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Quantitative Techniques
for
Decision Making

Interval Estimation

Population Mean: s Known

Population Mean: s Unknown
Determining the Sample Size

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Margin of Error and the Interval Estimate

A point estimator cannot be expected to provide the exact value of the population parameter.
An interval estimate can be computed by adding and subtracting a margin of error to the point
estimate.

Point Estimate +/- Margin of Error

The purpose of an interval estimate is to provide information about how close the point estimate is
to the value of the parameter.
The general form of an interval estimate of a population mean is

x  Margin of Error

Interval Estimate of a Population Mean:

s Known
In order to develop an interval estimate of a population mean, the margin of error must be
computed using either:
▪ the population standard deviation s , or
▪ the sample standard deviation s
▪ s is rarely known exactly, but often a good estimate can be obtained based on historical data.
▪ We refer to such cases as the s known case.

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Interval Estimate of a Population Mean:

s Known
◼ Interval Estimate of m

s
x  z /2
n

where: x is the sample mean

1 - is the confidence coefficient
z/2 is the z value providing an area of
/2 in the upper tail of the standard
normal probability distribution
s is the population standard deviation
n is the sample size

Interval Estimate of a Population Mean:

s Known

Sampling
distribution
of x

/2 1 -  of all /2

x values

x
m

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Interval Estimate of a Population Mean:

s Known

Sampling Sampling
distribution distribution
of x of z

/2 1 -  of all /2 /2 1 -  of all /2

x values z values

x 𝑍
m 0

𝑋ത𝐴 𝑋ത𝐵 −𝑍𝛼ൗ +𝑍𝛼ൗ

2 2
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Interval Estimate of a Population Mean:

s Known

Sampling
distribution
of x
1 -  of all
/2 /2
x values
interval
does not x
include m m interval
z /2 s x z /2 s x includes m
x
x
x 9

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Interval Estimate of a Population Mean:

s Known
◼ Interval Estimate of m

s
x  z /2
n

where: x is the sample mean

1 - is the confidence coefficient
z/2 is the z value providing an area of
/2 in the upper tail of the standard
normal probability distribution
s is the population standard deviation
n is the sample size

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Interval Estimate of a Population Mean:

s Known
Values of z/2 for the Most Commonly Used Confidence Levels

Confidence Table
Level α α/2 Look-up Area zα/2

90% .10 .05 .9500 1.645

95% .05 .025 .9750 1.960
99% .01 .005 .9950 2.576

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Interval Estimate of a Population Mean:

s Known
Because 90% of all the intervals constructed using 𝑥ҧ ± 1.645𝜎𝑥ҧ will contain the population mean, we
say we are 90% confident that the interval 𝑥ҧ ± 1.645𝜎𝑥ҧ includes the population mean µ.
We say that this interval has been established at the 90% confidence level.
The value .90 is referred to as the confidence coefficient.

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Interval Estimate of a Population Mean:

s Known
Example: Lloyd’s Department Store
Each week Lloyd’s Department Store selects a random sample of 100 customers in order to learn about the
amount spent per shopping trip.
With x representing the amount spent per shopping trip, the sample mean provides a point estimate of μ, the
mean amount spent per shopping trip for the population of all Lloyd’s customers.
Lloyd’s has been using the weekly survey for several years. Based on the historical data, Lloyd’s now
assumes a known value of σ = $20 for the population standard deviation. The historical data also indicate
that the population follows a normal distribution.
During the most recent week, Lloyd’s surveyed 100 customers (n=100) and obtained a sample mean of 𝑥ҧ =
$82. The sample mean amount spent provides a point estimate of the population mean amount spent per
shopping trip, μ.
Determine the interval estimate of μ with 95% confidence level.

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Interval Estimate of a Population Mean:

s Known
Example: Lloyd’s Department Store

95% of the sample means that can be observed are within + 1.96𝜎𝑥ҧ of the population mean m.

The margin of error is:

s  20 
z /2 = 1.96   = 3.92
n  100 
Thus, at 95% confidence,
the margin of error is $3.92.

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Interval Estimate of a Population Mean:

s Known
Example: Lloyd’s Department Store
Interval estimate of m is:

$82 + $3.92
or
$78.08 to $85.92

We are 95% confident that the interval contains the population mean.

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Interval Estimate of a Population Mean:

s Known
Example: Lloyd’s Department Store

Confidence Margin
Level of Error Interval Estimate
90% 3.29 78.71 to 85.29
95% 3.92 78.08 to 85.92
99% 5.15 76.85 to 87.15

In order to have a higher degree of confidence, the margin of error

and thus the width of the confidence interval must be larger.

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Interval Estimate of a Population Mean:

s Known
Adequate Sample Size
In most applications, a sample size of n = 30 is adequate.
If the population distribution is highly skewed or contains outliers, a sample size of 50 or more is
recommended.
If the population is not normally distributed but is roughly symmetric, a sample size as small as 15
will suffice.
If the population is believed to be at least approximately normal, a sample size of less than 15 can
be used.

