BUSINESS STATISTICS

Session 7: ESTIMATION 1. 1.1 Pre-Work INTRODUCTION

Marketing Manager in an organization needs to estimate the likely market share his company can achieve in the market place. Quality Assurance Manager may be interested in estimating the proportion defective of the finished product before shipment to the customer. Manager of the Credit Department needs to estimate the average collection period for collecting dues from the customers.
How confident are they in their estimates? Point estimation and interval estimation are essential in business planning. Point estimation, interval estimation and hypothesis testing together constitute inferential statistics. 1.2 POINT ESTIMATION CRITERIA FOR GOOD ESTIMATE

Many functions of sample observations may be proposed as estimates of the same parameter, e.g. either the mean or median or mode of the sample values may be used to estimate the parameter of the Normal Distribution. Marketing manager of an enterprise is interested in the population value, not in a sample value. A sample is of interest as long as it throws light on the population. Point estimation deals with the task of selecting a specific sample value as an estimate for a population parameter. Estimators & their Properties An estimator of a population parameter is a sample statistic used to estimate the parameter. The most commonly-used estimator of the: Population Parameter Mean () Variance (2) Standard Deviation () Proportion (P) is is is is the the the the Sample Statistic Mean (X) Variance (S2) Standard Deviation (S) Proportion (p)

Desirable properties of estimators include

1.3

Unbiasedness Efficiency Consistency Sufficiency

ESTIMATES

Estimates - Consistent A statistic t = t(X1, X2, , Xn), a function of the sample values X1, X2, , Xn is a consistent estimate of the population parameter , if E(t) and V(t) 0 as n . i.e. an estimator is said to be consistent if its probability of being close to the parameter it estimates increases as the sample size increases. Property of consistency is a desirable property of good estimator. Several consistent estimators may exist for the same parameter e.g. in sampling from a normal population N (, 2), both the sample mean and sample median are consistent estimators of . Estimates - Sufficient An estimator is said to be sufficient if it contains all the information in the data about the parameter it estimates. For example, the sample mean is a sufficient estimator because in computing it we use the entire data set. The sample median is not sufficient; it is found as the point in the middle of the data set, regardless of the exact magnitudes of all other data elements Estimates - Unbiased A statistic t = t(X1, X2, , Xn) is an unbiased estimate of population parameter , if E(t) = Otherwise (i.e. if E (t) ) the estimator is said to be biased. Bias (of a statistic in estimating ) = E (t) i.e. an estimator is said to be unbiased if its expected value is equal to the population parameter it estimates and any systematic deviation of the estimator from the population parameter of interest is called a bias. For example, if X1, X2,., Xn is a random sample drawn from a population with mean and variance 2, then sample mean X = Xi/n is an unbiased estimator of population mean because E(X) = so the sample mean is an unbiased estimator of the population mean. Unbiasedness is an average or long-run property. The mean of any single sample will probably not equal the population mean, but the average of the means of repeated independent samples from a population will equal the population mean. Sample variance s2 = (Xi-X)2/n is a biased estimator of the population variance 2 Because E(s2)=((n-1)/n)22 An unbiased estimator of the population variance 2 is given by S2 = (Xi X)2/(n-1) because E (S2) =2 The distinction between S2 and s2 in which only denominators are different

s2 is the variance of the sample observations, but S2 is the unbiased estimator of the variance 2 in the population. An unbiased estimator is on target on average. A biased estimator is off target on average. Estimates - Efficient An estimator is efficient if it has a relatively small variance (and standard deviation). An efficient estimator is, on average further from the parameter being estimated. An inefficient estimator is, on average closer to the parameter being estimated. 1.4 PROPERTIES OF SAMPLE MEAN AND SAMPLE VARIANCE

For a normally distributed population , both the sample mean and the sample median are unbiased estimators of the population mean . The sample mean, however, is more efficient than the sample median. This is so because the variance of the sample median happens to be 1.57 times as large as the variance of the sample mean. In addition, the sample mean is a sufficient estimator because in computing it we use the entire data set. Every observation in the sample is used in the calculation of the sample mean, The sample median is not sufficient; it is found as the point in the middle of the data set, regardless of the exact magnitudes of all other data elements. In general, the sample mean X is the best estimator of the population mean , because it is unbiased and has the smallest variance of all unbiased estimators of . The sample mean is also consistent. While the sample mean is the best, the sample median is sometimes used because it is more resistant to extreme observations. The sample variance (the sum of the squared deviations from the sample mean divided by (n-1)) is an unbiased estimator of the population variance. In contrast, the average squared deviation from the sample mean is a biased (though consistent) estimator of the population variance. E(S2) E(s2) Example The following observations constitute a random sample from an unknown population 14, 19, 17, 20, 25. Estimate the mean & SD of the population. Also find the estimate of standard error of sample mean. Solution _ Here, X = Xi/n = (14+19+17+20+25)/5 =95/5 = 19 _ and S2 = (Xi-X)2/(n-1) = = E( (Xi X)2/(n-1)) E ((Xi-X)2/n) = < 2 2

