Topic 8: Confidence Interval, Confidence Level

Kumar Mukherjee PhD

Concept of Confidence Interval (CI) and Confidence Level: Learning ObjectivesWhy these are important? How to Calculate CI? Relationship between CI and Confidence Level Effect of Sample Size on Width of CI

What is an Error probability?

Concept of CI
Sample statistic is used to make a best guess about parameter value in the population. Note that this parameter value is just a number in this case. It is also called a point estimate. However, for better information about the parameter value, we are not only interested to know about the point estimate, we are also interested to know about how close is our estimate to true population parameter (which is actually unknown)

Confidence Interval (CI)

Precision of the point estimate actually determines how close our estimate is to unknown population parameter. This requires to create an interval estimate ( i.e., an interval of numbers) around the point estimate within which the value of the parameter is believed to fall. This interval is called Confidence Interval (CI).

Confidence Interval (CI)

We want to be very sure that our parameter value falls within that interval, so the probability of the parameter falling within that interval is very close to 1. Normally, we try to be at least 95% confident that the CI contains the parameter value. For more precision, we want to be at least 99% confident.

What is a Confidence Level?

Confidence level is the probability that a confidence interval contains the parameter. So for a 95% CI , the confidence level is equal to 0.95 Similarly for a 85% CI, the confidence level is equal to 0.85

Constructing a CI
Sampling distribution of the point estimate is used to construct CI of the parameter. This sampling distribution is normal in most of cases. To construct CI, we add and subtract some multiple (z-score) of standard error of mean of the sampling distribution from the point estimate.

Formula to Calculate CI
CI of the population mean : Point estimate of mean z-score *(standard error of mean) = Y ( z score) * y Y ( z score) * n

In practice we dont know , so we estimate it by sample std. deviation s. s CI uses estimated standard error =
n

[z-score *(standard error of mean)] is also called Margin of Error

Example
Suppose the mean annual family income of a sample of 100 randomly selected households is $30,000 and the standard deviation is $1000. Find the point estimates of population mean and std deviation. Construct and interpret a 95% CI for population mean .

Example
By Central Limit Theorem, for large random samples, the sampling distribution of sample mean income is approximately normal about the population mean income . So, = $30,000 1000 100 Std error of mean = 100 From z-table we know that correspond to area in two tails = 0.05, the z-score is 1.96 95% CI for population mean = 30,000 1.96(100) = (29804, 30196)

Interpreting the 95% CI

The 95% CI (29804, 30196) found here is an interval estimate of population mean income for household. We can be 95% confident that this interval contains the actual population mean income. The point estimate of population mean income is $30,000 and we can be 95% confident that population mean income for household is not less than $29804 and not greater than $30,196

Can you construct a 90% CI for Population mean in the above example?
From z-table we see that correspond to area in two tails = 0.1, the z-score is 1.645 90% CI for population mean = 30,000 1.645(100) = (29835.5, 30164.5) Width of 90% CI = (30164.5 - 29835.5) = 329 Width of 95% CI = (30196 - 29804) = 392

Based on the last example what can you conclude about the relationship between Confidence Level and the Width of the Confidence Interval?

Answer
For a 0.9 Confidence level Width of CI is equal to 329. For a 0.95 Confidence level Width of CI is equal to 392. - As the Confidence Level Increases, the Width of CI also Increases.

Relationship Between Sample Size of a random sample and the Width of CI

Formula of CI of the population mean :
Y ( z score) * y Y ( z score) * n

As n increases,(/Sqrt (n)) decreases. So, the Width of CI decreases. Can you intuitively argue why the width of CI decreases as the sample size increases? Can you tell us what is the relationship between std. deviation of the sample and the width of CI?

What is an Error Probability ()?

It is the probability that a confidence interval does not contain the parameter of interest. Error probability = 1 Confidence Level For a confidence level of 0.95, the error probability is (1 0.95 ) = 0.05 This implies the probability that CI does not contain the parameter of interest is equal to 0.05. So, = 0.05