BUSI3007

BUSINESS RESEARCH METHODS

LECTURE 7: HYPOTHESIS TESTING I

REFERENCE

Statistical techniques in Business and Economics, Lind, Marchal

and Wathen, 16th edition

Chapter 10 (pg. 313 339), Chapter 11 (pg. 349 355)

2
OVERVIEW
What is Hypothesis Testing?
Six-Step Procedure for Testing a Hypothesis
One-Tailed and Two-Tailed Tests of Significance
(Testing a Population Mean ( ) Known
p Value in Hypothesis Testing
(Testing a Population Mean ( ) Unknown
Two-Sample Tests of Hypothesis: Independent Samples

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WHAT IS HYPOTHESIS
TESTING?
HYPOTHESIS
A statement about the value of a population parameter developed
for the purpose of testing.

HYPOTHESIS TESTING
A procedure based on sample evidence and probability theory to
determine whether the hypothesis is a reasonable statement.

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SIX-STEP PROCEDURE FOR T
ESTING A HYPOTHESIS

5
STEP 1: NULL AND ALTERNA
TE HYPOTHESIS
NULL HYPOTHESIS
A statement about the value of a population parameter developed
for the purpose of testing numerical evidence.

ALTERNATE HYPOTHESIS
A statement that is accepted if the sample data provide sufficient
evidence that the null hypothesis is false.

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STEP 1: NULL AND ALTERNA
TE HYPOTHESIS
Important Things to Remember about H0 and H1
H0: null hypothesis and H1: alternate hypothesis
H0 and H1 are mutually exclusive and collectively exhaustive
H0 is always presumed to be true
A random sample (n) is used to reject H0
If we conclude 'do not reject H0', this does not necessarily m
ean that the null hypothesis is true, it only suggests that ther
e is not sufficient evidence to reject H0; rejecting the null hyp
othesis then, suggests that the alternative hypothesis may b
e true.
Equality is always part of H0 (e.g. = , , ).
< and > always part of H1

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STEP 2: LEVEL OF SIGNIFICA
NCE
The significance level of a test:
Defined as the probability of rejecting the null hypothesis when
it is actually true.
This is denoted by the Greek letter .
Also known as Type I Error.
We select this probability prior to collecting data and testing th
e hypothesis.

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STEP 2: LEVEL OF SIGNIFICA
NCE
Another possible error:
The probability of not rejecting the null hypothesis when it is ac
tually false.
This is denoted by the Greek letter .
Also known as Type II Error.
We cannot select this probability.

9
STEP 3: TEST STATISTIC
TEST STATISTIC
A value, determined from sample information, used to determine
whether to fail to reject or reject the null hypothesis.

To test hypotheses about population means we use the z or t-stati

stic. For hypotheses about population variances, we use the F-st
atistic.

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STEP 4: DECISION RULE
A decision rule is a statement of the specific conditions under whi
ch the null hypothesis is rejected and the conditions under which i
t is not rejected.

CRITICAL VALUE
Based on the selected level of significance, the critical value is th
e dividing point between the region where the null hypothesis is re
jected and the region where it is not rejected.

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STEP 4: DECISION RULE
One-tail vs. Two-tail Test

Test is one-tailed if H1 states > or < . If H1 states a direction, t

est is one-tailed.

Example of one-tailed test:

H0: The mean income of woman stock brokers is less than or equ
al to $65000 per year.
H1: The mean income of woman stock brokers is greater than $65
000 per year.

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STEP 4: DECISION RULE
Example of two-tailed test:

H0: The mean income of woman stock brokers is equal to $65000

per year.
H1: The mean income of woman stock brokers is not equal to $65
000 per year.

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STEP 5: TAKE A SAMPLE, AR
RIVE AT A DECISION
Identify an unbiased sample.
Collect the data on the relevant variables.
Calculate test statistics.
Compare the test statistic to the critical value.
Make a decision, i.e., reject or fail to reject the null hypothesis.

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STEP 6: INTERPRET THE RES
ULT
What does the decision to reject or fail to reject the null hypothesi
s mean in the context of the study?

15
TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Jamestown Steel Company manufactures and assembles desks

and other office equipment . The weekly production of the Model
A325 desk at the Fredonia Plant follows the normal probability dis
tribution with a mean of 200 and a standard deviation of 16. Rece
ntly, new production methods have been introduced and new emp
loyees hired. The VP of manufacturing would like to investigate w
hether there has been a change in the weekly production of the M
odel A325 desk. The mean number of desks produced last year
(50 weeks) is 203.5
Is the mean number of desks produced at the Fredonia Plant diffe
rent from 200 at the 0.01 significance level?

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 1: State the null hypothesis and the alternate

hypothesis.
H0: = 200
H1: 200

Step 2: Select the level of significance.

= 0.01 as stated in the problem

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 3: Select the test statistic.

Use z-distribution since is known

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 4: Formulate the decision rule.

The decision is formulated by finding the critical values.

Since this is a two-tailed test, half of 0.01, or 0.005 is placed in ea

ch tail.

The area where H0 is not rejected, located between the two tails is
0.99.

Hence the area between 0 and the critical value is 0.4950.

The critical value (z- value) associated with an area of 0.4950 is 2

.58.

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 4: Formulate the decision rule.

The decision rule is:

Reject H0 if the computed value of z is not between -2.58 and +2.5

8.

Do not reject H0 if z falls between -2.58 and +2.58.

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 5: Make a decision.

Because 1.55 does not fall in the rejection region, H0 is not rejected.

Step 6: Interpret the result.

We conclude that the population mean is not different from 200. So we w
ould report to the vice president of manufacturing that the sample evidenc
e does not show that the production rate at the plant has changed from 2
00 per week.

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Suppose in the previous problem the vice president wants to kno

w whether there has been an increase in the number of units ass
embled. To put it another way, can we conclude, because of the i
mproved production methods, that the mean number of desks ass
embled was more than 200?

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 1: State the null hypothesis and the alternate

hypothesis.
H0: 200
H1: > 200

Step 2: Select the level of significance.

= 0.01 as stated in the problem

Step 3: Select the test statistic.

Use Z-distribution since is known

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 4: Formulate the decision rule.

The decision is formulated by finding the critical values of z.

In a one-tailed test, we put all the rejection region in one tail.

For a one-tailed test, the critical value is 2.33, found by:

1. Subtracting 0.01 from 0.500.
2. Finding the z value corresponding to 0.4900.

The decision rule is to reject H0 if the computed z-value is more th

an 2.33.

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TESTING FOR A POPULATION MEAN WIT
H A KNOWN POPULATION STANDARD DE
VIATION

Step 5: Make a decision.

Because 1.55 does not fall in the rejection region, H0 is not rejecte
d.

Step 6. Interpret the result.

Based on the evidence, we cannot conclude that the average nu
mber of desks assembled has increased because of the improved
production method.

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P-VALUE IN HYPOTHE
SIS TESTING
A p-value is the probability of observing a sample value as ext
reme as, or more extreme than, the value observed (the test st
atistic), given that the null hypothesis is true.

In testing a hypothesis, we can also compare the p-value to t

he significance level ().

Decision rule using the p-value:

Reject H0 if p-value < significance level.

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P-VALUE IN HYPOTHE
SIS TESTING
Recall the last problem where the hyp
othesis and decision rules were set up
as:

H0: 200
H1: > 200
Reject H0 if z > Critical value
where z = 1.55 and
Critical value =2.33

Reject H0 if p-value <

0.0606 is not < 0.01

Conclude: Fail to reject H0

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TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

When the population standard deviation () is unknown, the samp

le standard deviation (s) is used in its place
The t-distribution is used as test statistic, which is computed using
the formula:

with n 1 degrees of freedom.

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TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

The McFarland Insurance Company Claims Department reports t

he mean cost to process a claim is $60. An industry comparison s
howed this amount to be larger than most other insurance compa
nies, so the company instituted cost-cutting measures. To evaluat
e the effect of the cost-cutting measures, the supervisor of the Cla
ims Department selected a random sample of 26 claims processe
d last month. The sample information is reported below.
At the .01 significance level is it reasonable a claim is now less th
an $60?

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TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

Step 1: State the null hypothesis and the alternate hypothes

is.

H0: $60
H1: < $60

Step 2: Select the level of significance.

= 0.01 as stated in the problem

Step 3: Select the test statistic.

Use t-distribution since is unknown

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TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

Step 4: Formulate the decision rule.

df = 26 1 = 25

Find the critical value (t value) associated with a df of 25 and an

of 0.01 from the t-distribution table.

The t value associated with a df of 25 and an of 0.01 is 2.485.

This is a one-tailed test and the rejection region is in the left tail, h
ence the critical value is -2.485.

The decision rule is to reject H0 if the computed t-value is less tha

n -2.485.

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TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

32
TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

Step 5: Make a decision.

(computed from sample data)

Because -1.818 does not fall in the rejection region, H 0 is not reje
cted at the .01 significance level.

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TESTING FOR THE POPULATION MEAN:
POPULATION STANDARD DEVIATION UN
KNOWN

Step 6: Interpret the result.

We have not demonstrated that the cost-cutting measures reduce

d the mean cost per claim to less than $60. The difference of $3.5
8 ($56.42 - $60) between the sample mean and the population m
ean could be due to sampling error. The test results do not allow t
he claims department to conclude that the cost cutting measures
have been effective.

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COMPARING TWO POP
ULATIONS
Examples:
1. Is there a difference in the mean value of residential real estat
e sold by male agents and female agents in south Florida?
2. Is there a difference in the mean number of defects produced
on the day and the afternoon shifts at Kimble Products?
3. Is there a difference in the mean number of days absent betw
een young workers (under 21 years of age) and older workers
(more than 60 years of age) in the fast-food industry?

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TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

Main Assumptions
The two populations follow normal distributions.
The samples are from independent populations.
The standard deviations for both populations must be known.

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TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

The formula for computing the value of z is:

X1 X 2
z
12 22

n1 n2

37
TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

The U-Scan facility was recently installed at the Byrne Road Foo
d-Town location. The store manager would like to know if the mea
n checkout time using the standard checkout method is longer tha
n using the U-Scan. She gathered the following sample informatio
n. The time is measured from when the customer enters the line u
ntil their bags are in the cart. Hence the time includes both waiting
in line and checking out.

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TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

Step 1: State the null and alternate hypotheses.

H0: S U
H1: S > U

Step 2: Select the level of significance.

The 0.01 significance level is selected.

Step 3: Determine the appropriate test statistic.

We assume that the two population distributions are both norm
al and since both population standard deviations are known, w
e can use z-distribution as the test statistic.

39
TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

Step 4: Formulate a decision rule.

Reject H0 if z > 2.33

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TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

Step 5: Compute the value of z and make a decision

Xs Xu
z
s2 u2

ns nu
5.5 5The
.3 computed value of 3.13 is l
than the critical value of
arger 2.33. Our decisio
2 2
0 .40
n is to reject the 0 . 30 null hypothesis.

50 100
0.2
3.13
0.064

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TWO-SAMPLE TESTS OF HYPOTHE
SIS: INDEPENDENT SAMPLES

Step 6: Interpret the result.

The difference of .20 minutes between the mean checkout time us
ing the standard method is too large to have occurred by chance.
We conclude the U-Scan method is faster.

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