Statistics for Management

Q1.

Statistics plays a vital role in almost every facet of human life. Describe the functions of
Statistics. Explain the applications of statistics.

Ans:
Statistics plays an important role in almost every facet of human life. In business context, managers
are required to justify decisions on the basis of data. They need statistical models to support these
decisions. Statistical skills enable managers to collect, analyse and interpret data in order to take
suitable decisions. Statistical concepts and statistical thinking enable them to:
Solve problems in almost every domain
Support their decisions
Reduce guesswork
1. Statistics simplifies mass data: The use of statistical concepts helps in simplification of complex
data. Using statistical concepts, the managers can make decisions more easily. The statistical
methods help in reducing the complexity of the data and in the understanding of any huge mass of
data.
2. Statistics brings out trends and tendencies in the data: After data is collected, it is easy to analyse
the trend and tendencies in the data by using the various concepts of Statistics.
3. Statistics brings out the hidden relations between variables: Statistical analysis helps in drawing
inferences on the data. Statistical analysis brings out the hidden relations between variables.
4. Decision making power becomes easier: With the proper application of Statistics and statistical
software packages on the collected data, managers can take effective decisions, which can increase
the profits in a business.
5. Statistics makes comparison easier: Without using statistical methods and concepts, collection of
data and comparison would be difficult. Statistics helps us to compare data collected from various
sources. Grand totals, measures of central tendency and measures of dispersion, graphs and
diagrams and coefficient of correlation all provide ample scope for comparison.

Application of statistics
In the field of medicine, statistical tools like t-tests are used to test the efficiency of the new drug or
medicine. In the field of economics, statistical tools such as index numbers, estimation theory and
time series analysis are used in solving economic problems related to wages, price, production and
distribution of income. In the field of agriculture, an important concept of statistics such as analysis
of variance (ANOVA) is used in experiments related to agriculture, to test the significance between
two sample means. In Biology, Medicine and Agriculture, Statistical methods are applied in the
following:
Study of the growth of plants
Movement of fish population in the ocean
Migration pattern of birds
Theories of heredity
Estimation of yield of crop
Study of the effect of fertilizers on yield
Birth rate
Death rate
Population growth
Growth of bacteria
Insurance companies decide on the insurance premiums based on the age composition of the
population and the mortality rates. Actuarial science is used for the calculation of insurance

premiums and dividends. Statistics is a part of Economics, Commerce and Business. Statistical
analysis of the variations in price, demand and production are helpful to both businessmen and
economists. Cost of living index numbers help governments in economic planning and fixation of
wages. A governments administrative system is fully dependent on production statistics, income
statistics, labour statistics, economic indices of cost, and price. Economic planning of any nation is
entirely based on the statistical facts. Cost of living index numbers are also used to estimate the
value of money. In business activities, analysis of demand, price, production cost, and inventory
costs help in decision making. Management of limited resources and labour needs statistical
methods to maximise profit. Planned recruitments and distribution of staff, proper quality control
methods, and a careful study of the demand for goods in the market and balanced investment, help
the producer to extract maximum profit out of minimum capital investment. In manufacturing
industries, statistical quality control techniques help in increasing and controlling the quality of
products at a minimum cost. Hence, statistics is applied in every sphere of human activity.
Q2.

a. Explain the various measures of Dispersion.

b. Obtain the values of the median and the two Quartiles.
391

384

591

407

672

522

777

733

2488

1490

Ans:
a.
A measure of Dispersion may be defined as a statistics signifying the extent of the scattering of items
around a measure of central tendency. The property of deviations of values from the average is
called Dispersion or Variation. The degree of variation is found by the measures of variation. They
are as follows:
Range (R), Quartile Deviation (Q.D), Mean Deviation (M.D), Standard Deviation (S.D)
They have units of measurement attached to them. Therefore, they are known as absolute measures
of variation. The relative measures are as follows:
1. Coefficient of Range, 2.Coefficient of Quartile Deviation, 3.Coefficient of Mean Deviation, 4.
Coefficient of Variation
Range (R): Range represents the differences between the values of the extremes. The range of any
sample is the difference between the highest and the lowest values in the series. The values in
between two extremes are not taken into consideration. The range is a simple indicator of the
variability of a set of observations. It is denoted by R. In a frequency distribution, the range is taken
to be the difference between the lower limit of the class at the lower extreme of the distribution and
the upper limit of the class at the upper extreme of the distribution.
Range = Largest value Smallest value = L S
Coefficient of Range = (Largest value Smallest value) / (Largest value + Smallest value)
Quartile deviation (Q.D): Quartiles divide the total frequency in to four equal parts. The lower
quartile Q1 refers to the values of variate corresponding to the cumulative frequency N/4.Q2
corresponds to the value of variate with cumulative frequency equal to N/2.Upper quartile Q3 refers
to the value of variate corresponding to cumulative frequency 3N/4.
Hence, Quartile Deviation QD =1/2(Q3-Q1)
Co-efficient of Quartile Deviation = (Q3 -Q1)/ (Q3 +Q1)

Mean deviation (M.D): Mean deviation is defined as the mean of absolute deviations of the values
from the central value.
For individual series, Mean deviation from Mean is calculated as:

For discrete and continuous series, Mean deviation from Mean is calculated as:

For individual series, Mean deviation from Median is calculated as:

For discrete and continuous series, Mean deviation from Median is calculated as:

In case of continuous series X represents mid value of class-interval. However, mean deviation from
median is the least. The corresponding relative measures are coefficient of Mean Deviation.

Standard deviation: Standard deviation is the root of sum of the squares of deviations divided
by their numbers. It is also called mean square error deviation (or) root mean square deviation. It is
a second moment of dispersion. Since the sum of squares of deviations from the mean is a
minimum, the deviations are taken only from the mean (But not from median and mode).The
standard deviation is root mean square (RMS) average of all the deviations from the mean. It is
denoted by sigma ().
Individual series: There are two methods of calculating standard deviation in an individual
observation or series:
i) When deviations taken from Actual Mean: This method is used only when the mean is a whole
number.

ii) Deviation Taken from Assumed Mean: When the Arithmetic Mean is a fractional value the method
explained in (i) will be tedious and time consuming. Hence we use the following formula.

Where, d stands for the deviation from assumed mean d =X - A, A is assumed mean, f = N
Continuous series: In a continuous series mid-values of the class intervals are to be found out.
Where, X is the mid value of class interval for continuous series.

, A = assumed mean, f = N, i = class width

Where

b.
Median for Individual series

Formula:
Median = Size of (
)thitem ,Where N= total number of items in the series.
Steps for calculation:
1. Arrange the data in ascending or descending order
2. Locate the median by using the formula Size of (
3. The value or the size of the item is the Median

Solution:
Arranging in ascending order, we get
384, 391, 407, 522, 591, 672, 733, 777, 1490, 2488
We have N=10
Median = Size of (

)thitem

Median = (
)th item = 5.5th item
We have to take the average of 5th and 6th item
Median =
=631.5
The median for the given set of values is 631.5
Quartiles for Individual series

Formula:
First quartile,Q1 =

th

item
th

Second quartile, Q2 =
Third quartile,Q3 =

th

item

item

Solution:
Arranging in ascending order, we get
384, 391, 407, 522, 591, 672, 733, 777, 1490, 2488
We have N=10
th
Q1 =
item = (
)thitem = 2.75th item
=2nd Value + 0.75(3rd Value - 2nd Value)
=391 + 0.75(407 - 391) = 403
th
th
Q2 =
item =
item= 5.5th item
=5th Value + 0.5(6th Value 5th Value)
=591 + 0.5(672 - 591) = 631.5

Q3 =

th

item =

th

item= 8.25th item

)thitem

=8th Value +0.25(9th Value 8th Value)

=777 + 0.25(1490 -777) =955.25
Therefore, Q1, Q2, and Q3 are 403, 631.5 and 955.25 respectively.
Q3.

a. What is correlation? Distinguish between positive and negative correlation.

b. Calculate coefficient of correlation from the following data.

X
1
2
3
4
5
6
7
8
9
Y
9
8
10
12
11
13
14
16
15
Ans:
a.
When two or more variables move in sympathy with the other, then they are said to be correlated. If
both variables move in the same direction, then they are said to be positively correlated. If the
variables move in the opposite direction, then they are said to be negatively correlated. If they move
haphazardly, then there is no correlation between them. Correlation analysis deals with the
following:
Measuring the relationship between variables.
Testing the relationship for its significance.
Giving confidence interval for population correlation measure.
Following are some of the definitions:
According to Croxton and Cowden, When the relationship is of a quantitative nature, the
appropriate statistical tool for discovering and measuring the relationship and expressing it in a brief
formula is known as correlation.
According to A.M Tuttle, Correlation is an analysis of the covariation between two or more
variables.
According to W. A. Neiswanger, Correlation analysis contributes to the understanding of economic
behaviour, aids in locating the critically important variables on which others depend, may reveal to
the economist the connections by which disturbances spread, and suggest to him the paths through
which stabilising forces may become effective.
According to Tippett, The effect of correlation is to reduce the range of uncertainty of our
prediction.
Positive and negative correlations:
Both the variables (X and Y) willvary in the same direction. If variable X increases, variable Y also will
increase; and if variable X decreases, variable Y also will decrease; then the correlation in such cases
is known as positive correlation. If the given variables vary in opposite direction, then they are said
to be negatively correlated. If one variable increases, the other variable will decrease. In other
words, the variables are negatively correlated if there is an inverse relationship between the
variables. For example, price and supply of the commodity. On the other hand, correlation is said to
be negative or inverse if the variables deviate in the opposite direction, i.e., if the increase (decrease)
in the values of one variable results, on the average, in a corresponding decrease (increase) in the
values of the other variable. For example, temperature and sale of woolen garments.

b.
Solution: Karl Pearsons correlation coefficient:
Its value always lies between 1 and 1
It is not affected by change of origin or change of scale
It is a relative measure. It does not have any unit attached to it

X2

Y2

XY

1
2

9
8

1
4

81
64

9
16

3
4
5
6
7
8
9

x=45

10
12
11
13
14
16
15

9
16
25
36
49
64
81

100
144
121
169
196
256
225

30
48
55
78
98
128
135

Y=108

X2=285

Y2=1356

XY=597

Applying the formula for r and substituting the respective value from the table we get
r=

=0.95
Q4.

, Therefore Karl Pearsons correlation coefficient is 0.95.

Index number acts as a barometer for measuring the value of money. What are
the characteristics of an index number? State its utility.

Ans:
An index number is a number which is used to measure the level of a certain phenomenon as
compared to the level of the same phenomenon at some standard period. In other words, an index
number is a number which is used as a device for comparison between the price, quantity or value
of a group of articles in different situations for example, at a certain place or a period of time and
that of another place or period of time. When a comparison is with respect to prices, it is called an
index number of price, when it is with respect to physical quantities; it is named as index number of
quantities. Other index numbers are defined in the similar manner. The index numbers are meant
for comparison of variations arising out of the difference in situations, for example, change of time
or change of place.
Utility and Importance of Index Numbers: The primary purpose of index numbers is to measure
relative temporal or cross-sectional changes in a variable or a group of related variables which are
not capable of being directly measured. The greatest purpose of index numbers has been to
measure and compare the changes in prices and purchasing power of money which have received
great attention from economists for many years.
Today, index number is not only used for measuring price changes alone. Factors like wages,
employment, production, trade, demand, supply, business condition, industrial activity, financial
problems etc. are also studied through this statistical device. Just as a barometer measures the
pressure of atmosphere or gases, the index numbers measure the pressure of economic behaviour.
Thus, index numbers are called economic barometers.
Characteristics of Index Numbers
1. Expressed in numbers: Index numbers represent the relative changes such as increase in
production; reduction in prices etc. in the numbers.
2. Expressed in percentage: Index numbers are expressed in terms of percentages so as to show the
extent or relative change where the value of base is assumed to be 100 but the sign of percentage
(%) is not used.
3. Relative measure: Index numbers measure changes which are not capable of direct
measurement.
4. Specified averages: Index number represents a special case of average, in general known as
weighted average. It is a special type of average, because in a simple average, the data is
homogenous having the same unit of measurement, whereas the average variables have different
units of measurement.

5. Basis of comparison: Index numbers by their very nature are comparative. They compare changes
over time or between places or similar categories.
Q5.

Business forecasting acquires an important place in every field of the economy.

Explain the objectives and theories of Business forecasting.

