STATISTICAL INFERENCE REVIEW

Topics Outline
The Process of Statistical Inference
Sampling Distributions
The t Distributions
Confidence Interval Estimation
Hypothesis Tests for a Population Mean
The Process of Statistical Inference
A population is the set of all subjects (units, individuals, members, elements) of interest in
a particular study. A parameter is a number describing a characteristic of the population.
Parameters are usually unknown.
A sample is a subset of the population consisting of units which we actually examine and
for which we do have data. Several methods can be used to select a sample from a
population. One of the most common is simple random sampling. A simple random
sample of size n consists of n units chosen in such a way that:
1. Each unit in the population has the same chance of being selected in the sample.
2. All possible samples of size n have the same chance of being drawn.
A statistic is a number describing a characteristic of a sample. We use statistics to
estimate the unknown population parameters.
The purpose of statistical inference is to develop estimates and test hypotheses about the
characteristics of a population using information contained in a sample.

Population

Random
sample

Calculate
sample
statistics

Make an inference
about population
parameters

x
s2
s

Figure 1 The process of statistical inference.

The three most common types of statistical inference are:
1. Point estimation (for estimating the value of a population parameter)
2. Confidence intervals (for estimating a range of values of a population parameter)
3. Hypothesis testing (for assessing the evidence for a claim about a population parameter)

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Sampling Distributions
Statistical inference is based on the sampling distributions of statistics. That is, we use
probability to say what would happen if we applied the inference method many times.
The sampling distribution of a statistic is the distribution of all possible values taken by
the statistic when all possible samples of a fixed size n are taken from the population.
Sampling distribution of

known)

In general, it is impossible to determine the distribution of X exactly without knowledge

of the actual distribution of the parent population. However, it is possible to find its
limiting distribution.
Central Limit Theorem (CLT)
For any population distribution with mean
and finite standard deviation ,
the sampling distribution of the sample mean X is approximately normal with mean
and standard deviation

, and the approximation improves as n increases.

(a) Population
distribution

(b) Sampling
distribution of
X for n = 2

(c) Sampling
distribution of
X for n = 10

(d) Sampling
distribution of
X for n = 25

Figure 2 An illustration of the approach toward normality for

the sampling distribution of X as sample size increases.

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Notes:
1. The CLT says that if the sample size is large, then regardless of the form of the
population distribution, the random variable X is approximately normally distributed
with mean
and

and standard deviation

, where
is the population mean,
n
is the population standard deviation (see figure 2).

2. Rule of thumb: In statistics large generally means 30 or more.

3. Special case: If the random samples come from a normal population, then the random
variable X is exactly normally distributed, regardless of the size of the sample.
4. The standard deviation
by a factor of

is smaller than the standard deviation of the population

n
n . This means that:
X

(a) Averages are less variable than individual observations.

(b) The results of large samples are less variable than the results of small samples.
(c) If we want to decrease the standard deviation of X we have to increase the size of the sample.

5. The formula for conversion of a normally distributed random variable X

x
to the standard normal random variable Z is given by z
n

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Example 1
The time (in hours) that a technician requires to perform preventive maintenance on an
air-conditioning unit is governed by the exponential distribution whose density curve appears
in figure 2 (a). The mean time is = 1 hour and the standard deviation is = 1 hour.
In order to estimate the technicians time needed to maintain an air-conditioner,
a simple random sample of 70 air-conditioning units will be selected.
(a) Find the sampling distribution of the sample mean X .
The sample size n = 70 is large enough to invoke the Central Limit Theorem.

Thus, X is approximately normally

distributed with mean
= 1 and standard
1
deviation
= 0.12 hour.
n
70
(b) What is the probability that the sample mean will be less than 0.9 hours?

