LECTURES 6

ESTIMATION AND CONFIDENCE INTERVALS

OBJECTIVES AND OUTCOMES
• Objectives
• Learn point estimate and confidence intervals of a population mean
when 𝜎 is known or unknown
• Outcomes- When you have completed this lecture, you will be
able to:
• Compute and interpret a point estimate of a population mean.
• Compute and interpret a confidence interval for a population mean
when 𝜎 is known or unknown.
INTRODUCTION
• Sometimes, the information about the population, such as the
mean, the standard deviation, or the shape of the population, is
not known.
• One purpose of sampling is to estimate some of these values.
• For example, you select a sample from a population and use the mean
of the sample to estimate the mean of the population. This is called
point estimation.
• A more informative approach is to present a range of values where we
expect the population parameter to occur. Such a range of values is
called a confidence interval.
POINT ESTIMATES
• A point estimate is a single value (point) computed from sample
information and used to estimate a population value.
• For example, we may be interested in the number of hours worked by
consultants employed by a consultation firm. Using simple random
sampling, we select 50 consultants and ask each of them how many
hours they worked last week.
• The sample’s mean is a point estimate of the unknown
population mean.
EXAMPLE I – POINT ESTIMATION
• Suppose the Bureau of Tourism for Barbados wants an estimate of
the mean amount spent by tourists visiting the country.
• It would not be feasible to contact each tourist.
• Therefore, 500 tourists are randomly selected as they depart the
country and asked in detail about their spending while visiting
Barbados.
• The mean amount spent by the sample of 500 tourists is an estimate
of the unknown population parameter.
• That is, we let the sample mean serve as a point estimate of the
population mean.
EXAMPLE II – POINT ESTIMATION
• Recent medical studies indicate that exercise is an important
part of a person’s overall health.
• The director of human resources at a company, wants an
estimate of the number of hours per week employees spend
exercising.
• A sample of 70 employees reveals the mean number of hours of
exercise last week is 3.3.
• This value is a point estimate of the unknown population mean.
EXAMPLE III– POINT ESTIMATION
The American Management Association (AMA) is studying the
income of store managers in the retail industry. A random sample
of 49 managers reveals a sample mean of $45,420. What is the
population mean?
Solution: In this case, we do not know. We do know the sample
mean is $45,420. Hence, our best estimate of the unknown
population value is the corresponding sample statistic. Thus, the
sample mean of $45,420 is a point estimate of the unknown
population mean.
CONFIDENCE INTERVAL
• A confidence interval is the range of values constructed from
sample data so that the population parameter is likely to occur
within that range at a specified probability. The specified
probability is called the level of confidence.
• A confidence interval is a range of values within which the
population parameter is expected to occur.
THE FACTORS THAT DETERMINE THE WIDTH OF A CONFIDENCE
INTERVAL FOR A MEAN
• The sample size, standard deviation and level of confidence.
• To determine the confidence limits when the population
standard deviation is known, we use the z distribution. The
formula is
𝜎
𝑥ҧ ± 𝑧
Sample mean 𝑛
Sample standard deviation =
Z value of the confidence level Population standard deviation
Sample size
• The boxed term is called the Error Margin.
CONFIDENCE INTERVAL CONT
• A confidence interval is computed using two statistics: the sample mean
and the standard deviation.
• In computing a confidence interval, the standard deviation is used to
compute the limits of the confidence interval.
• Consider that we wish to select 100 samples of size n.
• 95% confidence interval means that 95 out of 100 samples will give us
such intervals that will contain the population mean. For this
requirement, the value of 𝑧 = 1.96.
• HOW to compute the 95% confidence interval?
• Why is 𝒛 = 𝟏. 𝟗6? Answer on the next slide.
Z VALUE FOR THE CONFIDENCE LEVEL
1. First, we divide the confidence level in
half, so .9500/2 = .4750.
2. Next, we find the value .4750 in Z-table.
3. Locate the corresponding row value in
the left margin, which is 1.9, and the
column value in the top margin, which is
.06. Adding the row and column values
gives us a z value of 1.96.
4. Thus, the probability of finding a z value
between 0 and 1.96 is .4750.
5. Likewise, because the normal distribution
is symmetric, the probability of finding a z
value between −1.96 and 0 is also .4750.
6. When we add these two probabilities, the
probability that a z value is between
−1.96 and 1.96 is .9500.
EXAMPLE IV – CONFIDENCE INTERVAL WHEN 𝜎 IS KNOWN
The American Management Association (AMA) is studying the
income of store managers in the retail industry.
A random sample of 49 managers reveals a sample mean of
$45,420. The standard deviation of this population is $2,050.
What is a reasonable range of values for the population mean?
(95% C. I.)? How do we interpret these results?
EXAMPLE IV – CONFIDENCE INTERVAL WHEN 𝜎 IS KNOWN
Solution:
𝜎 $2,050
𝑥ҧ ± 𝑧 = $45,420 ± 1.96 = $45,420 ± $574
𝑛 49
• The confidence interval limits are $44,846 and $45,994.
• The degree or level of confidence is 95%.
• The value, $574, is called the margin of error.
 EXAMPLE IV – CONFIDENCE INTERVAL WHEN 𝜎 IS KNOWN
• Suppose we select many samples of 49 store
managers, perhaps several hundred. For each
sample, we compute the mean and then construct
a 95% confidence interval.
• We could expect about 95% of these confidence
intervals to contain the population mean. About 5%
of the intervals would not contain the population
mean annual income, which is μ.
• The following diagram shows the results of
selecting samples from the population of store
managers in the retail industry.
• Note that not all intervals include the population
mean.
• We attribute this to sampling error, and it is the risk
we assume when we select the level of confidence.
EXAMPLE V – CONFIDENCE INTERVAL WHEN 𝜎 IS KNOWN
The Bun-and-Run is a franchise fast-food restaurant located in the Northeast specializing
in half-pound hamburgers, fish sandwiches, and chicken sandwiches.
The marketing department of Bun-and-Run Inc. reports that the distribution of daily
sales for their restaurants follows the normal distribution and that the population
standard deviation is $3,000.
A sample of 40 franchises showed the mean daily sales to be $20,000.
a. What is the population mean of daily sales for Bun-and-Run franchises?
Unknown. This is the value we wish to estimate.
b. What is the best estimate of the population mean? What is this value called?
The sample mean of $20,000 is the point estimate of the population mean daily
franchise sales.
EXAMPLE V – CONFIDENCE INTERVAL WHEN 𝜎 IS KNOWN
c. Develop a 95% confidence interval for the population mean of
daily sales.
$3,000
$20,000 ± 1.960 = $20,000 ± $930
40
d. Interpret the confidence interval.
The estimate of the population mean daily sales for the Bun-
and-Run franchises is between $19,070 and $20,930. About
95% of all possible samples of 40 Bun-and-Run franchises
would include the population mean.