Ans:
Business forecasting refers to the analysis of past and present economic conditions with the object
of drawing inferences about probable future business conditions. The process of making definite
estimates of future course of events is referred to as forecasting and the figure or statements
obtained from the process is known as forecast; future course of events is rarely known. In order to
be assured of the coming course of events, an organised system of forecasting helps. The following
are two aspects of scientific business forecasting:
Analysis of past economic conditions
Analysis of present economic conditions
Objectives of forecasting in business: Forecasting is a part of human nature. Businessmen also need
to look to the future. Success in business depends on correct predictions. In fact when a man enters
business, he automatically takes with it the responsibility for attempting to forecast the future. To a
very large extent, success or failure would depend upon the ability to successfully forecast the future
course of events. Without some element of continuity between past, present and future, there
would be little possibility of successful prediction. Forecasting helps a businessman in reducing the
areas of uncertainty that surround management decision making with respect to costs, sales,
production, profits, capital investment, pricing, expansion of production, extension of credit,
development of markets, increase of inventories and curtailment of loans.
There are a few theories that are followed while making business forecasts are:
1. Sequence or time-lag theory, 2.Action and reaction theory, 3.Economic rhythm theory, 4.
Specific historical analogy, 5. Cross-cut analysis theory
1. Sequence or time-lag theory: This is the most important theory of business forecasting. It is based
on the assumption that most of the business data have the lag and lead relationships, that is,
changes in business are successive and not simultaneous. There is time-lag between different
movements.
2. Action and reaction theory: This theory is based on the following two assumptions.
Every action has a reaction
Magnitude of the original action influences the reaction
When the price of rice goes above a certain level in a certain period, there is a likelihood that after
some time it will go down below the normal level. Thus, according to this theory a certain level of
business activity is normal or abnormal; conditions cannot remain so for ever. Thus, we find four
phases of a business cycle. They are:
1. Prosperity
2. Decline
3. Depression
4. Improvement
3. Economic Rhythm Theory: The basic assumption of this theory is that history repeats itself and
hence assumes that all economic and business events behave in a rhythmic order. According to this
theory, the speed and time of all business cycles are more or less the same and by using statistical
and mathematical methods, a trend is obtained which will represent a long term tendency of growth
or decline. It is done on the basis of the assumption that the trend line denotes thenormal growth or
decline of business events.
4. Specific historical analogy: History repeats itself is the main foundation of this theory. If
conditions are the same, whatever happened in the past under a set of circumstances is likely to
happen in future also. A time series relating to the data in question is thoroughly scrutinised such a

period is selected in which conditions were similar to those prevailing at the time of making the
forecast. However, this theory depends largely on past data.
5. Cross-cut analysis theory: This theory proceeds on the analysis of interplay of current economic
forces. In this method, the combined effects of various factors are not studied. The effect of each
factor is studied independently. Under this theory, forecasting is made on the basis of analysis and
interpretation of present conditions because the past events have no relevance with present
conditions.
Q6.

The weekly wages of 1000 workers are normally distributed around a mean of Rs.
70 and a standard deviation of Rs. 5. Estimate the number of workers whose weekly
wages will be:
a. Between 70 and 72
b. Between 69 and 72
c. More than 75
d. Less than 63
(Formula 2 marks, Calculation/Solution/Interpretation-8 marks)
Ans:
N=1000
=70 =5
a)
Between 70 and 72
P(70 <= X <= 72)
= P(70-70/5 <= X-/ <= 72-70/5)
= P(0<=Z<=2/5)
= P(0<=Z<=0.4)
Area under the curve from 0 to 0.4
log value = 0.1554
Number of workers=1000*0.1554 = 155.4
= 155
b)
Between 69 and 72
P(69 <= x <= 72)
= P(60-70/5 <= x-/ <= 72-70)
=P(-1/5 <= Z <= 2/5)
Area under the curve from 0 to 0.2 + Area under the curve from 0 to 0.4
=0.0793 + 0.1554 = 0.2447
Number of workers = 1000 * 0.2447 = 244.7
=244
c)
More than 75
= p[X-/ > 75-70/5]
= p[Z > 5/5] = P[Z > 1]
0.5 Area under curve from 0 to 1
= 0.5 0.3413 = 0.1587
Number of workers = 1000 * 0.1587 = 158.7 = 158
d)
Less than 63
P[X < 63]
= P[X-/ < 63-70/5]
= P[Z < -7/5]
=P[Z < -1.4]
0.5 Area under from 0 to 1.4
0.5 0.4192 = 0.0808
Number of workers = 1000 * 0.0808
= 80.8 = 80