Business Statistics
Interval Estimation
Margin of error and the Interval Estimate
A point estimator cannot be expected to provide the exact value of the population
parameter.
An interval estimate can be computed by adding and subtracting a margin of error to the
point estimate.
• The purpose of an interval estimate is to provide information about how
close the point estimate, is to the value of the parameter.
Interval Estimate of a Population Mean: σ Known
The general form of an interval estimate of a population mean is
• In order to develop an interval estimate of a population mean, the margin of error
must be computed using either:
Interval Estimate of a Population Mean: σ Known
Interval Estimate of μ:
Meaning of C% Confidence
• We say that this interval has been established at the 90% confidence level.
• The value 0.90 is referred to as the confidence coefficient.
Example: Discount Sounds
Discount Sounds has 260 retail outlets throughout the United States. The firm is
evaluating a potential location for a new outlet, based in part, on the mean
annual income of the individuals in the marketing area of the new location.
A sample of size n = 36 was taken; the sample mean income is $41,100. The
population is not believed to be highly skewed. The population standard
deviation is estimated to be $4,500, and the confidence coefficient to be used in
the interval estimate is 0.95.
Thus at 95% confidence, the margin of error is $1,470.
$41,100 + $1,470
or
$39,630 to $42,570
We are 95% confident that the interval contains the population mean.
In order to have a higher degree of confidence, the margin of error and
thus the width of the confidence interval must be larger.
Interval Estimate of a Population Mean: σ Known
Adequate Sample Size
• If the population distribution is highly skewed or contains outliers, a sample size of
50 or more is recommended.
• If the population is not normally distributed but is roughly symmetric, a sample
size as small as 15 will suffice.
• If the population is believed to be at least approximately normal, a sample size of
less than 15 can be used.
Interval Estimate of a Population Mean: σ unknown
• We’ll assume for now that the population is normally distributed.
t Distribution
• William Gosset, writing under the name “Student,” is the founder of the t distribution.
• Gosset was an Oxford graduate in mathematics and worked for the Guinness Brewery in
Dublin.
• He developed the t distribution while working on small-scale materials and temperature
experiments.
• The t distribution is a family of similar probability distributions.
• A specific t distribution depends on a parameter known as the degrees of
freedom.
• Degrees of freedom refer to the number of independent pieces of information
that go into the computation of s.
• A t distribution with more degrees of freedom has less dispersion.
• As the degrees of freedom increases, the difference between the t distribution and
the standard normal probability distribution becomes smaller and smaller.
For more than 100 degrees of freedom, the standard normal z value provides a good
approximation to the t value.
The standard normal z values can be found in the infinite degrees (∞) row of the t distribution
table.
Degrees of .20 area in .10 area in .05 area in .025 area in .01 area in .005 area in
Freedom upper tail upper tail upper tail upper tail upper tail upper tail
50 .849 1.299 1.676 2.009 2.403 2.678
60 .848 1.296 1.671 2.000 2.390 2.660
80 .846 1.292 1.664 1.990 2374 2.639
100 .845 1.290 1.660 1.984 2.364 2.626
Infinite .842 1.282 1.645 1.960 2.326 2.576
Degrees of .20 .10 .05 .025 .01 .005
Freedom
15 .866 1.341 1.753 2.131 2.602 2.947
16 .865 1.337 1.746 2.120 2.583 2.921
17 .863 1.333 1.740 2.110 2.567 2.898
18 .862 1.330 1.734 2.101 2.520 2.878
19 .861 1.328 1.729 2.093 2.539 2.861
Example: Apartment Rents
A reporter for a student newspaper is writing an article on the cost of off-
campus housing. A sample of 16 one-bedroom apartments within a half-mile of
campus resulted in a sample mean of $750 per month and a sample standard
deviation of $55.
Let us provide a 95% confidence interval estimate of the mean rent per month
for the population of one-bedroom apartments within a half-mile of campus.
We will assume this population to be normally distributed.
Interval Estimate
We are 95% confident that the mean rent per month for the population of one-
bedroom apartments within a half-mile of campus is between $720.70 and
$779.30.
Adequate Sample Size
Usually, a sample size of at least 30 is adequate when using a t
interval to estimate a population mean.
If the population distribution is highly skewed or contains outliers, a
sample size of 50 or more is recommended.
If the population is not normally distributed but is roughly symmetric,
a sample size as small as 15 will suffice.
If the population is believed to be at least approximately normal, a
sample size of less than 15 can be used.
Summary of Interval Estimation Procedures for a Population Mean
Sample Size for an Interval Estimate of a Population Mean
Let � = the desired margin of error.
� is the amount added to and subtracted from the point estimate to obtain an interval estimate.
If a desired margin of error is selected prior to sampling, the sample size necessary to satisfy the
margin of error can be determined.
• Margin of error
• Necessary sample size
Sample Size for an Interval Estimate of a Population Mean
The Necessary Sample Size equation requires a value for the population
standard deviation, �.
If � is unknown, a preliminary or planning value for � can be used in the
equation.
1. Use the estimate of the population standard deviation computed in a
previous study.
2. Use a pilot study to select a preliminary sample and use the sample
standard deviation from the study.
3. Use judgment or a “best guess” for the value of s.
Example: Discount Sounds
Recall that Discount Sounds is evaluating a potential location for a new retail
outlet, based in part, on the mean annual income of the individuals in the
marketing area of the new location.
Suppose that Discount Sounds’ management team wants an estimate of the
population mean such that there is a 0.95 probability that the sampling error is
$500 or less.
How large a sample size is needed to meet the required precision?
Sample Size for an Interval Estimate of a Population Mean
Interval Estimate of a Population Proportion
The general form of an interval estimate of a population proportion is:
Interval Estimate of a Population Proportion
Example: Political Science, Inc.
Political Science Inc. (PSI) specializes in voter polls and surveys designed to
keep political office seekers informed of their position in a race.
Using telephone surveys, PSI interviewers ask registered voters who they would
vote for if the election were held that day.
In a current election campaign, PSI has just found that 220 registered voters,
out of 500 contacted, favor a particular candidate. PSI wants to develop a 95%
confidence interval estimate for the proportion of the population of registered
voters that favor the candidate.
PSI is 95% confident that the proportion of all voters that favor the candidate is
between 0.3965 and 0.4835.
Example
A retail store was interested in finding the proportion of customers who pay
through cash (as against credit or debit card) for the merchandize they buy at
the store. From a sample of 100 customers, it was found that 70 customers paid
by cash. Calculate the 95% confidence interval for proportion of customers
who pay by cash.
Sample Size for an Interval Estimate of a Population Proportion
Margin of error
• Solving for �, the necessary sample size is
Necessary Sample Size
The planning value �∗ can be chosen by:
1. Using the sample proportion from a previous sample of the same or similar
size.
2. Selecting a preliminary sample and using the sample proportion from that
sample.
3. Using judgment or a “best guess” for the �∗ value.
4. Otherwise, use �∗ = 0.5.
Example: Political Science, Inc.
Suppose that PSI would like a 0.99 probability that the sample
proportion is within ± 0.03 of the population proportion.
How large a sample size is needed to meet the required precision?
(A previous sample of similar units yielded 0.44 for the sample
proportion.)
Note: We used 0.44 as the best estimate of p. If no information is available about p,
then 0.5 is often used because it provides the greatest possible sample size. If we had
used �∗ = 0.5, the recommended n would have been 1843.
Example
An online grocery store is interested in estimating the basket size (number
of items ordered by the customer) of its customers so that it can optimize
its size of crates used for delivering the grocery items. From a sample of
70 customers, the average basket size was estimated as 24 and the standard
deviation estimated from the sample was 3.8. Calculate the 95%
confidence interval for the basket size of the customer order.
