:
Fail to reject a true H0

Reject a false H 0

## • A decision may be incorrect in two ways:

Type I Error: Reject a true H 0

## • The Probability of a Type I error is denoted

by .
Type II Error: Fail to reject a false H0
• The Probability of a Type II error is denoted
by .
Type I and Type II Errors
Errors in Hypothesis Testing

 = P(Reject H 0 H 0 is true)
 = P(Accept H 0 H 0 is false)

## One is inversely proportional to the other.

Can not minimize both the errors simultaneously
Hence, we fix P(type I error) at a pre-assigned value
and then minimize P(type II error)
Level of Significance
Upper bound of P(type I error) is called Level of Significance and
is denoted by α.

## Level of significance gives maximum allowable error that can

be committed in testing a hypothesis.

## Significance level tells us how strong the evidence should be for

us to reject H0.
The p-Value
p-value is the probability of getting a test statistic value more
extreme than the observed value (we have obtained), given the
null hypothesis is true.

hypotheses.

## Policy: When the p-value is less than  , reject H0.

Interpreting the p-value
The smaller the p-value, the more statistical evidence exists
to support the alternative hypothesis.
If the p-value is less than 1%, there is overwhelming
evidence that supports the alternative hypothesis.
If the p-value is between 1% and 5%, there is a strong
evidence that supports the alternative hypothesis.
If the p-value is between 5% and 10% there is a weak
evidence that supports the alternative hypothesis.
If the p-value exceeds 10%, there is no evidence that
supports the alternative hypothesis.
We observe a p-value of .0069, hence there is
overwhelming evidence to support H1: > 170.
The Power of a Test

## The power of a statistical hypothesis test is the

probability of rejecting the null hypothesis when the
null hypothesis is false.

Power = (1 - )

## Lesser is the P(type II error), more is the power

STATISTICAL INFERENCE
TYPE OF TESTS
The type of test is determined by the Alternative Hypothesis (H1)

## Note that the inequality points to the left

Decision Rule: Reject Ho if test statistic < critical value
STATISTICAL INFERENCE

## Note that the inequality points to the right

Decision Rule: Reject H0 if test statistic > critical value
STATISTICAL INFERENCE
Two Tailed Test - H1: parameter ≠ value

## Note that the inequality points to both sides

Decision Rule: Reject H0 if test statistic < critical value
(left) or test statistic > critical value (right)
Six Steps of Hypothesis Testing
Any significance test procedure has five distinct steps

1. Making assumptions
2. Constructing hypotheses
3. Determining the test statistic
4. Constructing critical region
5. Determining p-values
6. Drawing conclusion
UNIVARIATE POPULATION
Significance test for sample
mean (when σ is known)
Assumptions :
• A random sample is drawn from a population (normal
distribution) with mean μ and sd σ
• Sample size should be large (small)
• Population sd is known

Hypotheses:
H 0 :   0 H 0 :   0 H 0 :   0
H1 :    0 H 0 :    0 H 0 :    0

## Test Statistic: sample mean = x

By CLT,
 2 
x  (~) N   , 
n 
 
x  0
z obs  ~ N (0,1), under H 0

n
Hypothesis Test of the Population
Mean When σ Is Known
• The Critical Value Approach
 Determining the critical value(s) depending on the
specification of the competing hypotheses.

Reject H0 if
z > z/2 or z < −z/2
Reject H0 if z < −z Reject H0 if z > z

LO 9.4
Critical Region :

## Right tail :   {zobs  z }

Left tail :   {zobs   z }
Two tail :   {zobs  z / 2 or z   z / 2 }
Example
An automatic bottling machine fills cola into two liter (2000 cc)
bottles. A consumer advocate wants to challenge this average
amount. A random sample of 40 bottles coming out of the machine
was selected and the exact content of the selected bottles are
recorded. The sample mean was 1999.6 cc. The population
standard deviation is known from past experience to be 1.30 cc.
Test appropriate hypothesis.

Ho :   2000
H 1 :   2000
Hypothesis Test of the Population
Mean When σ Is Known
• The p-value Approach
 Determining the p-value depending on the specification
of the competing hypotheses.

## Reject H0 if p-value < 

LO 9.3
Test statistic ; p-value
x 
z  0 = 1999.6 - 2000
obs  1.3
n 40

= 1.95
z  1.645
0.05
z  -1.645
obs
p - value  P(Z  -1.95)
 0.0256  0.05

## Reject Null i.e. the test is significant

There is sufficient evidence for rejection
Problem
I believe that on an average a PGP student at IIMK
spends 15 hours per week using library resources. A
random sample of 8 students were selected and
the average number of hours they spend in the library
came out to be 16.3 hrs. Assuming reading time to follow
normal distribution with sd 3.6 hrs, test a suitable
hypothesis

To test
H0: μ = 15
H1: μ ≠ 15
Test statistic ; p-value
x 
z  0 = 16.3 -15
obs  3.6
n 8
= 1.02
z  1.96
0.025
z  1.96
obs
p - value  P(Z  1.02)  P(Z  1.02)
 0.1539 * 2  0.3078  0.05

## Do not reject Null i.e. the test is insignificant

There is no enough evidence for rejection of the belief
Significance test for population
proportion
Assumptions :
• A random random sample is drawn from a population
• Sample size should be large

Hypotheses:
H 0 : p  p0 H 0 : p  p0 H 0 : p  p0
H 1 : p  p0 H 0 : p  p0 H 0 : p  p0
Test Statistic: sample proportion= p̂
By CLT,

 p (1  p ) 
ˆ  N  p,
p 
 n 
ˆ  p0
p
zobs  ~ N (0,1)
p0 (1  p0 )
n
Critical Region :

## Right tail :   {zobs  z }

Left tail :   {zobs   z }
Two tail :   {zobs  z / 2 or z   z / 2 }
Example: Contd.
Producer of electric bulbs claim that proportion of
defectives in a lot can never be more than 1%. A
wholesaler takes a random sample of 100 bulbs
from the lot and found 3 defectives.

H0: p = 0.01
H1: p > 0.01
Approach 1: Test statistic:

0.03  0.01
zobs   2.01, under H 0
0.01(0.99) / 100
z0.05  1.645
zobs  z0.05

## Reject Null i.e. the test is significant

There is sufficient evidence for rejection of the claim of
the producer
p-value: The p-value would depend on the direction of the
alternative as follows :
• If H1 : p > p0, p-value will be the right tailed area above
the observed value of the test statistic (Zobs) under the
standard normal curve.
• If H1 : p < p0, p-value will be the left tailed area below the
observed value of the test statistic under the standard normal
curve.
• If H1 : p ≠ p0, p-value will be the tailed area beyond the
observed value of the test statistic under the standard normal
curve. Since the normal curve is symmetric, it can also be
calculated as twice the one-tailed area above (or below) the
observed value of the test statistic.
Approach 2: p-value
0.03  0.01
ˆ  0.03)  P ( Z 
P( p )
0.01(0.99) / 100
P ( Z  2.01)  1   (2.01)
 1  0.9778  0.022  0.05

## Reject Null i.e. the test is significant

There is sufficient evidence for rejection of the claim of
The producer
Problem
It is known that the percentage of managers who are female
in the Indian corporate sector has been pretty low, about
18%. The HRD ministry wants to know whether the
percentage has improved during recent times. Accordingly,
a random sample of 100 managers were chosen and 25 of
them were females.
Perform an appropriate test of hypotheses for the above
problem.
Significance test for sample
mean (when σ is unknown)
small sample
Assumptions :
• An iid random sample is drawn from normal
distribution with mean μ and sd σ
• Population sd σ is unknown

Hypotheses:

H 0 :   0 H 0 :   0 H 0 :   0
H1 :    0 H 0 :   0 H 0 :   0

## Test Statistic: sample mean= x ;

σ needs to be estimated. Unbiased estimator of σ is
n
1
 s 
ˆ '

n  1 i 1
( xi  x ) 2
   ( n  1) s
2 '2
x ~ N   , ; ~  2
n 1
 n   2

x  0
tobs  '
~ t n 1 , under H 0
s
n
Critical Region :

## Right tail :  {tobs  t ;n 1}

Left tail :  {tobs  t ;n 1}
Two tail :  {tobs  t / 2;n 1 or tobs  t / 2;n 1}
Example
New software companies that create programs for world wide web applications believe
that average staff age at these companies is 27. A random sample of 18 staff is chosen
from these companies and their age is given as follows: 41, 18, 25, 36, 26, 35, 24, 30, 28,
19, 22, 22, 26, 23, 24, 31, 22, 22. Test appropriate hypothesis.

H0:  = 27 n = 18
H1:   27 x = 26.3
n = 18 s = 6.15
For  = 0.05 and (18-1) = 17 df , x   26.3 - 27
critical values of t are ±2.11 t  s 0 = 6.15
obs
x  0 n 18
The test statistic is: t 
s =  0.48  Do not reject H
n 0
Equivalence between Hypotheses
tests and Confidence intervals
The main idea is that a two-sided hypotheses test will give
us exactly the same conclusion (about the population
parameter) as a confidence interval i.e if we test
H0: θ = θ0 vs H1: θ ≠ θ0 and fail to reject H0 at significance
level (=0.01/0.05/0.1), then the corresponding 100(1−)%
(99%, 95%, 90%) confidence interval will contain the null
value (i.e θ0).

95% CI of 
[26.3 - (1.96* 6.15/ 18) , 26.3 - (1.96* 6.15/ 18)]
[23.46 , 29.14]
Problem
The manager of a small convenience store does not want her customers
standing in line for too long prior to a purchase. In particular, she is willing to
hire an employee for another cash register if the average wait time of the
customers is more than five minutes. She randomly observes the wait time (in
minutes) of customers during the day as:

## a. Set up the null and the alternative hypotheses to determine if

the manager needs to hire another employee.
b. Calculate the value of the test statistic. What assumption
regarding the population is necessary to implement this step?
c. Use the critical value approach to decide whether the manager
needs to hire another employee at α=0.10.
d. Repeat the above analysis with the p-value approach.