Introduction to Estimation

Copyright © 2005 Brooks/Cole, a division of Thomson Learning, Inc.

 Estimation…
There are two types of inference: estimation and hypothesis
testing; estimation is introduced first.

The objective of estimation is to determine the approximate

value of a population parameter on the basis of a sample
statistic.

E.g., the sample mean ( ) is employed to estimate the

population mean ( ).

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 Estimation…
The objective of estimation is to determine the approximate
value of a population parameter on the basis of a sample
statistic.

There are two types of estimators:

Point Estimator

Interval Estimator

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 Point Estimator…
A point estimator draws inferences about a population by
estimating the value of an unknown parameter using a single
value or point.

We saw earlier that point probabilities in continuous

distributions were virtually zero. Likewise, we’d expect that
the point estimator gets closer to the parameter value with an
increased sample size, but point estimators don’t reflect the
effects of larger sample sizes. Hence we will employ the
interval estimator to estimate population parameters…

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 Interval Estimator…
An interval estimator draws inferences about a population
by estimating the value of an unknown parameter using an
interval.

That is we say (with some ___% certainty) that the

population parameter of interest is between some lower and
upper bounds.

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 Point & Interval Estimation…
For example, suppose we want to estimate the mean summer
income of a class of business students. For n=25 students,
is calculated to be 400 $/week.

point estimate interval estimate

An alternative statement is:

The mean income is between 380 and 420 $/week.

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 Qualities of Estimators…Statisticians have already determined the “best” way to estimate a
population parameter.

Qualities desirable in estimators include unbiasedness,

consistency, and relative efficiency:

• An unbiased estimator of a population parameter is an estimator

whose expected value is equal to that parameter.

• An unbiased estimator is said to be consistent if the difference

between the estimator and the parameter grows smaller as the
sample size grows larger.

• If there are two unbiased estimators of a parameter, the one whose

variance is smaller is said to be relatively efficient.

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 Confidence Interval Estimator for :
The probability 1– is called the confidence level.

Usually represented upper confidence

with a “plus/minus” limit (UCL)
( ± ) sign

lower confidence
limit (LCL)

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 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. Its 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.
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 Four commonly used confidence levels…
Confidence Level

 cut & keep handy! 

Table 10.1
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 Example 10.1…
A computer company samples demand during lead time over
25 time periods:
235 374 309 499 253
421 361 514 462 369
394 439 348 344 330
261 374 302 466 535
386 316 296 332 334

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…

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 Example 10.1…
“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 pop’n mean:

And so our confidence interval estimator will be:

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 Example 10.1… CALCULATE

In order to use our confidence interval estimator, we need the

following pieces of data:

370.16 Calculated from the data…

1.96

75
Given
n 25

therefore:

The lower and upper confidence limits are 340.76 and 399.56.

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 Interval Width…
A wide interval provides little information.
For example, suppose we estimate with 95% confidence that
an accountant’s average starting salary is between $15,000
and $100,000.

Contrast this with: a 95% confidence interval estimate of

starting salaries between $42,000 and $45,000.

The second estimate is much narrower, providing accounting

students more precise information about starting salaries.

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

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 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:

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 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

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 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
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 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!

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 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).

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 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:

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 Example 10.2…
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?

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 Example 10.2…
Things we know:

Confidence level = 99%, therefore =.01

We want 1 , hence W=1.

We are given that = 6.

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 Example 10.2…
We compute…

That is, we will need to sample at least 239 trees to have a

99% confidence interval of 1

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