Chapter 7

Statistical Inference
Statistical Inference
 Statistical inference focuses on drawing
conclusions about populations from samples.
◦ Statistical inference includes estimation of population
parameters and hypothesis testing, which involves
drawing conclusions about the value of the parameters of
one or more populations.
Hypothesis Testing
 Hypothesis testing involves drawing inferences about
two contrasting propositions (each called a hypothesis)
relating to the value of one or more population
parameters.
 H0: Null hypothesis: describes an existing theory
 H1: Alternative hypothesis: the complement of H0
 Using sample data, we either:
- reject H0 and conclude the sample data provides
sufficient evidence to support H1, or
- fail to reject H0 and conclude the sample data
does not support H1.
Example 7.1: A Legal Analogy for Hypothesis
Testing
 In the U.S. legal system, a defendant is innocent
until proven guilty.
◦ H0: Innocent
◦ H1: Guilty
 If evidence (sample data) strongly indicates the
defendant is guilty, then we reject H0.
 Note that we have not proven guilt or innocence!
Hypothesis Testing Procedure

Steps in conducting a hypothesis test:

1. Identify the population parameter and formulate
the hypotheses to test.
2. Select a level of significance (the risk of
drawing an incorrect conclusion).
3. Determine the decision rule on which to base a
conclusion.
4. Collect data and calculate a test statistic.
5. Apply the decision rule and draw a conclusion.
One-Sample Hypothesis Tests
 Three types of one sample tests:
1. H0: parameter ≤ constant
H1: parameter > constant
2. H0: parameter ≥ constant
H1: parameter < constant
3. H0: parameter = constant
H1: parameter ≠ constant
 It is not correct to formulate a null hypothesis
using >, <, or ≠.
Determining the Proper Form of
Hypotheses
 Hypothesis testing always assumes that H0 is true and
uses sample data to determine whether H1 is more likely
to be true.
◦ Statistically, we cannot “prove” that H0 is true; we can only fail to
reject it.
 Rejecting the null hypothesis provides strong evidence
(in a statistical sense) that the null hypothesis is not true
and that the alternative hypothesis is true.
 Therefore, what we wish to provide evidence for
statistically should be identified as the alternative
hypothesis.
Example 7.2: Formulating a One-Sample Test
of Hypothesis
 CadSoft receives calls for technical support. In the past,
the average response time has been at least 25 minutes.
It believes the average response time can be reduced to
less than 25 minutes.
◦ If the new information system makes a difference, then, data
should be able to confirm that the mean response time is less
than 25 minutes; this defines the alternative hypothesis, H1.

H0: mean response time ≥ 25

H1: mean response time < 25
Understanding Potential Errors in Hypothesis
Testing
Hypothesis testing can result in one of four
different outcomes:
1. H0 is true and the test correctly fails to reject H0
2. H0 is false and the test correctly rejects H0
3. H0 is true and the test incorrectly rejects H0
(called Type I error)
4. H0 is false and the test incorrectly fails to reject
H0 (called Type II error)
Terminology
 The probability of making a Type I error = α (level of
significance) = P(rejecting H0 | H0 is true)
◦ The value of 1 – a is called the confidence coefficient
= P(not rejecting H0 | H0 is true),
◦ The value of α can be controlled. Common values are 0.01, 0.05,
or 0.10.
 The probability of making a Type II error = β = P(not
rejecting H0 | H0 is false)
◦ The value of 1 - β is called the power of the test
= P(rejecting H0 | H0 is false).
◦ The value of β cannot be specified in advance and depends on the
value of the (unknown) population parameter.
Example 7.3: How β Depends on the True
Population Mean
 In the CadSoft example:
H0: mean response time ≥ 25
H1: mean response time < 25
 If the true mean is 15, then the sample mean will most
likely be less than 25, leading us to reject H0.
 If the true mean is 24, then the sample mean may or
may not be less than 25, and we would have a higher
chance of failing to reject H0.
Example 7.3: How β Depends on the True
Population Mean
 In the CadSoft example:
H0: mean response time ≥ 25
H1: mean response time < 25
 If the true mean is 15, then the sample mean will most likely be
less than 25, leading us to reject H0.
 If the true mean is 24, then the sample mean may or may not be
less than 25, and we would have a higher chance of failing to
reject H0.
 The further away the true mean is from the hypothesized
value, the smaller the value of β.
 Generally, as a decreases, b increases.
Improving the Power of the Test
 We would like the power of the test to be high
(equivalently, we would like the probability of a Type II
error to be low) to allow us to make a valid conclusion.
 The power of the test is sensitive to the sample size; small
sample sizes generally result in a low value of 1 - b.
 The power of the test can be increased by taking larger
samples, which enable us to detect small differences
between the sample statistics and population parameters
with more accuracy.
 If you choose a small level of significance, you should try
to compensate by having a large sample size.
Selecting the Test Statistic
 The decision to reject or fail to reject a null hypothesis is
based on computing a test statistic from the sample
data.
 The test statistic used depends on the type of hypothesis
test.
◦ Test statistics for one-sample hypothesis tests for means:
Example 7.4 Computing the Test Statistic
 In the CadSoft example, sample data for 44 customers
revealed a mean response time of 21.91 minutes and
a sample standard deviation of 19.49 minutes.

