BUSINESS STATISTICS:

Text and Problems

With Introduction to Business Analytics

Dr. N. D. VOHRA
 Chapter 10

Testing of Hypotheses:
Means and Proportions
 HYPOTHESES TESTING PROCESS

• The process of hypothesis testing essentially comprises of

the following:
a) Hypothesis: Making a statement/claim about the
population,
b) Sampling from the population and analyzing the
sample data, and
c) Determining whether the differences between what is
observed and the statement made could have been due
to chance alone and hence insignificant or they are
significant and casting a doubt on the statement made.
 METHODOLOGY OF
HYPOTHESES TESTING

• Step 1: Set up null and alternate

hypotheses.
• Step 2: Select the level of significance.
• Step 3: Select test statistic.
• Step 4: Establish the decision rule.
• Step 5: Perform computations.
• Step 6: Draw conclusion.
STEP 1: SET UP NULL AND ALTERNATE
HYPOTHESES

• For every hypothesis test, a pair of hypotheses is set up:

• A null hypothesis (H0)
Hypothesis of ‘no difference’ or ‘no change’
• An alternate hypothesis (H1).
It states what may be believed to be true
• The null hypothesis is always the one to be tested.
• If evidence from sample is sufficient to reject H0, then we
reject it and accept H1, otherwise H0 is not rejected and
accepted to be true by default.
 EXAMPLE

• A study claims that the mean income of the senior

executives in the manufacturing sector in an
industrial state is Rs 625,000 per annum.
To test this claim, it is decided to take a sample of 200
executives and obtain their mean income. Set up the
appropriate hypotheses.
 SETTING UP OF HYPOTHESES

• The null and alternate hypotheses would be:

• Null hypothesis,
H0: µ = Rs 625,000
(The claim is true)
• Alternate hypothesis,
H1: µ ≠ Rs 625,000
(The claim is not true)
 STEP 2: SELECT THE LEVEL OF
SIGNIFICANCE

The level of significance: (α) α

Is the probability of rejecting
a null hypothesis
when it is true.
It is complementary Level of
to the level of confidence. Confidence:
1- α
 STEP 3: SELECT A TEST STATISTIC

Comparison Critical
Statistic
Value
Depends on the
knowledge about
Choice of an population parameters,
appropriate sample size, number of
test-statistic z, t, F, samples collected etc
χ2 etc.
 STEP 3: SELECT TEST STATISTIC

• The testing of hypothesis is done by means of computing

some statistic and comparing its value with a certain
standard value, called critical value, to determine whether
null hypothesis may be rejected.
• There are several test statistics such as z, t, F, χ2 etc
available.
• The nature of underlying population from which
sampling is done, the knowledge about its parameters,
sample size, number of samples collected etc are the
factors which govern the choice of a test-statistic.
STEP 4: ESTABLISH THE DECISION RULE

• If the computed value of the test statistic is more extreme

than its critical value/s, then reject H0, else accept H1.
• The critical values are obtained having reference to
appropriate area tables relating to the concerned test
statistic.
• The critical value depends on several factors including the
statistic being used, the level of significance and whether
the test is two-tailed or one-tailed.
 TWO-TAILED VS. ONE-TAILED TEST

Two-tailed Test One-tailed Test

A two-tailed test of hypothesis is A one-tailed test of hypothesis is
conducted where it is important conducted where it is important
to consider both directions of to consider only a single
difference away from the direction of difference away
parameter specified in the null from the parameter value
hypothesis. specified in the null hypothesis.
Here the rejection region lies In such a test, the rejection
in both ends of the sampling region lies only in one end of
distribution. the sampling distribution.
 TWO-TAILED TEST OF HYPOTHESIS

Sampling Distribution and Regions of Acceptance and Rejection

 ONE-TAILED TEST OF HYPOTHESIS
(RIGHT-TAILED)

Sampling Distribution and Regions of Acceptance and Rejection

 ONE TAILED TEST OF HYPOTHESIS
(LEFT-TAILED)

Sampling Distribution and Regions of Acceptance and Rejection

 STEP 5: PERFORM COMPUTATIONS

• The next step in hypothesis testing is taking

sample(s).
• Having collected the sample(s), we use the sample
information to calculate the value of the test-statistic
in question.
• This calculated value is meant to be compared with
the critical value.
 STEP 6: DRAW CONCLUSION

• The final step in the hypothesis testing process calls for

drawing conclusion from the test.
• This is done on the basis of the comparison of the
calculated value of the test statistic with the critical value.
• The null hypothesis stands rejected if the calculated value
of the test statistic is more extreme than the critical value.
• This is true both for two-tailed and one-tailed tests.
 DRAW CONCLUSION (contd.)

• In a two-tailed test, if the calculated value of the statistic is

more than the upper critical value or lower than the lower
critical value, we reject the null hypothesis.
• In right-tailed test, we reject null hypothesis if the calculated
value of the statistic is more than the critical value.
• Similarly, we reject null hypothesis if the calculated value of
the statistic is smaller than the critical value in case of
left-tailed test.
 DRAW CONCLUSION (contd.)

• When the critical value is not exceeded by the calculated value of

the test statistic, it suggests that there is no adequate evidence
against the null hypothesis.
• In such a case, we fail to reject the null hypothesis and this
hypothesis is accepted only by default.
• This acceptance of the null hypothesis by no means proves that it
is true.
• This is just like in a court of law an accused may be pronounced
as not guilty for lack of evidence. An accused is presumed, and
not proved, to be innocent in such a situation.
 FOUR POSSIBILITIES IN A
TEST OF HYPOTHESIS

1. The null hypothesis is in fact true and it is accepted by the test.

2. The null hypothesis is in fact true and it is rejected by the test.
3. The null hypothesis is in fact false and it is rejected by the test.
4. The null hypothesis is in fact false and it is accepted by the test.
Possibilities 1 and 3 result in correct decision while in cases 2 and 4
the decision is incorrect.
 ERRORS IN HYPOTHESIS TESTING

State of Hypothesis test conclusion

affairs H0 is accepted H0 is rejected
Correct Type I error
H0 is true
Decision Probability = α

Type II error Correct

H0 is false
Probability = β Decision
 α , β AND THEIR RELATIONSHIP

• α is the probability of committing a Type I error while β is the

probability of committing a Type II error.
• Type I and Type II errors are inversely related to each other so
that:
❑ A lowering of α would increase the value of β, and
❑ An increase in α would decrease the value of β.
• This is because a reduction in α increases the acceptance region
and the probability of accepting the null hypothesis. If it is in fact
false then it would mean an increase in the value of β.
• For a given sample size, the decision maker faces the conflict
about the two types of errors.
 α , β AND THEIR RELATIONSHIP

• Hypothesis testing only mentions α: the probability of

committing a Type I error.
• There can be no mention of β since its value can be
calculated only when true value of the parameter is
known.
• The choice of α is guided by the relative cost of making
each of the errors.
• Thus, a lower value of α (which implies a higher level of
confidence) is not necessarily better in all cases.
 MORE ABOUT β

• The value of β can be determined only when the true

universe value is known.
• The closer is the true population parameter value to
the hypothesized value, the greater likelihood is of
the Type II error.
• Conversely, farther is the true population parameter
value from the hypothesized value, the smaller is the
chance making of the Type II error.
 CALCULATION OF β

• To calculate β, first chart the sampling distribution for the

hypothesized value of the parameter and mark the acceptance
region.
• Next, plot the sampling distribution corresponding to the true
value of parameter.
• The part of acceptance region covered by the sampling
distribution corresponding to the true value of parameter gives the
value of β.
• If the hypothesized and the true population parameter values are
close, then the common area shall be higher.
CALCULATION OF β
 OC CURVE

• Since the true value of the population parameter (say μ) is

not known, we may assume different values of it and
calculate the probability of making a Type II error, β.
• We can chart the probability of committing a Type II
error for various possible true values of the population
parameter by means of an operating characteristic curve,
OC curve.
• The OC curve for a two-tailed test is obviously different
from that for a one-tailed test because of location of the
rejection region in the two cases.
 OC CURVE FOR A
TWO-TAILED TEST WITH α = 0.05
 OC CURVE FOR A
ONE-TAILED TEST WITH α = 0.05
 POWER OF A TEST

• Power of a test is the complement of making Type II

error. It is the probability of rejecting a null hypothesis
that is false.
• The power of a test increases with increases in the
deviation of the true parameter value from the
hypothesized value.
• Like the OC curve, a power curve can also be charted.
• Further, like for OC curve, a power curve is different for
two-tailed and one-tailed tests.
POWER CURVE: TWO-TAILED TEST
POWER CURVE: ONE-TAILED TEST
 P-VALUE APPROACH TO
HYPOTHESIS TESTING

• The p-value approach to hypothesis testing is an alternative

to the critical value approach although it can be used along
with that as well.
• For a two-tailed test, the p-value refers to the probability of
an absolute difference between the sample result and the
hypothesized parameter value at least as large as observed.
• The p-value for a one-tailed test describes the probability of
a one-directional difference between the sample result and
the hypothesized parameter value at least as large as
observed.
 ACCEPT/REJECT DECISIONS USING
P-VALUE APPROACH

• If the p-value < level of significance, α

H0 is rejected
• If the p-value > level of significance, α
H0 is not rejected.
• The p-value approach has the advantage that it
not only allows to take accept/reject decisions
but also reveals how strong the sample evidence
is.
 P-VALUE AND
STRENGTH OF EVIDENCE

In general terms,
❑ if the p-value is smaller than 0.10, we have only some evidence
that H0 is not true;
❑ if the p-value is less than 0.05, then there is a strong evidence
that H0 is not true;
❑ if the p-value is less than 0.01, the evidence that H0 is not true
is regarded as very strong,
❑ if the p-value is less than 0.001, then the evidence that H0 is
not true is considered to be extremely strong
 ONE-SAMPLE
TESTS OF HYPOTHESES

•
 ONE-SAMPLE
TESTS OF HYPOTHESES

•
 ONE-SAMPLE
TESTS OF HYPOTHESES

•
 ONE-SAMPLE
TESTS OF HYPOTHESES

Hypothesis Test for Mean when σ is unknown: Small

Sample
When
The parent population is normally distributed,
The population standard deviation is not known, and
The sample size is small ( n ≤30), then
The appropriate test to use for hypotheses test for µ is the t
-test.
t – TEST FOR MEANS
 CHOICE OF TEST STATISTIC
Large Sample: z
test
Standard deviation
Known
Small Sample: z test
Normal

Large Sample: z
test
Standard deviation
Not Known
Small Sample:
t- test
Population
Large Sample: z
test
Standard deviation
Known
Small Sample:
PROBLEM
Not Normal
Large Sample: z
test
Standard deviation
Not Known
Small Sample:
PROBLEM
 TESTING FOR POPULATION
PROPORTIONS: LARGE SAMPLES
•
 TWO-SAMPLE
TESTS OF HYPOTHESES

• The analysis is of two populations from each of

which a sample is taken.
• Accordingly, there are two independent sets of data.
• To test whether the two samples could have been
drawn from the populations that have equal
parameters.
 TWO-SAMPLE
TESTS OF HYPOTHESES
Test for Two Independent Sample Means
• The test is whether the two samples could have been drawn from the
populations that have equal means.
• Thus, Null hypothesis: µ1 – µ2 = 0.
• The test could be two-tailed or one-tailed.
• For two-tailed test, the alternate hypothesis:
µ1 ≠ µ2 or µ1 – µ2 ≠ 0
• For one tail test, the alternate hypothesis:
µ1 > µ2 or µ1 – µ2 > 0,
µ1 < µ2 or µ1 – µ2 < 0.
 TWO-SAMPLE
TESTS OF HYPOTHESES

•
 TWO-SAMPLE TESTS OF
HYPOTHESES

•
 TWO-SAMPLE
TESTS OF HYPOTHESES

Test for Two Independent Sample Means:

Small Samples, Standard Deviations Not Known
For small samples with n1 < 30 and n2 < 30, and
population standard deviations not known, the
testing of hypothesis for two independent sample
means is done using t – statistic.
The use of this test requires three conditions to be
satisfied.
 CONDITIONS FOR
APPLICATION OF t – STATISTIC
(ASSUMING EQUAL VARIANCES)

•
 APPLICATION OF t – STATISTIC
(ASSUMING UNEQUAL VARIANCES)

• The use of t –test is based on the following conditions:

1. Both the sampled populations are normally distributed or
are closely so.
2. The variances of the both the populations are not equal.
3. The samples drawn are independent.
 APPLICATION OF t – STATISTIC
(ASSUMING UNEQUAL VARIANCES)

Usually, the integer the value of degrees of freedom obtained using

this formula is rounded down.
 TWO-SAMPLE
TESTS OF HYPOTHESES

•
 POOLED VARIANCE FOR
TWO-SAMPLE TEST

•
 TWO-SAMPLE TESTS OF
HYPOTHESES

Test for Difference between Means:

Dependent Samples
• When paired samples are taken then the testing is done by taking the
differences as a random variable and treating it like a one-sample test.
• For example, we may consider performance of a group of workers
before and after training as an illustration of paired or dependent
samples.
• D may be calculated by subtracting the ‘before’ scores from the ‘after’
scores.
• Various D scores are then averaged to get their mean value. This is then
compared with 0, the hypothesized difference between the scores.
 TWO-SAMPLE TEST OFHYPOTHESES-
DEPENDENT SAMPLES

•
 TWO-SAMPLE TESTS OF
HYPOTHESES FOR PROPORTIONS

• Deals with cases in which each element sampled can be classified into one
of the two categories – success or failure.
• Two independent samples are drawn from two populations, proportions of
successes in each sample p1 and p2 respectively are calculated.
• It is hypothesized that the two population proportions of successes π1 and
π2 respectively are equal.
• This test involves examining whether the difference between sample
proportions p1 – p2 is significantly different from the hypothesized
difference of 0.
• The z-statistic is used for this hypothesis testing.
 TWO-SAMPLE TESTS OF
HYPOTHESES FOR PROPORTIONS
END OF CHAPTER 10