= {(14-19)2+ (19-19)2+ (17-19)2+ (20-19)2+ (25-19)2}/4 = {25+0+4+1+36}/4 = 66/4 = 4.06 _ Since X and S2 are unbiased estimator of the population mean and population variance 2, the estimates of and are 19 and 4.06 respectively. _ Standard error of sample mean is S.E (X) = /n But is not known, it is estimated by S _ Estimate of S.E (X) = S/n = 4.06/5 = (66/20) = 3.3 = 1.82 1.5 POINT ESTIMATION POPULATION PROPORTION

Sample proportion p is an unbiased estimator of population proportion P; i.e. E(p) = P Using central limit theorem, if sample size is large, regardless of the shape of population distribution, the distribution of the sample proportion follows a normal distribution with mean = P and S.D = (P(1-P)/n) The standard error of proportion P = (P(1-P)/n) 2. 2.1 Post Work Learning Objectives i. ii. 2.2 To construct & interpret confidence interval, estimate for the mean and proportion To determine sample size necessary to develop a confidence interval for the mean and proportion

Summary

Session 6 shall provide a conceptual framework of statistical estimation which is one of the components of statistical inference. The session is focused on i. The definition and meaning of point estimation for the population mean and population proportion ii. The role of sample mean and sample proportion in estimating the population mean and population proportion with their property of unbiasedness iii. The conceptual framework of interval estimation with its key elements iv. The methodology for establishing the confidence interval for the population mean and the population proportion based on the sample mean and the sample proportion v. Examples giving the 95% and 99% confidence interval for the population mean and the population proportion for large samples vi. Establishing confidence interval for small samples using the t distribution after explaining the role of degrees of freedom in computing the value of t. vii. Determining the optimal sample size based on precision, confidence level and a knowledge about the population standard deviation

2.3
2.4

Readings Chapter 7 (Text Book)

Learning Activities

1. A machine produces components, which have a SD 1.6 cm in length. A random

sample of 64 parts is selected from output and this sample has a mean length of 90 cms. Customer will reject the part if it is either less than 88 cms or more than 92 cms. Does the 95% confidence interval for the true mean length of all the components produced ensure acceptance by the customer? 2 The average travel time taken based on a random sample of 10 people working in a company to reach the office is 40 minutes with a SD of 10 minutes. Establish 95% confidence interval for the mean travel time of everyone in company (assuming normal) which will help the company redesign the working hours. 3. In a health survey involving a random sample of 75 patients who developed a particular illness, 70% of them are cured of this illness by a new drug. Establish 95% & 99% confidence interval for the population proportion of all the patients who will be cured by the new drug which would help assess the market potential for this new drug by a pharmaceutical company. . 4. A private bank offering internet banking facility wants to know the proportion of customers who are satisfied with its service quality. The bank wants this estimate to be within 0.04 with a confidence level of 95%. A pilot study done earlier reveals that out of 120 customers, 90 are satisfied customers. What should be the sample size for a new comprehensive survey to ascertain satisfaction level? 5. The director of a market research agency wishes to study the reach of a particular advertising campaign. He is concerned with the percentage of the target market that has seen at least a portion of the campaign. The director does not think that the figure will exceed 25%. What should be the sample size for this study if the director wishes the estimate to be within three percentage points of the true value and 95% confidence level is specified? 6. Suppose that you have an estimator with a relatively large bias. The estimator is consistent and efficient, however. If you had a generous budget for your sampling survey, would you use this estimator? 7. Suppose that you have 2 biased estimators of the population parameter. Estimator A has a bias equal to 1/n( that is the mean of the estimator is 1/n unit away of the parameter it estimates, where n is the sample size used. Estimator B has a bias equal to 0.01 (the mean of the estimator is 0.01 units away from the parameter of interest).Under what conditions is estimator A better than B?

8. Suppose that you have two statistics A & B as possible estimators of the same population parameter. Estimator A is unbiased, but has a large variance. Estimator B has a small bias, but has only 1/100th the variance of estimator A. If you had a generous budget for your sampling survey, which estimator is better for you? Explain. 9. A statistic A is a sufficient estimator of a population parameter. Why should you use it as a possible estimate? Is there any reason of not using it? 10. Suppose that in a sampling survey to estimate the population variance, the biased estimator is used instead of unbiased one. The sample size used was n=100 & the estimate obtained was 1287. Can you find the value of the unbiased estimate of the population variance?

11. The average travel time taken based on a random sample of 15 people working in a
company to reach the office is 45 minutes with an S.D of 9minutes. Assuming normal, establish the 95% confidence interval for the mean travel time of every one in the office. 12. A marketing research firm wants to conduct a survey to estimate the average amount spent on entertainment by each person visiting a popular resort. The people who plan the survey would like to determine the average amount spent by all people visiting the resort to within $120, with 95% confidence. From past operation of the resort, an estimate of the population standard deviation is $400. What is the minimum required sample size? -------------------------------------------------------------------------------------