BALT3301 Managerial Decision Making Under Uncertainty

Chapter 6 Sampling and Estimation

Zhen Liu, PhD
Goodwin College of Business
Benedictine University

Email: zliu@ben.edu
http:/www.linkedin.com/in/zhenliu
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Chapter 6
Sampling and
Estimation
Topics
 Sampling
◦ Statistical sampling
◦ Estimating population parameters
◦ Sampling error
◦ Sampling distributions
 Estimation
◦ Interval estimate
◦ Confidence intervals (CIs)
◦ Using CIs for decision making
◦ Prediction intervals
◦ Cis and sample size

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publishing as Prentice Hall 6-4
Review on Sampling
◦ Population—consists of all items of interest
in a statistical problem.
 Population Parameter is unknown.
◦ Sample—a subset of the population.
 Sample Statistic is calculated from sample and
used to make inferences about the population.
 Bias—the tendency of a sample statistic to
systematically over- or underestimate a
population parameter.
Statistical Sampling
 Sampling is the foundation of statistical analysis.
 Sampling plan - a description of the approach that is
used to obtain samples from a population prior to any
data collection activity.
 A sampling plan states:
- its objectives
- target population
- population frame (the list from which the sample is
selected)
- operational procedures for collecting data
- statistical tools for data analysis
Example 6.1: A Sampling Plan for a
Market Research Study
 A company wants to understand how golfers might
respond to a membership program that provides
discounts at golf courses.
◦ Objective - estimate the proportion of golfers who would join the
program
◦ Target population - golfers over 25 years old
◦ Population frame - golfers who purchased equipment at particular
stores
◦ Operational procedures - e-mail link to survey or direct-mail
questionnaire
◦ Statistical tools - PivotTables to summarize data by demographic
groups and estimate likelihood of joining the program
Sampling Methods
 Subjective Methods
 Judgment sampling – expert judgment is used to select
the sample
 Convenience sampling – samples are selected based
on the ease with which the data can be collected
 Probabilistic Sampling
 Simple random sampling involves selecting items from
a population so that every subset of a given size has an
equal chance of being selected
Topics
 Sampling
◦ Statistical sampling
◦ Estimating population parameters
◦ Sampling error
◦ Sampling distributions
 Estimation
◦ Interval estimate
◦ Confidence intervals (CIs)
◦ Using CIs for decision making
◦ Prediction intervals
◦ Cis and sample size

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publishing as Prentice Hall 6-9
Point Estimation
 Estimating Population Parameters
◦ Unbiased Estimators
◦ Errors in Point Estimation
 Sampling Error
◦ Understanding Sampling Error

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Sampling Error
 Sampling (statistical) error occurs because
samples are only a subset of the total population
◦ Sampling error is inherent in any sampling process,
and although it can be minimized, it cannot be totally
avoided.
 Nonsampling error occurs when the sample
does not represent the target population
adequately .
◦ Nonsampling error usually results from a poor sample
design or inadequate data reliability.
Example 6.3: A Sampling Experiment
 A population is uniformly distributed between 0
and 10.
◦ Mean = (0 + 10)/2 = 5
◦ Variance = (10 − 0)2/12 = 8.333
 Experiment:
◦ Generate 25 samples of size 10 from this population.
◦ Compute the mean of each sample.
◦ Prepare a histogram of the 250 observations,
◦ Prepare a histogram of the 25 sample means.
◦ Repeat for larger sample sizes and draw comparative
conclusions.
Example 6.3: Experiment Results

Note that the average of all the sample means

is quite close the true population mean of 5.0.
Topics
 Sampling
◦ Statistical sampling
◦ Estimation and sampling distributions
◦ Sampling error
◦ Sampling distributions
 Estimation
◦ Interval estimate
◦ Confidence intervals (CIs)
◦ Using CIs for decision making
◦ Prediction intervals
◦ Cis and sample size

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 6-14
Sampling Distributions

 Sampling Distribution of the Mean

 Applying the Sampling Distribution of the Mean

(Central Limit Theorem)

