ECON 1005 Lectures

HYPOTHESIS TESTING

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 Statistical Decisions
• Very often in practice, we are called upon to make
decisions about populations on the basis of sample
information

• Such decisions are Statistical Decisions.

• In attempting to reach such decisions it may become

useful or necessary to make assumptions

• These assumptions are Statistical Hypotheses.

• It seems logical, therefore, that a framework exists

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within which we can TEST such hypotheses
 Consider a Court Case….
• You are a juror in a court case

• You must begin with the assumption that the

defendant is innocent until proven guilty

• Your first position is that of innocence

• Evidence is presented to you

• Based on that evidence, you decide between two

options: either remain at your original position
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(innocence) or move to a different position (guilty)
 Consider a Court Case….
• You will decide guilt only if you are convinced,
beyond a critical minimum (beyond reasonable
doubt) to move beyond your stance of innocence

• Sometimes (unfortunately) the courts get it

wrong

• What are the types of errors that can be made?

• (1) an innocent man is found guilty
• (2) a guilty man is found innocent

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 Decision Errors
• Found Guilty, but really Innocent:
– A Type I Error is the error that results from
rejecting the null hypothesis when indeed the null
hypothesis is true.

• Found Not Guilty, but really Guilty:

– A Type II Error is the error that results from not
rejecting the Null Hypothesis when indeed the
null hypothesis is no longer true (i.e. when the
alternative Hypothesis is true).

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 Decision Errors
Ho is true
Ho is false
(really not
(really guilty)
guilty)
Your Decision: Correct
Decision Type II Error
Do Not
( )
Reject Ho

Your Decision: Type I Error Correct

Reject Ho ( ) Decision
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 Significance Levels
• The significance level of a test of hypothesis is the
maximum probability with which we would be willing to
commit a Type I error

• This probability, often denoted by ‘alpha’ is generally

specified before samples are drawn, so the results
obtained don’t influence the researcher’s choice.

• If the significance level is 5%, then there are about 5

chances in 100 that we would reject the hypothesis,
when it should be accepted.

• In other words, we are about 95% confident that we

have made the right decision! 7
 Hypothesis Testing
• This example has outlined the steps of
hypothesis testing
• (1) you have an original position
• (2) you have an alternative position
• (3) you have some critical region that defines
your movement from one position to the next
• (4) you are presented evidence
• (5) you compare that evidence with your
critical region
• (6) you come to a conclusion
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 Hypothesis Testing
• (1) you have an original position
• (2) you have an alternative position
• (3) you have some critical region that defines
your movement from one position to the next
• (4) you are presented evidence
• (5) you compare that evidence with your
critical region
• (6) you come to a conclusion

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The Original Position: The Null Hypothesis
• The null hypothesis is denoted by Ho

• This is the hypothesis being tested (in our

courtroom example, the assumption of innocence)

• It is always phrased in neutral, non-confrontational

language that speaks to H“no
1 : change” and “no
difference”

• Hence the only sign used in a null hypothesis is the

“=” sign

• must be rejected or not rejected based on the

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evidence presented.
 Hypothesis Testing
• (1) you have an original position
• (2) you have an alternative position
• (3) you have some critical region that defines
your movement from one position to the next
• (4) you are presented evidence
• (5) you compare that evidence with your
critical region
• (6) you come to a conclusion

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 The Alternative Position:
The Alternative Hypothesis
• The alternative hypothesis is denoted by H1 or Ha

• This is the alternative to the null hypothesis when H0

is rejected (in our courtroom example – guilty)

• This is phrased so as to include language such as

“different from”, “greater than” or ‘less than”.

• There are therefore three choices for an alternative

hypothesis:
• Less than “<”
• Greater than “>”
• Not equal to “≠” 12
 One-Tailed and Two Tailed Hypothesis Tests
• There are therefore three choices for H1 :
– Less than “<”
– Greater than “>”
– Not equal to “≠”

• If H1 is “not equal to”, we have what is called a “two-

tailed test”

• If H1 is either “less than” or “greater than”, we have

what is called a “one-tailed test”

• If H1 is “less than”, we have a “left-tailed test”

• If H1 is “greater than”, we have a “right-tailed test” 13

 Class Activity

• Explain which of the following is a two-tailed test, a

left-tailed test, or a right-tailed test:
• H0 : = 45
• H1 : > 45

• H0 : = 23
• H1 : 23

• H0 : = 75
• H1 : < 75

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 Class Activity
• Write the null and alternative hypotheses for each of
the following examples. Determine if each is a case of
a two-tailed, left-tailed or right-tailed test.
– To test if the mean number of hours spent working per week
by university students who hold jobs is different from 20
hours
– To test whether or not a bank’s ATM is out of service for an
average of more than 10 hours per month
– To test if the mean credit card debt of university students is
less than 1000 TTD
– To test if the mean time a customer has to wait on the phone
to speak to a b-mobile representative is more than 12
minutes

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Rejection Regions for One-Tailed and Two Tailed
Hypothesis Tests f(z)

• A two-tailed test has rejection

/2 /2

regions in both tails -z 0 z

f(z)

• A Left-tailed test has the rejection

region in the left tail -z 0

f(z)

• A Right-tailed test has the rejection

region in the right tail 0 z

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 Class Activity
• Sketch the rejection regions for each of the following
cases by drawing a sample distribution curve for the
sample mean, assuming a normal distribution.

• H0 : = 45
• H1 : > 45

• H0 : = 23
• H1 : 23

• H0 : = 75
• H1 : < 75
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 Hypothesis Testing
• This example has outlined the steps of
hypothesis testing
• (1) you have an original position
• (2) you have an alternative position
• (3) you have some critical region that defines
your movement from one position to the next
• (4) you are presented evidence
• (5) you compare that evidence with your
critical region
• (6) you come to a conclusion
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 The Critical Region
• The critical region defines the conditions
under which the Null Hypothesis will be
rejected.

• It is based on three things:

– The distribution of the underlying
population
– The form of the alternative hypothesis:
“less than”, “greater than” or “not equal to”
– The chosen significance level
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 The Distribution of the Underlying Population
• Is the underlying population normally distributed?

• If not, can we assume normality in the presence of

large samples, by an appeal to the Central Limit
Theorem?

• Recall the Normal and Standard Normal

Distributions here, as this is crucial.

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 The Form of the Alternative Hypothesis
• A two-tailed test has rejection f(z)

regions in both tails

/2 /2

-z 0 z

f(z)
• A Left-tailed test has the rejection
region in the left tail
-z 0

f(z)

• A Right-tailed test has the rejection

region in the right tail
0 z

• Note the presence of versus /2 in terms of the

definition of the critical region! 21
 The Chosen Significance Level
• The significance level is the probability of
making a Type 1 Error (mistakingly rejecting
the Null when the Null is true).

• Is usually given. If not given, a popular choice

is 5%

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 Calculating the Critical Region
• Assuming normality, how can we calculate the
critical regions for one-tailed and two-tailed tests?

• For a left-tailed test, the CR is defined as Z< -Z

• For a right-tailed test, the CR is defined as Z > Z

• For a two-tailed test, the CR is defined as Z< -Z /2

and Z > Z /2

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 Activity
• For each of the following examples of tests of
hypotheses about , show the rejection and non-
rejection regions on the sampling distributions for
the stated levels of significance, assuming
normality.

• H0 : = 45, H1 : > 45, significance level of 5%

• H0 : = 23, H1 : 23, significance level of 8%

• H0 : = 75, H1 : < 75, significance level of 4%

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 Hypothesis Testing
• (1) you have an original position
• (2) you have an alternative position
• (3) you have some critical region that defines
your movement from one position to the next
• (4) you are presented evidence
• (5) you compare that evidence with your
critical region
• (6) you come to a conclusion

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The Evidence: The Test Statistic
• The Test Statistic is what is used as our
evidence. We calculate the Test Statistic,
and compare it to the Critical Region
previously discussed.

• We can distinguish among the following sets

of Test Statistics:
– Testing Means
– Testing Proportions
– Testing Differences Between Means
– Testing Differences Between Proportions 26
 Testing Means
When Testing values of Means, the Test
Statistic is as follows:
X
Z
/ n
X bar is the value of the sample mean
is the value of the population mean under
the null hypothesis
is the population standard deviation
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n is the sample size
 Class Activity
• A random sample of 80 observations produced a
sample mean of 86.50. Calculate the critical
regions and the test statistics for each of the
following tests of hypotheses, using = 5%
(0.05). The population standard deviation is
known to be 5.40 and the population distribution
is normal.

• H0 : = 8.5 versus H1 : 8.5

• H0 : = 8.5 versus H1 : > 8.5

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 Testing Proportions
When Testing values of Proportions, the Test
Statistic is as follows:
ˆ
p p
Z
pq
n
p hat is the sample proportion
p is the population proportion under the null
q is 1-p
n is the sample size 29
Testing Differences Between Means

[( X1 X 2 ) ( 1 2 )]
Z
SE ( X1 X 2 )

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Testing Differences Between Proportions

p 1 p 2
Var(p 1 p 2 )

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 Hypothesis Testing
• This example has outlined the steps of
hypothesis testing
• (1) you have an original position
• (2) you have an alternative position
• (3) you have some critical region that defines
your movement from one position to the next
• (4) you are presented evidence
• (5) you compare that evidence with your
critical region
• (6) you come to a conclusion
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 The Decision Rule
• The decision criteria or decision rule is
the logic by which a decision is made in a
test of hypothesis

• Golden Rule: If the Test Statistic Falls

Within the Critical Region, you REJECT the
Null Hypothesis

• Clearly, if the Test Statistic falls outside of

the Critical Region, you DO NOT REJECT 33
the Null Hypothesis
 Hypothesis Testing
(1) H0 : always in terms of an equality
(2) HA : one of 3 options
(3) significance level
(4) define the critical region (which depends on
the distribution, the significance level, and HA
(5) calculate the test statistic (are you testing
means? Proportions? Differences between two
means? Differences between two proportions?
(6) Come to your decision (compare the test
statistic with the critical region)

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 P-Values (Probability Values)
• The p-value of a test of hypothesis gives us an
indication of how certain we are that the null
hypothesis should, or should not be rejected.

• The smaller the p-value, the more strongly we

are inclined to reject the null.

• The p-value represents the lowest level of

significance at which we will reject the null

• It can be calculated as the probability region(s)

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associated with the test statistic
 Activity
• A study conducted a few years ago claims
that adult males spend an average of 11
hours a week watching sports on television.
A recent sample of 100 adult males showed
that the mean time they spend per week
watching sports on television is 9.50 hours
with a standard deviation of 2.2 hours. Test
at the 1% significance level if currently, all
adult males spend less than 11 hours per
week watching sports on television.
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 Activity
• A study conducted a few years ago claims
that adult males spend an average of 11 hours
a week watching sports on television (Ho : =
11). A recent sample of 100 adult males
(n=100) showed that the mean time they
spend per week watching sports on television
is 9.50 hours (X bar) with a standard deviation
of 2.2 hours ( ). Test at the 1% significance
level ( ) if currently, all adult males spend less
than 11 hours per week watching sports on
television. (Ha: < 11)
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 Activity
• Ho : = 11
• Ha: < 11 : a left tailed test.
• = 1%
• Critical Region: Z < -Z = region to the left of
-2.33
• Test Statistic: (9.50 – 11) / (2.2/ 100) = -
6.818
• Does the test statistic fall within the critical
region?
• What is your decision?
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 End of Lecture
• This material is covered in the PS Mann
Chapter 9

• Please revise this material in anticipation

of the next lecture on Chi Square
Distributions

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