Workshop 8 Solutions: Video Solution For Q8.1

Business Statistics Week 8
Workshop 8 Solutions
Q8.1
Use tables to find the p-values for the following tests. (We assume the population standard
deviation is known). If α=0.05, state the conclusion (no interpretation possible here).
(i) H0: µ = 500
H1: µ ≠ 500
Zcalc = -1.76
Since the alternative hypothesis (H1) is two sided, we need to multiply the p-value by two.
2P(Z < -1.76) = 2 X 0.0392 = 0.0784
So, p-value = 0.0784
Since 0.0784 >0.05, we cannot reject H0.
(ii) H0: µ ≤ 200
H1: µ >200
Zcalc = 2.63
Since the alternative hypothesis (H1) is one-sided, the p-value is the probability that Z would
be larger than 2.63
P(Z > 2.63) = 1 - P(Z < 2.63) = 1 - 0.9957
So, p-value = 0.0043
Since 0.0043 < 0.05, we can reject H0.
Video Solution for Q8.1
1
Q8.2
Eighteen per cent of multinational companies provide an allowance for personal long-
distance calls for executives living overseas. Suppose a researcher thinks that multinational
companies are having a more difficult time recruiting executives to live overseas and that an
increasing number of companies are providing an allowance for personal long-distance calls
to these executives to ease the burden of living away from home. To test this claim, a new
study is conducted by randomly sampling 376 multinational companies. Twenty two per cent
of these surveyed companies are providing an allowance for personal long-distance calls to
executives living overseas.
(a) Has the proportion of multinational companies that provide an allowance for personal
long- distance calls for executives living overseas increased? Use the p-value approach
at the 1% level of significance.
Let X = number of multinational companies that provide an allowance for personal long-
distance calls for executives living overseas
n = 376; p = 0.22; α = 0.01
nπ = 376 x 0.18 = 67.68 and n(1-π) = 376(1-0.18) = 308.32
Note that both are greater than 5, hence the normal approximation is reasonable.
Step 1: Hypotheses
H0 :   0.18
H1 :   0.18 (One-tailed test)
Step 2: Test statistic
𝑝−𝜋
𝑍= is distributed approximately as N(0,1)
𝜋(1−𝜋)
√
𝑛
0.22 − 0.18
𝑍𝑐𝑎𝑙𝑐 = = 2.02
√0.18(1 − 0.18)
376
2
Step 3: p value
P(Z > 2.02) = 1 - P(Z < 2.02) = 1- 0.9783 = 0.0217
Step 4: Decision Rule and Decision
Reject H0 if p-value < α
Since 0.0217 > 0.01, we cannot reject H0.
Step 5: Conclusion
We CANNOT reject H0 at the 1% level of significance.

The sample DOES NOT provide enough evidence against H0.
That is, the proportion of multinational companies that provide an allowance for
personal long-distance calls for executives living overseas is NOT higher than 18%.
The sample evidence shows that the proportion of multinational companies that provide
an allowance for personal long-distance calls for executives living overseas has not
increased.
(b) Interpret the p-value.
If the true proportion of multinational companies that provide an allowance for personal
long-distance calls for executives living overseas is 18%, then 2.17% of the time we
would expect a sample proportion at least as large as the one we actually got.
(c) Interpret the Type I error in the context of this question.
A Type I Error occurs if we reject H0 when it is true.
In the context of this question, Type I error occurs when we conclude that the
proportion of multinational companies that provide an allowance for personal long-
distance calls for executives living overseas is higher than 18%, when it actually is not.
3
Q8.3
The approval process for a life insurance policy requires a review of the application and the
applicant’s medical history, possible requests for additional medical information and medical
examinations, and a policy compilation stage where the policy pages are generated and then
delivered. The ability to deliver policies to customers in a timely manner is critical the
profitability of this service. During one month, a random sample of 25 approved policies is
selected and the total processing time in days is recorded. The sample mean is found to be
34.64. The population standard deviation is 27.00.
(a) In the past, the mean processing time averaged 45 days. What assumption about
the population distribution is needed in order to be able to complete the hypothesis
test?
We need to assume that the underlying population distribution is normal.
(b) At the 5% level of significance, is there evidence that the mean processing time has
changed from 45 days? Use the p-value approach.
Let X = Processing time for a life insurance policy (days)
𝜎 2
Assume 𝑋~𝑁(𝜇, 𝜎 2 ) therefore 𝑋̅~𝑁 (𝜇, )
25
𝑋̅ = 34.64 σ = 27 n = 25 α = 0.05
Step 1: Hypotheses
H0: µ = 45 days
H1: µ ≠ 45 days Two-tailed test
Step 2: Test statistic
Since σ known, use Z.
̅−𝜇
𝑋
𝑍=𝜎
⁄ 𝑛
√
34.64 − 45
𝑍𝑐𝑎𝑙𝑐 = = −1.92
27⁄
√25
4
Step 3: p-value
2P(Z < -1.92)= 2 x 0.0274 = 0.0548
Step 4: Decision Rule and Decision
Reject H0 if p-value < α
Since 0.0548 > 0.05, we cannot reject H0.
Step 5: Conclusion:
We cannot reject H0 at the 5% level of significance. The sample does not provide enough
evidence against H0. Therefore, the mean processing time has not changed from 45
days.
(c) Define the power of a statistical test.
Power of the test is the likelihood of rejecting the null when it is false. (1-β) is referred
to as the “Power of the Test”.
Eg: Refer to the judicial example- It is the likelihood that the defendant is found guilty
when he actually is.
(d) Interpret the power of a test in the context of this question.
Power of the test is the likelihood of concluding that the mean processing time has
changed from 45 days when it actually has.
(e) Interpret the Type II Error in the context of this question.
Type II Error occurs if we do not reject H0 when it is false.
In context of this question, a Type II error occurs when we conclude that the mean
processing time has not changed from 45 days when it actually has.

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Business Statistics Week 8

(i) H0: µ = 500

2P(Z < -1.76) = 2 X 0.0392 = 0.0784

So, p-value = 0.0784

Since 0.0784 >0.05, we cannot reject H0.

(ii) H0: µ ≤ 200

be larger than 2.63

P(Z > 2.63) = 1 - P(Z < 2.63) = 1 - 0.9957

So, p-value = 0.0043

Since 0.0043 < 0.05, we can reject H0.

Video Solution for Q8.1

n = 376; p = 0.22; α = 0.01

nπ = 376 x 0.18 = 67.68 and n(1-π) = 376(1-0.18) = 308.32

Step 2: Test statistic

P(Z > 2.02) = 1 - P(Z < 2.02) = 1- 0.9783 = 0.0217

Step 4: Decision Rule and Decision

Reject H0 if p-value < α

Since 0.0217 > 0.01, we cannot reject H0.

We CANNOT reject H0 at the 1% level of significance.

(b) Interpret the p-value.

(c) Interpret the Type I error in the context of this question.

A Type I Error occurs if we reject H0 when it is true.

Video Solution for Q8.2

We need to assume that the underlying population distribution is normal.

Let X = Processing time for a life insurance policy (days)

H1: µ ≠ 45 days Two-tailed test

Step 2: Test statistic

Since σ known, use Z.

2P(Z < -1.92)= 2 x 0.0274 = 0.0548

Step 4: Decision Rule and Decision

Reject H0 if p-value < α

Since 0.0548 > 0.05, we cannot reject H0.

(c) Define the power of a statistical test.

(d) Interpret the power of a test in the context of this question.

(e) Interpret the Type II Error in the context of this question.

Type II Error occurs if we do not reject H0 when it is false.

Video Solution for Q8.3

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