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Interval Estimate of a Population Mean:

s unknown
If an estimate of the population standard deviation s cannot be developed prior to sampling, we use
the sample standard deviation s to estimate s .
This is the s unknown case.
In this case, the interval estimate for m is based on the t distribution.

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t Distribution
William Gosset, writing under the name “Student”, is the founder of the t distribution.
Gosset was an Oxford graduate in mathematics and worked for the Guinness Brewery in Dublin.
He developed the t distribution while working on small-scale materials and temperature
experiments.

(13 June 1876 – 16 October 1937) 19

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t Distribution

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t Distribution
A specific t distribution depends on a parameter known as the degrees of freedom.
Degrees of freedom refer to the number of independent pieces of information that go into the
computation of s.
A t distribution with more degrees of freedom has less dispersion.
As the degrees of freedom increases, the difference between the t distribution and the standard
normal probability distribution becomes smaller and smaller.

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t Distribution

t distribution
Standard (20 degrees
normal of freedom)
distribution

t distribution
(10 degrees
of freedom)

z, t
0

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t Distribution
For more than 100 degrees of freedom, the standard normal z value provides a good approximation
to the t value.
The standard normal z values can be found in the infinite degrees (∞) row of the t distribution table.

Standard normal
z values

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t Distribution

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Interval Estimate of a Population Mean:

s unknown
◼ Interval Estimate

s
x  t /2
n

where: 1 - = the confidence coefficient

t/2 = the t value providing an area of /2 in the upper
tail of a t distribution with n - 1 degrees of freedom
s = the sample standard deviation

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Interval Estimate of a Population Mean:

s unknown
Example: Credit Card Debt
To illustrate the interval estimation procedure for the σ unknown case, we will consider a study designed to
estimate the mean credit card debt for the population of U.S. households.
A sample of n = 70 households provided the credit card balances shown in Table 8.3. For this situation, no
previous estimate of the population standard deviation σ is available. Thus, the sample data must be used to
estimate both the population mean and the population standard deviation.
Using the data in Table 8.3, we compute the sample mean 𝑥ҧ = $9312 and the sample standard deviation s =
$4007.

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Interval Estimate of a Population Mean:

s unknown
Example: Credit Card Debt

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Interval Estimate of a Population Mean:

s unknown
➢ At 95% confidence,  = .05, and /2 = .025.
➢ t.025 is based on n - 1 = 70 - 1 = 69 degrees of freedom.
➢ In the t distribution table we see that t.025 = 1.995.

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Interval Estimate of a Population Mean:

s unknown

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Interval Estimate of a Population Mean:

s unknown
Interval Estimate
s
x  t.025 Margin
n of Error

4007
9312  1.995 = 9312  955
70

We are 95% confident that the mean credit card balance for the population
of all household is between $8,357 and $10,267.

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Interval Estimate of a Population Mean:

s unknown
Adequate Sample Size

In most applications, a sample size of n = 30 is

adequate when using the expression 𝑥ҧ ± 𝑡𝛼Τ2 𝑠Τ 𝑛 to
develop an interval estimate of a population mean.

If the population distribution is highly skewed or

contains outliers, a sample size of 50 or more is
recommended.

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Interval Estimate of a Population Mean:

s unknown
Adequate Sample Size

If the population is not normally distributed but is

roughly symmetric, a sample size as small as 15
will suffice.

If the population is believed to be at least

approximately normal, a sample size of less than 15
can be used.

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Summary of Interval Estimation Procedures

for a Population Mean

Yes Can the No

population standard
deviation s be assumed
known ?

Use the sample

standard deviation
s Known s to estimate s
Case
Use Use
s s Unknown s
x  z /2 Case x  t /2
n n

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Sample Size for an Interval Estimate

of a Population Mean
Let E = the desired margin of error.
E is the amount added to and subtracted from the point estimate to obtain an interval estimate.
If a desired margin of error is selected prior to sampling, the sample size necessary to satisfy the
margin of error can be determined.

s
➢ Margin of Error E = z /2
n

Necessary Sample Size ( z / 2 ) 2 s 2

➢
n=
E2
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Sample Size for an Interval Estimate

of a Population Mean
The Necessary Sample Size equation requires a value for the population standard deviation s.
If s is unknown, a preliminary or planning value for s can be used in the equation.
➢ Use the estimate of the population standard deviation computed in a previous study.
➢ Use a pilot study to select a preliminary study and use the sample standard deviation from the
study.
➢ Use judgment or a “best guess” for the value of s .

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Sample Size for an Interval Estimate

of a Population Mean
Example: Lloyd’s Department Store

Recall that Lloyd’s Department Store is planning to get an estimate of the mean amount spent per
shopping trip. Suppose that Lloyd’s management team wants an estimate of the population mean
such that there is a 0.95 probability that the sampling error is $2 or less.

How large a sample size is needed to meet the required precision?

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Sample Size for an Interval Estimate

of a Population Mean
Example: Lloyd’s Department Store
s
z / 2 =2
n
At 95% confidence, z.025 = 1.96. Recall that s = 20.

(1.96)2 (20)2
n= = 384.16 = 385
(2)2

A sample of size 385 is needed to reach a desired precision of

+ $2 at 95% confidence.

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Thank You !!!

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