Hypothesis testing procedure

1. Formulate Ho and H1.

2. Select appropriate test
3. Choose the level of significance,
4. Determine sample size and collect data
5. Determine probability
6. Compare the probability
1.

Formulate hypothesis: A null hypothesis is a statement of no difference or no effect. If

null hypothesis is not rejected (Accepted) no changes will be made in decision. An alternative
hypothesis is one in which some difference or effect is expected. Accepting the alternative
hypothesis will lead to changes in opinions or actions. In marketing research, the null hypothesis
is formulated in such a way that its rejection leads to the acceptance of the desired conclusion.
i) one tailed test: when alternate hypothesis is expressed directionally we use one tailed test.
(Directional means when the expected probability is greater than or less than the proportion) A
one-tailed test is a statistical test in which the critical area of a distribution is one-sided so that it
is either greater than or less than a certain value, but not both.
An example of when one would want to use a one-tailed test is in the error rate of a factory. Let's
say a label manufacturer wants to make sure that errors on labels are below 1%. It would be too
costly to have someone check every label, so the factory selects random samples of the labels
and test whether errors exceed 1% with whatever level of significance they choose. This
represents the implementation of a one-tailed test.
ii) Two tailed test: when alternate hypothesis is not expressed directionally. A two-tailed test is
a statistical test in which the critical area of a distribution is two sided and tests whether a sample
is either greater than or less than a certain range of values.
An example of when one would want to use a two-tailed test is at a candy production/packaging
plant. Let's say the candy plant wants to make sure that the number of candies per bag is around
50. The factory is willing to accept between 45 and 55 candies per bag. It would be too costly to
have someone check every bag, so the factory selects random samples of the bags, and tests
whether the average number of candies exceeds 55 or is less than 45 with whatever level of
significance it chooses.

2. Selecting an appropriate test:

Example:
A major departmental store will introduce its new online shopping service if more than 40
% of customers are using internet. 30 customers were surveyed and it was found that 17
out of 30 are using internet.
a. formulate the null and alternative hypothesis
b. Discuss the type 1 and type 2 errors that could occur in hypothesis testing
c. which statistical test would you use and why?
d. A random sample of 30 consumers was surveyed and 17 respondents indicated that they are
using internet.
e. Should the store introduce online shopping? and why?
f. Explain your answer with step by step hypothesis testing process.
Solution:
Step:1 Ho= the internet users of departmental store is less than 40 % i.e = 0.40
H1 = the internet users of departmental store is more than 40 % > 0.40
(Note: If the null hypothesis is rejected, than H1 will be accepted and new online shopping will
be introduced)
Step: 2 : we will be using z test as the sample size is 30.
Value of sample proportion i.e. p= 17/30 = 0.567
Level of significance, = 0.05

Step: 3

where, =

0.40(0.60)
30

= 0.089

Z=

0.5670.40
0.089

= 1.88

Step 4:
now Check Z value in normal distribution table
so Zcal = 0.5 + 0.4699 = 0.9699
which is greater than significance level 0.05, that is why reject the null hypothesis and hence the
alternative hypothesis will be accepted and online shopping service will be introduced.
OR
at the level of significance 0.05 the critical value of z is 1.65 which is less than z cal 1.88 so we
can reject the null hypothesis. Critical value of z at significance level o.o5 is 1.65, at 0.025 is
1.96 and at 0.01 is 2.33

0.5+0.4699 =
0.9699
0.4699

Z=
1.88

Type 1 and Type 2 error.

Type 1 error occurs when the sample results lead to the rejection of null hypothesis when it is in
fact true. for example in this particular illustration if we concluded that the proportion of
customers preferring new online service was greater than 0.40 in fact it is less than 0.40.
The probability of type one error is known as alpha error.
Type 2 error occurs when the null hypothesis is not rejected when in fact it is true. in this
example type 2 error would occur if we concluded that the proportion of the customers preferring
new online service was less than or equal to 0.40, when in fact it is more than 40 %.

Do it yourself:
Current advertising campaign for a major soft drink brand would changed if less than 30
% of the customers like it.
a. formulate the null and alternative hypothesis
b. Discuss the type 1 and type 2 errors that could occur in hypothesis testing
c. which statistical test would you use and why?
d. A random sample of 300 consumers was surveyed and 84 respondents indicated that they liked
the campaign.
e. Should the campaign be changed? and why?
f. Explain your answer with step by step hypothesis testing process.

Area under the Normal Curve: