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Economics Dr.

Sauer
Ch 8: Hypothesis Test for Means and Proportions

I. Hypothesis Tests for Means
A null hypothesis is a claim about a population characteristic.
H
0


Ex: A property developer makes a claim that the average annual rental income per student is at most
$5000.

H
0
: < 5000

If the null hypothesis is rejected, then the alternative hypothesis prevails.
The alternative hypothesis is the complement of the null.
H
1
H
A


Ex: If H
0
: < 5000, then H
1
: > 5000


The null hypothesis is usually a statement about the status quo and its expression always contains the
equality.
__________________________________
Ex: A property developer claims the average rental income per room in student housing is at most
$5000 for the year. A sample of 36 students is randomly selected. The mean annual rent is calculated to
be $5200 from this sample. The standard deviation for all rents is $735.
1. State the null and alternative hypothesis.


2. Decide at what level of probability the null hypothesis will be rejected.
- the null hypothesis will be rejected if the p-value is less than a given probability
- usually 0.05 or 0.01
For this example, lets use = 0.05.

3. Sketch the curve and identify the critical region.





4. Calculate Z:









5. Calculate the p-value.
The p-value is the area under the curve and to the right of our sample Z.

x
H
x
x
Z
o
u
0

=
n
x
o
o =
Ex: A property developer claims the average rental income per room in student housing is at least
$5000 for the year. A sample of 36 students is randomly selected. The mean annual rent is calculated to
be $5200 from this sample. The standard deviation for all rents is $735. Use = 0.05
1. State the null and alternative hypothesis.




2. Sketch the curve and identify the critical region.






3. Calculate Z:









4. Calculate the p-value.
The p-value is the area under the curve and to the left of our sample Z.


_____________________________
Comparing the two scenarios:
H
0
: < 5000
H
1
: > 5000
Accept the null hypothesis that the true mean is less than or equal to $5000 with a
p-value of 0.0516.

H
0
: > 5000
H
1
: < 5000
Accept the null hypothesis that the true mean is greater than or equal to $5000 with
a p-value of 0.9485.

______________________________
Ex: A property developer claims the average rental income per room in student housing is $5000 for the
year. A sample of 36 students is randomly selected. The mean annual rent is calculated to be $5200 from
this sample. The standard deviation for all rents is $735. Use = 0.05
1. State the null and alternative hypothesis.






x
H
x
x
Z
o
u
0

=
n
x
o
o =
2. Sketch the curve and identify the critical region.







3. Calculate Z:







4. Calculate the p-value.



__________________________
The Relationship between Confidence Intervals and Hypothesis Testing
Same example: Lets calculate the 95% confidence interval.






A two-sided Confidence Interval is a set of acceptable two-sided null hypotheses at the same level of
significance.
(same argument for one-sided CIs and hypotheses)


II. Type I and Type II errors
If a sample mean falls in the acceptance region, we say there is no significant difference between the
sample mean and the hypothesized population mean.

If the sample mean falls in the rejection region, we say there is a significant difference between the
sample mean and the hypothesized population mean.
- the difference is too great to attribute to chance

If you reject the null when it is actually true, it is called a Type I error.

is the probability of committing a Type I error.

If you reject the alternative hypothesis when it is actually true, it is called a Type II error.

is the probability of committing a Type II error.

x
H
x
x
Z
o
u
0

=
n
x
o
o =
x
Z x o
o 2 /




The power of a test is the probability of accepting a true alternative hypothesis.
The power of a test is also defined as the probability of rejecting a false null hypothesis.
The power of a test increases as increases.

III. Hypothesis tests for Proportions

Ex: A Budget airline claims that 96% of its flights depart on time. A researcher working for the
company records departure information for 80 randomly selected flights and finds that 5 departed late.
Test the airlines claim at the 1% significance level.
1. State the null and alternative hypotheses



2. Sketch the curve and identify the critical region.







3. Calculate Z:









4. p-value





p
p
p
Z
o
t
=
n
s
p
) 1 ( t t
=
Alternative:
| p | = | 0.04 0.0625| = 0.0225







If the true percentage of late departures is 4%, there is a 30% chance of selecting 5 or more late
departures or 1.4 or fewer departures in 80.
__________________________

IV. Hypothesis Test for Difference in Means
Ex: A group of students and a group of young professionals are asked about their yearly rent
expenditures.

Is there a difference in the average rental expenditure between the two groups? (5% significance level)

1. State the null and alternative hypotheses



2. Sketch the curve and identify the critical region.








3. Calculate Z:










4. p-value



B x A x
B A B A
B x A x
s
x x
Z


=
) ( ) ( u u
B
B
A
A
B x A x
n
s
n
s
s
2 2
+ =

V. Hypothesis Test for Difference in Proportions


When testing whether or not two population proportions are different, combine the two sample
proportions into a pool.

p
c
= # items with given characteristic in both samples
sum of all items in both samples





___________________________
Ex: Test the hypothesis that the support for the Green Party is the same in both areas. Use 10%
significance.


1. State the null and alternative hypotheses




2. Sketch the curve and identify the critical region.






3. Calculate Z:








4. p-value







When the null hypothesis is rejected, the p-value is the level of significance.
|
|
.
|

\
|
+ =

B A
c c combined pB pA
n n
p p s s
1 1
) 1 (
pB pA
B A B A
pB pA
s
p p
Z


=
) ( ) ( t t
|
|
.
|

\
|
+ =

B A
c c pB pA
n n
p p s
1 1
) 1 (

____________________________________________________________________
Concepts:
Type I, Type II errors
Power of a test

Skills:
Perform Hypothesis Tests for means, proportions, differences in means, differences in proportions

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