P( X < 0.9) = P z

0.9 1
= P(z < 0.84) = 0.2005 or 20%
1
70

Therefore, if you budget 0.9 hours per unit, there is an 80% chance that the technician
will not complete the work within the budgeted time.
(c) What is the probability that the sample mean will be greater than 1.25 hours?
P( X > 1.25) = P z

1.25 1
= P(z > 2.09)
1
70

= 1 P(z

2.09) = 1 0.9817 = 0.0183

Thus, if you budget 1.25 hours per unit, there is only a 2% chance that the technician will
not complete the work within the budgeted time. You therefore budget 1.25 hours per unit.
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Sampling distribution of

unknown)

In most practical situations, the true value of the population standard deviation is unknown. In
such cases, we estimate by the sample standard deviation s.
We assume the population distribution is normal. Then in the place of the random variable
X
X
Z
we use the random variable T
which has t distribution
s

n
with n 1 degrees of freedom.

The t Distributions
The t distribution, also known as the Students t distribution, was discovered in 1908 by William
Gosset who was a chemist employed by the Guinness brewing company.
He considered himself a student still learning statistics, so he signed his papers with a pseudonym
Student. Or perhaps he used a pseudonym due to trade secrets restrictions by Guinness.
The probability density function for Students t distribution with

degrees of freedom is

1
f (t )

2
2

, where

( )

1) (

1) ,

(n)

(n 1)! for integer n

0
0

1
2
Note that there are different t distributions; it is a family of similar probability distributions.
When we speak of a specific t distribution, we have to specify the degrees of freedom.
We will write the t distribution with n 1 degrees of freedom as t(n 1).

Figure 3 Density curves for the t distributions with 2 and 9 degrees of freedom
and the standard normal distribution. All are symmetric with center 0.
The t distributions are somewhat more spread out.
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Properties of t distributions:
1. The t density curves are symmetric, bell-shaped, and have their peak at 0 like the standard
normal distribution.
2. Since the peak of t is lower than that of the standard normal distribution, the tails of t are heavier
(because the area under the curve is 1).
Why do we need to use a distribution with heavier tails?
3. As the degrees of freedom increase the t density curve approaches the standard normal curve.
Using the t-Table
Each row in the t-Table contains critical values t* for the t distribution whose degrees of freedom
appear at the left of the row. For convenience, we label the table entries both by the confidence
level (in percent) required for confidence intervals and by the one-sided and two-sided P-values
required for hypothesis tests.
The bottom row of the t-Table contains the standard normal critical values z*. By looking down
any column, you can check that the t critical values approach the normal values as the degrees of
freedom increase.
Please note the difference in using the z- and t- tables.
The z-Table gives probabilities (areas under the curve) to the left of specified z-values.
The t-Table gives the t-values for a specified upper tail area.
Example 2 You have a simple random sample of size n = 25.
The corresponding t distribution has n 1 = 25 1 = 24 degrees of freedom.
(a) What is the critical value t* such that t has probability 0.025 to the right of t*?
In the t-Table, in the row for df = 24
above one-sided P-value 0.025,
we find t* = 2.064.
With Excel, t*= TINV(0.05,24) = 2.064.
(b) What is the critical value t* such that t has probability 0.75 to the left of t*?
If t has probability 0.75 to the left of t*,
then t has probability 0.25 to the right of t*.
In the t-Table, in the row for df = 24 above
one-sided P-value 0.25, we find t* = 0.685.
With Excel, t*= TINV(0.5,24) = 0.685.

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Confidence Interval Estimation

In practice, only one sample is selected and the point estimates x , s 2 , s cannot really be expected
to coincide with the true population parameters , 2 , . Therefore, it is sometimes preferable to
replace the point estimates with interval estimates, that is, with intervals for which we can assert
with a reasonable degree of uncertainty that they will contain the parameter under consideration.
There is a common format for all confidence interval estimates:
Point Estimate (Critical Value)(Standard Error)
Although this format is always used, there are slightly different formulas that we use depending
on what population value we are estimating and certain other conditions.
Suppose a simple random sample with mean and standard deviations s has been drawn from a
normally distributed population. A confidence interval for the population mean
is
s
x t*
n
where t* is the critical value for the t(n1) density curve with area 1
between t* and t*.
1
is called confidence level. For example, if = 0.05, then the confidence level is 0.95, or 95%.
s
The value
is the standard error (SE) of the mean.
n
Confidence intervals based on t distributions are robust to violations of normality.
This means that the above confidence interval is exact when the population distribution is normal
and is approximately correct and still valid for large n in other cases. (However, caution should be
exercised when the population distribution is very severely skewed and/or has extreme outliers).
The point estimate x is at the center of the confidence interval. The amount that we add and
subtract to the point estimate
s
m t*
n
is called margin of error and is equal to half-length of the interval.
This margin of error has n in the denominator. Therefore, increasing the sample size n reduces
the margin of error for any confidence level. We can find the sample size required to obtain a
confidence interval with specified margin of error m by solving the above equation for n:
n

t*s
m

Remember, though, that increasing the sample size is typically associated with higher cost in
practice. The best approach is to use the smallest possible sample size that gives useful results.

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Example 3
A study of commuting times reports the travel times to work of a random sample of 20 employed
adults in New York State. The mean is x = 31.25 minutes and the standard deviation is s = 21.88
minutes. Assume that the travel times to work are normally distributed.
(a) What is the point estimate of the average travel time to work?
The point estimate is x = 31.25 minutes.
(b) What is the standard error of the mean?
SE =

21.88

n
20
(c) What is the critical value for 95% confidence?

4.8925

df = 20 1 = 19
t* = 2.093 (from t-Table)
(d) What is the margin of error for 95% confidence?
m = t*SE = (2.093)(4.8925) = 10.24
(e) What is the 95% confidence interval for the mean travel time to work?
x

m = 31.25 10.24 = 21.01 to 41.49

We are 95% confident that the mean travel time to work for employed adults in New York
State is between 21.01 and 41.49 minutes.
(f) Construct 90% and 99% confidence intervals.
The 90% and 99% confidence intervals replace the 95% critical value t* = 2.093 by the
90% and 99% critical values t* = 1.729 and t*= 2.861, respectively.
90% confidence interval: x t *
99% confidence interval: x t *

s
n
s

31.25 (1.729 )

21.88
20
21.88

31.25 8.46 or 22.79 to 39.71

31.25 (2.861)
31.25 14.00 or 17.25 to 45.25
n
20
Note that: 1. The obtained intervals are centered at the point estimate x = 31.25.
2. A longer interval is required to estimate
with a higher level of confidence.
(The margin of error equals 8.46 for 90% confidence, 10.24 for 95%, and 14.00 for 99%.)

(g) How many more observations should we include in the sample if we want to estimate
the mean travel time within 6 minutes with 95% level of confidence?
n

t*s
m

(2.093)(21.88)
6

45.7948
6

7.6325 2

58.25

59 (Rounding up!)

We need a total of 59 observations. Therefore, 59 20 = 39 more randomly drawn

observations should be included in the sample.
Note: The general rule is to round the sample size up to the next whole integer to slightly oversatisfy
the criteria. This conservative approach will make the interval somewhat smaller than required.

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Hypothesis Tests for a Population Mean

The goal of hypothesis tests is to assess the evidence provided by a sample about some claim
concerning a population.
We will assume that the population from which a simple random sample of size n was drawn has
a normal distribution. When the population is not normally distributed the results will still be
approximately correct and research shows that the following rules of thumb can be used:
If n < 15, the data must be close to normal (roughly symmetric, single peak, no outliers).
If 15 n < 40, mild skewness is acceptable, but not outliers.
If n 40, the results will be valid even with strong skewness.
The claim tested by a statistical test is called the null hypothesis and is denoted by H 0 .
Usually the null hypothesis is a statement of no effect or no difference.
The test is designed to assess the strength of the evidence against the null hypothesis.
The claim about the population that we are trying to find evidence for is called the alternative
hypothesis and is denoted by H a . The alternative hypothesis is one-sided if it states that a
parameter is smaller than (in left-sided) or larger than (in right-sided) the null hypothesis value.
It is two-sided if it states that the parameter is different from the null value (it could be either
smaller or larger):
left-sided test
H0 :
Ha :

right-sided test

H0 :

Ha :

two-sided test

H0 :

Ha :

To test a hypothesis about a population mean, we use the test statistic

s
n

The P-value is the probability if H 0 is true, of randomly drawing a sample like the one obtained,
or more extreme, in the direction of H a . The P-value is calculated as the corresponding area
under the curve, one-tailed or two-tailed depending on H a :
left-sided test

right-sided test

two-sided test

Small P-values are evidence against H 0 , because they say that the observed result is unlikely to
occur when H 0 is true. Large P-values fail to give evidence against H 0 .
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We can compare the P-value with a predefined level of significance

If P-value
If P-value >

we reject H 0 and say that the result is statistically significant at level

we do not reject H 0 .

A result with a certain P-value could be significant at one level of significance and not
significant at another level of significance.
There is no rule for how small a P-value we should require to reject H 0 it is a matter of judgment.
The most commonly used values for
are 0.05 and 0.01.
If we choose = 0.05, we are requiring that the data give evidence against H 0 so strong that it
would happen no more than 5% of the time (5 times in 100 samples in the long run) when H 0 is true.
The following steps are appropriate for testing a claim about a population mean:
1. Check the conditions for statistical inference.
2. Formulate H 0 and H a .
3. Select a level of significance

4. Calculate the test statistic

s
n

5. Find the P-value.

6. Reject H 0 if the P-value
.
Do not reject H 0 if the P-value

7. State a conclusion in context.

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Example 4
A business travel magazine wants to classify transatlantic gateway airports according to the
mean rating for the population of business travelers. A rating scale with a low score of 0 and a
high score of 10 will be used, and airports with a population mean rating greater than 7 will be
designated as superior service airports.
The magazine staff surveyed a random sample of 60 business travelers at each airport to obtain
the ratings data. The sample for Londons Heathrow Airport provided a sample mean rating of
x = 7.25 and a sample standard deviation of s = 1.052.
Do the data indicate that Heathrow should be designated as a superior service airport?
Solution:
1. The sample size n = 60 is large enough to perform safely the hypothesis test.
2. We want to develop a hypothesis test for which the decision to reject H 0 will lead to the
conclusion that the population mean rating for the Heathrow Airport is greater than 7.
Thus, a right-sided test is required:

3. We will use

H0 :

Ha :

= 0.05 as the level of significance for the test.

4. The value of the test statistic is

x
s

7.25 7
1.052

60

0.25
0.1358

1.84

5. The sampling distribution of t has n 1 = 60 1 = 59 degrees of freedom.

Because the test is a right-sided test, the P-value is the area under the curve of the t
distribution to the right of t = 1.84.
Using the t-Table for t distribution with 60 (the closest to 59) degrees of freedom, we see that
1.84 is between 1.671 and 2.000 which correspond to one-sided P-values 0.05 and 0.025.
Therefore, our P-value must be less than 0.05 and greater than 0.025.
We can approximate it as P-value (0.025 + 0.05)/2 = 0.0375
Using Excel,
P-value = TDIST(1.84,59,1) = 0.0354
6. Since P-value <

, we reject the null hypothesis.

7. The Heathrow Airport can be classified as a superior service airport.

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Example 5
The company Holiday Toys manufactures and distributes its products through more than 1000
retail outlets. For this years most important new toy, Holidays marketing director is expecting
demand to average 40 units per retail outlet.
Prior to making the final production decision based upon this estimate, Holiday decided to survey a
sample of 25 retailers in order to develop more information about the demand for the new product.
Each retailer was provided with information about the features of the new toy along with the cost and
the suggested selling price. Then each retailer was asked to specify an anticipated order quantity.
Here are their answers about the number of units they anticipate to order:
26
45

23
39

32
52

47
52

45
22

31
22

47
33

59
21

21
34

52
42

45
30

53
28

34

Should Holiday Toys continue its production planning based on the marketing directors estimate
or they have to reevaluate their production plan?
Solution:

H0 :

40

Ha :

40

Count

The sample data will be used to conduct the

following two-sided test:

The histogram of the sample data shows a

mild right skewness with no extreme outliers.
So the use of a t distribution with n 1 = 24
degrees of freedom is appropriate.
Let

7
6
5
4
3
2
1
0
20-26 27-33 34-40 41-47 48-54 55-61
Number of units

= 0.05. We calculate x = 37.4, s = 11.79, and the test statistic

s
n

37.4 40
11.79

2.6
2.358

1.10

25

Because we have a two-sided test, the P-value is two times the area under the curve for the t
distribution to the left of t = 1.10. Since the t distribution is symmetric, however, the area under the
curve to the left of t = 1.10 is the same as the area under the curve to the right of t = 1.10. Using the
t-Table for df = 24, we see that t = 1.10 is very close to 1.059 corresponding to two-sided P-value 0.30.
(Excel gives: P-value = TDIST(1.10,24,2) = 0.2822)
The P-value

0.30 is greater than

= 0.05. Therefore, H 0 cannot be rejected.

Sufficient evidence is not available to conclude that Holiday Toys should change its production
plan for the coming season. Therefore, Holiday Toys should continue its production planning for
the coming season based on the expectation that the average demand is 40 units per retail outlet.
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Confidence Interval Approach (for two-sided tests)

It turns out that the testing of H 0 :
is equivalent to
0 against H a :
0 at a significance level
computing a (1 )100% confidence interval on
and rejecting H 0 if the hypothesized mean 0 is not
inside the confidence interval. If 0 is inside the confidence interval, the null hypothesis is not rejected.
Note: The same approach could be used for one-tailed tests too.
However, it would require one-sided confidence intervals which we have not studied.
Example 5 (Continued)
For this example, x = 37.4, s = 11.79, n = 25.
The critical value for df = 24 and 95% confidence is t* = 2.064.
The 95% confidence interval is
x

t*

s
n

37.4 2.064

11.79

37.4 (2.064 )(2.358)

25

= 32.53 to 42.27
This interval contains the hypothesized mean ( 0 = 40).
Therefore, we do not reject the null hypothesis at the 5% (

37.4 4.87

= 0.05) significance level.

Type I and Type II Errors

Because in hypothesis testing sample data is used to make conclusions about a population,
we must allow for the possibility of errors. Two types of errors can be made in any test.
A Type I error occurs when we reject a true null hypothesis,
that is, claiming H a when in fact H 0 is true.
A Type II error occurs when we do not reject a false null hypothesis,
that is, claiming H 0 when in fact H a is true.
The probabilities of Type I and Type II errors are:
P(Type I error) =
P(Type II error) =
where

is the level of significance of the test.

Ideally we would like both

and
to be as small as possible. Unfortunately, an inverse
relationship exists between them such that as
gets smaller,
gets larger.
In practice, Type I errors are regarded as more serious. As a consequence, the person conducting
the test must control for the probability of Type I error. He or she is doing so by choosing a small
value for the level of significance , for example 0.05, or 0.01.
Controlling for a Type II error is not common. To avoid the risk of making a Type II error,
we should never directly accept H 0 . We should either reject or do not reject H 0 .
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Example 6
Carpetland salespersons averaged $8,000 per week in sales. Steve Contois, the firms vice president,
proposed a compensation plan with new selling incentives. Steve hopes that the results of a trial
selling period will enable him to conclude that the compensation plan increases the average sales
per salesperson.
(a) Develop the appropriate null and alternative hypotheses.
(b) What is the Type I error in this situation? What are the consequences of making this error?
(c) What is the Type II error in this situation? What are the consequences of making this error?
Solution:
reject H 0
(a) H 0 :

(Type I error if H 0 is true )

8000
do not reject H 0 (Type II error if H 0 is false)

accept H a
Ha :

8000

do not accept H a
H a is a research hypothesis to see if the plan increases average sales.

(b) Type I error is claiming that

> 8000 when the new plan does not increase the sales.
A mistake could be implementing the plan when it does not help.
(c) Type II error is concluding that
8000 when the plan really would increase sales.
This could lead to not implementing a plan that would increase sales.

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