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publishing as Prentice Hall 6-15
 Sampling Distribution of the Means
• Population is described by parameters.
 A parameter is a constant, whose value may be unknown.
 Only one population.
• Sample is described by statistics.
 A statistic is a random variable whose value depends on
the chosen random sample.
 Statistics are used to make inferences about the
population parameters.
 Can draw multiple random samples of size n.
Sampling Distribution of the Means
• Estimator
 A statistic that is used to estimate a population
parameter.
 For example, X , the mean of the sample, is an
estimator of , the mean of the population.
• Estimate
 A particular value of the estimator.
 For example, the mean of the sample x is an
estimate of , the mean of the population.
Estimating Population Parameters
 A point estimate is a single number derived from
sample data that is used to estimate the value of a
population parameter.
 If the expected value of an estimator equals the
population parameter it is intended to estimate, the
estimator is said to be unbiased.
Sampling Distribution of the Means
• Sampling Distribution of the Mean X
 Each random sample of size n drawn from the
population provides an estimate of —the sample
mean x .
 Drawing many samples of size n results in many
different sample means, one for each sample.
 The sampling distribution of the mean is the
frequency or probability distribution of these
sample means.
Example
One simple random
sample drawn from the
  Random Variable     population—a single
X1 X2 X3 X4
Mean of distribution of values of X.
          X
6 10 8 4 5.57
5 10 4 3 5.71
1
4
8
1
4
6
3
2
6.36
4.07
A distribution of means
6 6 8 4 from each random draw
7 7 8 6
1 5 10 5 from the population—a
5
4
5
6
9
4
1
2
sampling distribution.
7 4 9 5
8
9
5
2
8
7
6
7
Means from each
9 1 2 3 distribution (random draw)
6 10 2 6
Means 5.57   5.71   6.36   4.07   5.43
from the population.
Sampling Distribution of the Means
• The Expected Value and Standard Deviation
of the Sample Mean
 Expected Value
• The expected value of X,

E X   
• The expected value, or estimator, of the mean,

 
E X  E X   
Sampling Distribution of the Means
• The Expected Value and Standard Deviation
of the Sample Mean
 Variance of X Var  X    2

 Standard Deviation and Standard Error

• of X
SD  X    2  
The standard error is the
• of X standard deviation of the
sampling distribution for all
samples of size n.
Example 6.5: Computing the Standard
Error of the Mean
 For the uniformly distributed population, we found
s2 = 8.333 and, therefore, s = 2.89
Central Limit Theorem
1. If the sample size (n > 30) is large enough , then the
sampling distribution of the mean is:
- approximately normally distributed regardless
of the distribution of the population
- has a mean equal to the population mean
2. If the population is normally distributed, then the
sampling distribution is also normally distributed for any
sample size.
◦ The central limit theorem allows us to use the theory we learned
about calculating probabilities for normal distributions to draw
conclusions about sample means.
Applying the Sampling Distribution of
the Mean
 The key to applying sampling distribution of the
mean correctly is to understand whether the
probability that you wish to compute relates to an
individual observation or to the mean of a sample.
◦ If it relates to the mean of a sample, then you must use
the sampling distribution of the mean, whose standard
deviation is the standard error, not the standard deviation
of the population.
 Example: Pizza Chain
• The chefs at a local pizza chain in Cambria,
California, strive to maintain the suggested size
of their 16-inch pizzas. Despite their best
efforts, they are unable to make every pizza
exactly 16 inches in diameter.
• The manager has determined that the size of
the pizzas is normally distributed with a mean
of 16 inches and a standard deviation of 0.8
inch.
Adopted from Cengage Slides 26
 Example: Pizza Chain
• Example: Given that  = 16 inches and σ = 0.8 inches,
determine the following:
 What is the probability that a randomly selected pizza is less
than 15.5 inches?
• x   15.5  16
Z


0.8
 0.63 𝑃(𝑋<15.5)=𝑃(𝑍<−0.63)
 What is the probability that 2 randomly selected pizzas average
less than 15.5 inches?