t = -1.05 indicates that the sample mean of 21.91 is

1.05 standard errors below the hypothesized mean of
25 minutes.
Drawing a Conclusion
 The conclusion to reject or fail to reject H0 is based on
comparing the value of the test statistic to a “critical
value” from the sampling distribution of the test statistic
when the null hypothesis is true and the chosen level of
significance, a.
◦ The sampling distribution of the test statistic is usually the normal
distribution, t-distribution, or some other well-known distribution.
 The critical value divides the sampling distribution into
two parts, a rejection region and a non-rejection region.
If the test statistic falls into the rejection region, we reject
the null hypothesis; otherwise, we fail to reject it.
 Rejection Regions

H0: parameter ≥ constant H0: parameter ≤ constant H0: parameter = constant

H1: parameter < constant H1: parameter > constant H1: parameter ≠ constant

For a one-tailed test, if H1 is stated as <, the

rejection region is in the lower tail; if H1 is stated as
>, the rejection region is in the upper tail (just think
of the inequality as an arrow pointing to the proper
tail direction).
Example 7.5: Finding the Critical Value and
Drawing a Conclusion
 In the CadSoft example, use α = 0.05.
◦ H0: mean response time ≥ 25
◦ H1: mean response time < 25
 n = 44; df = n −1 = 43
 t = -1.05
 Critical value = tα/2, n−1 = T.INV(1− α , n −1) = T.INV(0.95, 43) = 1.68
 t = -1.05 does not fall in the rejection region.
 Fail to reject H0.
Even though the sample mean of
21.91 is well below 25, we have too
much sampling error to conclude the
that the true population mean is less
than 25 minutes.
Example 7.6: Conducting a Two-Tailed
Hypothesis Test for the Mean
 Excel file Vacation Survey
 Test whether the average age of respondents is equal to 35.
◦ H0: mean age = 35
◦ H1: mean age ≠ 35
 n = 34; sample mean = 38.677; sample standard deviation = 7.858.
 Test statistic:

 Critical value = T.INV.2T(.05, 33) = 2.0345

 p-value = T.DIST.2T(2.69, 33) = 0.0111
 Reject H0.
p-Values
 A p-value (observed significance level) is the
probability of obtaining a test statistic value
equal to or more extreme than that obtained
from the sample data when the null hypothesis
is true.
 An alternative approach to Step 3 of a

hypothesis test uses the p-value rather than the

critical value:
Reject H0 if the p-value < α
Finding p-Values
 For a lower one-tailed test, the p-value is the probability
to the left of the test statistic t in the t-distribution, and is
found using the Excel function:
◦ =T.DIST(t, n-1, TRUE).
 For an upper one-tailed test, the p-value is the
probability to the right of the test statistic t, and is found
using the Excel function:
◦ 1 - T.DIST(t, n-1, TRUE).
 For a two-tailed test, the p-value is found using the Excel
function:
◦ T.DIST.2T(t, n-1), if t > 0
◦ T.DIST.2T(-t, n-1), if t < 0
Example 7.7: Using p-Values
 In the CadSoft example, the p-value is the left tail area of
the observed test statistic, t = -1.05.
 p-value =TDIST(-1.05, 43, true) = 0.1498
 Do not reject H0 because the p-value ≥ α,
i.e., 0.1498 ≥ 0.05
 For the Vacation Survey two-tailed hypothesis test in Example
7.6, the p-value for this test is
 p-value =T.DIST.2T(2.73,33) = 0.010
 Reject H0 because 0.010 < 0.05
One-Sample Tests for Proportions
 Test statistic:

 p0 is the hypothesized value and ⌃p is the sample

proportion
Example 7.8: One-Sample Test for the
Proportion
 CadSoft sampled 44 customers and asked them to rate
the overall quality of a software package. Sample data
revealed that 35 respondents (a proportion of 35/44 =
0.795) thought the software was very good or excellent.
In the past, this proportion has averaged about 75%. Is
there sufficient evidence to conclude that this
satisfaction measure has significantly exceeded 75%
using a significance level of 0.05?
Example 7.8 Continued
 Hypotheses:
◦ H0: p ≤ 0.75
◦ H1: p > 0.75
 Test statistic:

 Critical value = NORM.S.INV(0.95) = 1.645

 p-value = 1 − NORM.S.DIST(0.69,TRUE) = 0.24
 Do not reject H0.
Two-Sample Hypothesis Tests
 Lower-tailed test
◦ H0: population parameter (1) - population parameter (2) ≥ D0
◦ H1: population parameter (1) - population parameter (2) < D0
 This test seeks evidence that the difference between
population parameter (1) and population parameter (2)
is less than some value, D0.
 When D0 = 0, the test simply seeks to conclude
whether population parameter (1) is smaller than
population parameter (2).
Two-Sample Hypothesis Tests
 Upper-tailed test
◦ H0: population parameter (1) - population parameter (2) ≤ D0
◦ H1: population parameter (1) - population parameter (2) > D0
 This test seeks evidence that the difference between
population parameter (1) and population parameter (2)
is greater than some value, D0.
 When D0 = 0, the test simply seeks to conclude
whether population parameter (1) is larger than
population parameter (2).
Two-Sample Hypothesis Tests
 Two-tailed test
◦ H0: population parameter (1) - population parameter (2) = D0
◦ H1: population parameter (1) - population parameter (2) ≠ D0
 This test seeks evidence that the difference between
the population parameters is equal to D0.
 When D0 = 0, we are seeking evidence that population
parameter (1) differs from population parameter (2).
 In most applications, D0 = 0, and we are simply seeking to
compare the population parameters.
Excel Analysis Toolpak Procedures for Two-
Sample Hypothesis Tests
Two-Sample Tests for Difference in
Means
 Forms of the hypothesis test:
Example 7.9: Comparing Supplier
Performance
 Purchase Orders database

 Determine if the mean lead time for Alum Sheeting (µ1) is

greater than the mean lead time for Durrable Products
(µ2).
Selecting the Proper Excel Procedure
 Population variances are known:
 z-Test: Two-Sample for Means
 Population variances are unknown and assumed
unequal:
 t-Test: Two-Sample Assuming Unequal Variances
 Population variances are unknown but assumed equal:
 t-Test: Two-Sample Assuming Equal Variances
 These tools calculate the test statistic, the p-value for
both a one-tail and two-tail test, and the critical values
for one-tail and two-tail tests.
Intepreting Excel Output
 If the test statistic is negative, the one-tailed p-value is
the correct p-value for a lower-tail test; however, for an
upper-tail test, you must subtract this number from 1.0 to
get the correct p-value.
 If the test statistic is nonnegative (positive or zero), then
the p-value in the output is the correct p-value for an
upper-tail test; but for a lower-tail test, you must subtract
this number from 1.0 to get the correct p-value.
 For a lower-tail test, you must change the sign of the
one-tailed critical value.
Example 7.10: Testing the Hypotheses for
Supplier Lead-Time Performance
 t-Test: Two-Sample Assuming Unequal Variances
◦ Variable 1 Range: Alum Sheeting data
◦ Variable 2 Range: Durrable Products data
Example 7.10 Continued
 Results
◦ Rule 2: If the test statistic is nonnegative (positive or
zero), then the p-value in the output is the correct p-value
for an upper-tail test.

t = 3.83
Critical value = 1.81
p-value = 0.00166
Reject H0.
Two-Sample Test for Means with
Paired Samples
 In many situations, data from two samples are naturally
paired or matched.
 When paired samples are used, a paired t-test is more
accurate than assuming that the data come from
independent populations.
 Hypotheses (mD is the mean difference between the paired
samples):

 Excel Data Analysis tool: t-Test: Paired Two-Sample for

Means
Example 7.11 Using the Paired Two-Sample
Test for Means
 Excel file Pile Foundation
◦ Test for a difference in the means of the estimated and
actual pile lengths (two-tailed test).
Example 7.11 Continued
 Results:

 t = -10.91
 t is smaller than the

lower critical value

 p-value ≈ 0
 Reject the null

hypothesis
Test for Equality of Variances
 Test for equality of variances between two samples
using a new type of test, the F-test.
◦ To use this test, we must assume that both samples are drawn
from normal populations.
 Hypotheses:

 F-test statistic:

 Excel tool: F-test for Equality of Variances

F-Distribution
 The F-distribution has two degrees of freedom, one associated with
the numerator of the F-statistic, n1 - 1, and one associated with the
denominator of the F-statistic, n2 - 1.
 Table 4, Appendix A provides only upper-tail critical values, and the
distribution is not symmetric.
Conducting the F-Test
 Although the hypothesis test is really a two-tailed test,
we will simplify it as an upper-tailed, one-tailed test to
make it easy to use tables of the F-distribution and
interpret the results of the Excel tool.
◦ We do this by ensuring that when we compute F, we take the ratio
of the larger sample variance to the smaller sample variance.
 Find the critical value Fa/2,df1,df2 of the F-distribution, and
then we reject the null hypothesis if the F-test statistic
exceeds the critical value.
 Note that we are using a/2 to find the critical value, not
a. This is because we are using only the upper tail
information on which to base our conclusion.
Example 7.12: Applying the F-Test for
Equality of Variances
 Determine whether the variance of lead times is the same
for Alum Sheeting and Durrable Products in the Purchase
Orders data.
◦ The variance of the lead times for Alum Sheeting is larger than the
variance for Durable Products, so this is assigned to Variable 1.

F = 3.47
Critical value =
2.91
P-value = 0.029
Reject H0
Analysis of Variance (ANOVA)
 Used to compare the means of two or more population
groups.

 ANOVA derives its name from the fact that we are

analyzing variances in the data.
 ANOVA measures variation between groups relative to
variation within groups.
 Each of the population groups is assumed to come from
a normally distributed population.
Example 7.13: Difference in Insurance Survey
Data
 Determine whether any significant differences exist in
satisfaction among individuals with different levels of
education.

 The variable of interest is called a factor. In this example, the

factor is the educational level, and we have three categorical
levels of this factor, college graduate, graduate degree, and
some college.
Example 7.14: Applying the Excel ANOVA
Tool
 Data Analysis tool: ANOVA: Single Factor
◦ The input range of the data must be in contiguous
columns
Example 7.14: Continued
 Results

◦ F = 3.92
◦ Fcrit = 3.46
◦ F > Fcrit
◦ p-value = 0.0356
◦ Reject H0.
Assumptions of ANOVA
 The m groups or factor levels being studied
represent populations whose outcome measures
1. are randomly and independently obtained,
2. are normally distributed, and
3. have equal variances.

 If these assumptions are violated, then the level

of significance and the power of the test can be
affected.
Chi-Square Test for Independence
 Test for independence of two categorical
variables.
◦ H0: two categorical variables are independent
◦ H1: two categorical variables are dependent
Example 7.15: Independence and Marketing
Strategy
 Energy Drink Survey data. A key marketing question is whether the
proportion of males who prefer a particular brand is no different from
the proportion of females.
◦ If gender and brand preference are indeed independent, we would expect that
about the same proportion of the sample of female students would also prefer
brand 1.
◦ If they are not independent, then advertising should be targeted differently to
males and females, whereas if they are independent, it would not matter.
Chi-Square Test Calculations
 Step 1: Using a cross-tabulation of the data, compute
the expected frequency if the two variables are
independent.
Example 7.16: Computing Expected
Frequencies
Chi-Square Test Calculations
 Step 2: Compute a test statistic, called a chi-square
statistic, which is the sum of the squares of the
differences between observed frequency, fo, and
expected frequency, fe, divided by the expected
frequency in each cell:
Chi-Square Distribution
 The sampling distribution of C2 is a special distribution
called the chi-square distribution.
◦ The chi-square distribution is characterized by degrees of
freedom.
◦ Table 3 in Appendix A
Chi-Square Test Calculations
(continued)
 Step 3: Compare the chi-square statistic for the level of
significance a to the critical value from a chi-square
distribution with (r – 1)(c – 1) degrees of freedom, where r and
c are the number of rows and columns in the cross-tabulation
table, respectively.
◦ The Excel function CHISQ.INV.RT(probability, deg_ freedom) returns the
value of C2 that has a right-tail area equal to probability for a specified
degree of freedom.
◦ By setting probability equal to the level of significance, we can obtain the
critical value for the hypothesis test.
◦ The Excel function CHISQ.TEST(actual_range, expected_range)
computes the p-value for the chi-square test.
Example 7.17: Conducting the Chi-Square
Test
 Test statistic = 6.49
 d.f. = (2 – 1)(3 – 1) = 2
 Critical value =
CHISQ.INV.RT(0.05,2) = 5.99
 p-value =
CHISQ.TEST(F6:H7,F12:H13)
= 0.0389
 Reject H0

Test
statistic