𝑃( 𝑋¯ <15.5)=𝑃(𝑍<−0.88)
•
x  15.5  16
Z   0.88
 n 0.8 2

LO 7.3
 Example: Pizza Chain
• Example: Given that  = 16 inches and σ = 0.8 inches,
determine the following:
 What is the probability that a randomly selected pizza is less
than 15.5 inches?
• There are two ways to calculate this. Either calculate the Z score and
then use NORM.S.DIST to look up the associated probability, or calculate
the probability directly with NORM.DIST
• The answers will be slightly different because of the error introduced by
rounding the Z score to two decimal places.
n= 1
se 0.8
z= -0.6250
P(X<z) = 0.266
P(X<z) = 0.266
• see spreadsheet on file: Chapter 6 Sampling and Estimation_d2l.xls
LO 7.3
 Example: Pizza Chain
• Example: Given that  = 16 inches and σ = 0.8 inches,
determine the following:
 What is the probability that 2 randomly selected pizzas average
less than 15.5 inches?
• The answers produced by NORM.S.DIST and NORM.DIST are slightly
different because of the error introduced by rounding the Z score to two
decimal places.

n= 2 There are 2 pizzas in the sample

se 0.565685 <-- =0.8/SQRT(2)

z= -0.8839 <-- =(15.5-16)/B2

P(X<z) = 0.1884 <-- =NORM.S.DIST(B3,1)
P(X<z) = 0.1884 <-- =NORM.DIST(15.5,16,B2,1)

LO 7.3
• Tuesday 1/31/23

Adopted from Cengage Slides 30

Example 6.6: Using the Standard Error in
Probability Calculations
 The purchase order amounts for books on a publisher’s Web site is
normally distributed with a mean of $36 and a standard deviation of
$8.
 Find the probability that:
a) someone’s purchase amount exceeds $40.

Use the population standard deviation:

P(x > 40) = 1− NORM.DIST(40, 36, 8, TRUE) = 0.3085

b) the mean purchase amount for 16 customers exceeds $40.

Use the standard error of the mean:

P(x > 40) = 1− NORM.DIST(40, 36, 2, TRUE) = 0.0228
See file: Chapter 6 Sampling and Estimation_d2l.xls
Topics
 Sampling
◦ Statistical sampling
◦ Estimating population parameters
◦ Sampling error
◦ Sampling distributions
 Estimation
◦ Interval estimate
◦ Confidence intervals (CIs)
◦ Using CIs for decision making
◦ Prediction intervals
◦ CIs and sample size

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 6-32
Estimation

 Interval Estimates
 Confidence Intervals

◦ Confidence Interval for the Mean with Known Population

Standard Deviation
◦ The t-Distribution
◦ Confidence Interval for the Mean with Unknown Population
Standard Deviation
◦ Confidence Interval for a Proportion
◦ Additional Types of Confidence Intervals
 Using Confidence Intervals for Decision Making
 Prediction Intervals
 Confidence Intervals and Sample Size

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 6-33
Recall Point Estimator/Estimate
• Point Estimator
 A function of the random sample used to make inferences
about the value of an unknown population parameter.
 For example, X is a point estimator for 
• Point Estimate
 The value of the point estimator derived from a given
sample.
 For example, x  96.5 is a point estimate of the mean
mpg for all ultra-green cars.
Interval Estimates
 Often it is more informative to provide a range of values rather
than a single point estimate for the unknown population
parameter.
 Confidence Interval—provides a range of values that, with a

certain level of confidence, contains the population parameter of

interest.
Also referred to as an interval estimate.

 Construct a confidence interval as:



Point estimate ± Margin of error.

Margin of error accounts for the variability of the estimator and the
desired confidence level of the interval.
Interval Estimates
 An interval estimate provides a range for a population
characteristic based on a sample.
◦ Intervals specify a range of plausible values for the characteristic
of interest and a way of assessing “how plausible” they are.
 In general, a 100(1 - a)% probability interval is any
interval [A, B] such that the probability of falling between
A and B is 1 - a.
◦ Probability intervals are often centered on the mean or median.
◦ Example: in a normal distribution, the mean plus or minus 1
standard deviation describes an approximate 68% probability
interval around the mean.
Example 6.7: Interval Estimates in the
News
 A Gallup poll might report that 56% of voters
support a certain candidate with a margin of error
of ± 3%.
◦ We would have a lot of confidence that the candidate
would win since the interval estimate is [53%, 59%]
 Suppose the poll reported a 52% level of support
with a ± 4% margin of error.
◦ We would be less confident in predicting a win for the
candidate since the interval estimate is [48%, 56%].
 •
 Level of significance (i.e., probability of error)
= α.
 Confidence coefficient = (1 − α)

α = 1 − confidence coefficient
• A confidence coefficient of 0.95 implies that
 the probability of error α equals 1 – 0.95 =
0.05 and the confidence level equals 100(1 –
0.05)% = 95%.
• Similarly, for a 90% confidence interval,
 the confidence coefficient equals 0.90 and α
= 1 – 0.90 = 0.10.

LO 8.2
Remark on Confidence Intervals
 A confidence interval is a range of values between
which the value of the population parameter is believed
to be, along with a probability that the interval correctly
estimates the true (unknown) population parameter.
◦ This probability is called the level of confidence, denoted by 1 -
a, where a is a number between 0 and 1.
◦ The level of confidence is usually expressed as a percent;
common values are 90%, 95%, or 99%.
 For a 95% confidence interval, if we chose 100 different
samples, leading to 100 different interval estimates, we
would expect that 95% of them would contain the true
population mean.
Remark on Confidence Intervals
 It does not imply that the probability that μ falls in
the confidence interval is 0.95.
◦ μ is a constant, although its value is not known. It either
falls in the interval (probability equals one) or does not
fall in the interval (probability equals zero).
 Informally, we can report with 95% confidence that
μ lies in the given interval.

Adopted from McGraw Hill 40

Confidence Interval for the Mean with
Known Population Standard Deviation

 Sample mean ± margin of error

 Margin of error is: ± zα/2 (standard error)
 zα/2 is the value of the standard normal random variable for
an upper tail area of α/2 (or a lower tail area of 1 − α/2).
◦ zα/2 is computed as =NORM.S.INV(1 – a/2)
◦ Example: if a = 0.01 (for a 99% confidence interval), then
NORM.S.INV(0.995) = 2.575;
◦ Example: if a = 0.05 (for a 95% confidence interval), then
NORM.S.INV(0.975) = 1.96;
◦ Example: if a = 0.10 (for a 90% confidence interval), then
NORM.S.INV(0.95) = 1.645,
◦ See file: Chapter 6 Sampling and Estimation_d2l.xls
Example 6.8: Computing a Confidence
Interval with a Known Standard Deviation
 A production process fills bottles of liquid detergent. The
standard deviation in filling volumes is constant at 15
mls. A sample of 25 bottles revealed a mean filling
volume of 796 mls.
 A 95% confidence interval estimate of the mean filling
volume for the population is

 See file: Chapter 6 Sampling and Estimation_d2l.xls

Excel Workbook for Confidence Intervals
 The worksheet Population Mean Sigma Known in the
Excel workbook Confidence Intervals computes this
interval using the CONFIDENCE.NORM function
Confidence Interval Properties
 As the level of confidence, 1 - a, decreases, za/2
decreases, and the confidence interval becomes
narrower.
◦ For example, a 90% confidence interval will be narrower than a
95% confidence interval. Similarly, a 99% confidence interval will
be wider than a 95% confidence interval.
 Essentially, you must trade off a higher level of accuracy
with the risk that the confidence interval does not contain
the true mean.
◦ To reduce the risk, you should consider increasing the sample
size.
Estimation

 Interval Estimates
 Confidence Intervals

◦ Confidence Interval for the Mean with Known Population

Standard Deviation
◦ The t-Distribution
◦ Confidence Interval for the Mean with Unknown Population
Standard Deviation
◦ Confidence Interval for a Proportion
◦ Additional Types of Confidence Intervals
 Using Confidence Intervals for Decision Making
 Prediction Intervals
 Confidence Intervals and Sample Size

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publishing as Prentice Hall 6-45
The t-Distribution
 The t-distribution is a family of probability distributions
with a shape similar to the standard normal distribution.
Different t-distributions are distinguished by an additional
parameter, degrees of freedom (df).
◦ As the number of degrees of freedom increases, the t-distribution
converges to the standard normal distribution
The t-Distribution
• Summary of the tdf Distribution
 Bell-shaped and symmetric around 0 with
asymptotic tails (the tails get closer and closer to
the horizontal axis, but never touch it).
 Has slightly broader tails than the normal
distribution.
Confidence Interval for the Mean with
Unknown Population Standard Deviation

where tα/2 is the value of the t-distribution with

df = n − 1 for an upper tail area of α/2.
 t values are found in Table 2 of Appendix A or with the
Excel function T.INV(1 – a/2, n – 1).
 The Excel function
=CONFIDENCE.T(alpha, standard_deviation, size)
can be used to compute the margin of error
Example 6.9: Computing a Confidence
Interval with Unknown Standard Deviation
 Excel file Credit Approval Decisions. Find a 95% confidence interval
estimate of the mean revolving balance of homeowner applicants
(first, sort the data by homeowner).
 Sample mean = $12,630.37; s = $5393.38; standard error =
$1037.96; t0.025, 26 = 2.056.

12,630.37 ± 2.056(5393.38/√27)

 See file: Chapter 6 Sampling and Estimation_d2l.xls

Estimation

 Interval Estimates
 Confidence Intervals

◦ Confidence Interval for the Mean with Known Population

Standard Deviation
◦ The t-Distribution
◦ Confidence Interval for the Mean with Unknown Population
Standard Deviation
◦ Confidence Interval for a Proportion
◦ Additional Types of Confidence Intervals
 Using Confidence Intervals for Decision Making
 Prediction Intervals
 Confidence Intervals and Sample Size

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 6-50
Confidence Interval for a Proportion
 An unbiased estimator of a population proportion
p (this is not the number pi = 3.14159 …) is the
statistic pˆ = x / n (the sample proportion), where
x is the number in the sample having the desired
characteristic and n is the sample size.
 A 100(1 – a)% confidence interval for the

proportion is
Example 6.10: Computing a Confidence
Interval for a Proportion
 Insurance Survey. We are interested in the proportion of
individuals who would be willing to pay a lower premium
for a higher deductible for their health insurance.
◦ Sample proportion = 6/24 = 0.25.
 Confidence interval:

 See file: Chapter 6 Sampling and Estimation_d2l.xls

 Example 6.11: Drawing a Conclusion about a
Population Mean Using a Confidence Interval
 In Example 6.8, the required volume for the bottle-filling
process is 800 and the sample mean is 796 mls. We
obtained a confidence interval [790.12, 801.88]. Should
machine adjustments be made?

Although the sample mean is

less than 800, the sample does
not provide sufficient evidence
to draw that conclusion that the
population mean is less than
800 because 800 is contained
within the confidence interval.
Estimation

 Interval Estimates
 Confidence Intervals

◦ Confidence Interval for the Mean with Known Population

Standard Deviation
◦ The t-Distribution
◦ Confidence Interval for the Mean with Unknown Population
Standard Deviation
◦ Confidence Interval for a Proportion
◦ Additional Types of Confidence Intervals
 Using Confidence Intervals for Decision Making
 Prediction Intervals
 Confidence Intervals and Sample Size

Copyright © 2013 Pearson Education, Inc.

publishing as Prentice Hall 6-54
Confidence Intervals and Sample Size
 We can determine the appropriate sample size needed
to estimate the population parameter within a specified
level of precision (± E).
 Sample size for the mean:

 Sample size for the proportion:

◦ Use the sample proportion from a preliminary sample as an

estimate of p or set p = 0.5 for a conservative estimate to
guarantee the required precision.
Example 6.14: Sample Size Determination
for the Mean
 In Example 6.8, the sampling error was ± 5.88 mls.
 What is sample size is needed to reduce the margin of
error to at most 3 mls?

Round up to
97 samples.
Example 6.15: Sample-Size
Determination for a Proportion
 For the voting example we discussed, suppose
that we wish to determine the number of voters to
poll to ensure a sampling error of at most ± 2%.
With no information, use p = 0.5: