Bbs14e PPT ch08

Chapter 8
Confidence Interval
Estimation
A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 1

Objectives
In this chapter, you learn:

 To construct and interpret confidence interval estimates
for the mean and the proportion.
 To determine the sample size necessary to develop a
confidence interval for the mean or proportion.

Online Topics For Chapter
 Application of Confidence Interval Estimation In

Auditing: Section 8.6.
 Estimation and Sample Size Estimation for
Finite Population: Section 8.7.
 Bootstrapping: Section 8.8.

Chapter Outline
Content of this chapter

 Confidence Intervals for the Population
Mean, μ:
 when Population Standard Deviation σ is Known.
 when Population Standard Deviation σ is Unknown.
 Confidence Intervals for the Population
Proportion, π.
 Determining the Required Sample Size.

Point and Interval Estimates
DCOVA
 A point estimate is a single number.

 A confidence interval provides additional
information about the variability of the estimate.
Lower Upper
Confidence Confidence
Point Estimate Limit
Limit
Width of
confidence interval

Point Estimates
DCOVA
We can estimate a with a Sample

Population Parameter … Statistic
(a Point Estimate)
Mean μ X
Proportion π p

QUIZ

QUIZ
True or False: A population parameter is used to estimate a

confidence interval.

Confidence Intervals
DCOVA
 How much uncertainty is associated with a

point estimate of a population parameter?
 An interval estimate provides more
information about a population characteristic
than does a point estimate.
 Such interval estimates are called confidence
intervals.

Confidence Interval Estimate
DCOVA
 An interval gives a range of values:
 Takes into consideration variation in sample
statistics from sample to sample.
 Based on observations from 1 sample.
 Gives information about closeness to
unknown population parameters.
 Stated in terms of level of confidence:
 e.g. 95% confident, 99% confident.
 Can never be 100% confident.

QUIZ
True or False: For a given data set, the confidence interval

will be wider for 95% confidence than for 90% confidence.

Confidence Interval Example
DCOVA
Cereal fill example
 Population has µ = 368 and σ = 15.
 If you take a sample of size n = 25 you know:
 368 ± 1.96 * 15 / 25 = (362.12, 373.88) contains 95% of

the sample means of sample size 25.
 95% of the intervals formed in this manner will contain µ.
 When you don’t know µ, you use X to estimate µ.
 If X = 362.3 the interval is 362.3 ± 1.96 * 15 / 25 = (356.42, 368.18).
 Since 356.42 ≤ 368 ≤ 368.18 the interval based on this sample makes
a correct statement about µ.
But what about the intervals from other possible samples

of size 25?

(continued)
DCOVA
Lower Upper Contain
Sample # X
Limit Limit µ?
1 362.30 356.42 368.18 Yes
2 369.50 363.62 375.38 Yes
3 360.00 354.12 365.88 No
4 362.12 356.24 368.00 Yes
5 373.88 368.00 379.76 Yes

(continued)
DCOVA

(continued)
DCOVA
 In practice you only take one sample of size n.
 In practice you do not know µ so you do not
know if the interval actually contains µ.
 However you do know that 95% of the intervals
formed in this manner will contain µ.
 Thus, based on the one sample you actually
selected, you can be 95% confident your
interval will contain µ (this is a 95% confidence
interval).
Note: 95% confidence is based on the fact that we used Z = 1.96.
Estimation Process
DCOVA
Random Sample
We can be 95%
Population Mean confident that
(mean, μ, is X = 50 μ is between 40
unknown) & 60.
Sample

General Formula
DCOVA
 The general formula for all confidence
intervals is:
Point Estimate ± (Critical Value)(Standard Error)
Where:
Point Estimate is the sample statistic estimating the
population parameter of interest.
Critical Value is a table value based on the sampling

distribution of the point estimate and the desired confidence
level.
Standard Error is the standard deviation of the point

estimate.
Confidence Level
DCOVA
 Confidence the interval will contain

the unknown population parameter.
 A percentage (less than 100%).

Confidence Level, (1-) (continued)
DCOVA
 Suppose confidence level = 95%.
 Also written (1 - ) = 0.95, (so  = 0.05).
 A relative frequency interpretation:
 95% of all the confidence intervals that can be
constructed will contain the unknown true
parameter.
 A specific interval either will contain or will
not contain the true parameter:
 No probability involved in a specific interval.

Confidence
Intervals DCOVA
Population Population
Mean Proportion
σ Known σ Unknown

Confidence Interval for μ
(σ Known) DCOVA
 Assumptions:
 Population standard deviation σ is known.
 Population is normally distributed.
 If population is not normal, use large sample (n > 30).
 Confidence interval estimate:
σ
X  Z α/2
n
where is the point estimate
X
Zα/2 is the normal distribution critical value for a probability of /2 in each tail
is the standard error
σ/ n

QUIZ
True or False: Holding the sample size fixed, increasing the

level of confidence in a confidence interval will necessarily
lead to a wider confidence interval.

Finding the Critical Value, Zα/2
DCOVA
Z α/2  1.96
 Consider a 95% confidence interval:
1  α  0.95so α  0.05
α α
 0.025  0.025
2 2
Z units: Zα/2 = -1.96 0 Zα/2 = 1.96

Lower Point Estimate Upper
X units: Confidence Confidence
Limit Limit

Common Levels of Confidence
DCOVA
 Commonly used confidence levels are 90%,
95%, and 99%.
Confidence
Confidence
Coefficient, Zα/2 value
Level
1 
80% 0.80 1.28
90% 0.90 1.645
95% 0.95 1.96
98% 0.98 2.33
99% 0.99 2.58
99.8% 0.998 3.08
99.9% 0.999 3.27

Intervals and Level of Confidence
DCOVA
Sampling Distribution of the Mean
/2 1  /2
x
Intervals μx  μ
extend from x1
σ x2 (1-)100%
X  Zα / 2
n of intervals
to constructed
σ contain μ;
X  Zα / 2
n ()100% do
Confidence Intervals not.

Example
DCOVA
 A sample of 11 circuits from a large normal
population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is 0.35 ohms.
 Determine a 95% confidence interval for the

true mean resistance of the population.

Example DCOVA
(continued)
 A sample of 11 circuits from a large normal
population has a mean resistance of 2.20
ohms. We know from past testing that the
population standard deviation is 0.35 ohms.
σ
X  Zα/2
 Solution: n
 2.20  1.96 (0.35/ 11 )
 2.20  0.2068
1.9932  μ  2.4068

Interpretation
DCOVA
 We are 95% confident that the true mean
resistance is between 1.9932 and 2.4068
ohms.
 Although the true mean may or may not be
in this interval, 95% of intervals formed in
this manner will contain the true mean.

QUIZ
Suppose a 95% confidence interval for turns out to be (1,000,

2,100). To make more useful inferences from the data, it is desired
to reduce the width of the confidence interval. Which of the following
will result in a reduced interval width?
a) Increase the sample size.
b) Increase the confidence level.
c) Increase the population mean.
d) Increase the sample mean.

QUIZ
6
A 99% confidence interval estimate can be interpreted to mean that
a) if all possible samples of size n are taken and confidence interval

estimates are developed, 99% of them would include the true population
mean somewhere within their interval.
b) we have 99% confidence that we have selected a sample whose interval

does include the population mean.
c) Both above.
d) None of the above.

DCOVA
Confidence
Intervals
Mean Proportion
σ Known σ Unknown

Do You Ever Truly Know σ?
 Probably not!
 In virtually all real world business situations, σ

is not known.
 If there is a situation where σ is known then µ is

also known (since to calculate σ you need to
know µ.)
 If you truly know µ there would be no need to

gather a sample to estimate it.
(σ Unknown)
DCOVA
 If the population standard deviation σ is

unknown, we can substitute the sample
standard deviation, S.
 This introduces extra uncertainty, since
S is variable from sample to sample.
 So we use the t distribution instead of the
normal distribution.

(σ Unknown) (continued)
 Assumptions: DCOVA
 Population standard deviation is unknown.
 Population is normally distributed.
 If population is not normal, use large sample (n > 30).
 Use Student’s t-Distribution.
 Confidence Interval Estimate:
S
X  tα / 2
n
(where tα/2 is the critical value of the t-distribution with n -1 degrees of freedom
and an area of α/2 in each tail.)

Student’s t Distribution
DCOVA
 The t is a family of distributions.

 The tα/2 value depends on degrees of
freedom (d.f.).
 Number of observations that are free to vary after
sample mean has been calculated.
d.f. = n - 1

Degrees of Freedom (df)
DCOVA
Idea: Number of observations that are free to vary
after sample mean has been calculated.
Example: Suppose the mean of 3 numbers is 8.0.
Let X1 = 7 If the mean of these three

Let X2 = 8 values is 8.0,
What is X3? then X3 must be 9
(i.e., X3 is not free to vary)
Here, n = 3, so degrees of freedom = n – 1 = 3 – 1 = 2.
(2 values can be any numbers, but the third is not free to vary
for a given mean.)
Student’s t Distribution
DCOVA
Note: t Z as n increases
Standard
Normal
(t with df = ∞)
t (df = 13)
t-distributions are bell-
shaped and symmetric, but
have ‘fatter’ tails than the t (df = 5)
normal
0 t
Student’s t Table
DCOVA
Upper Tail Area
Let: n = 3
df .10 .05 .025 df = n - 1 = 2
 = 0.10
1 3.078 6.314 12.706 /2 = 0.05
2 1.886 2.920 4.303

3 1.638 2.353 3.182 /2 = 0.05
The body of the table

contains t values, not 0 2.920 t
probabilities

Selected t distribution values
DCOVA
With comparison to the Z value
Confidence t t t Z
Level (10 d.f.) (20 d.f.) (30 d.f.) (∞ d.f.)
0.80 1.372 1.325 1.310 1.28

0.90 1.812 1.725 1.697 1.645
0.95 2.228 2.086 2.042 1.96
0.99 3.169 2.845 2.750 2.58
Note: t Z as n increases
Example of t distribution
confidence interval DCOVA
A random sample of n = 25 has X = 50 and

S = 8. Form a 95% confidence interval for μ.
 d.f. = n – 1 = 24, so t α/2  t 0.025  2.0639
The confidence interval is

S 8
X  t α/2  50  (2.0639)
n 25
46.698 ≤ μ ≤ 53.302

Example of t distribution
confidence interval
(continued)
DCOVA
 Interpreting this interval requires the assumption

that the population you are sampling from is
approximately a normal distribution (especially
since n is only 25).
 This condition can be checked by creating a:

 Normal probability plot or
 Boxplot.

QUIZ

QUIZ

Example of Excel, Minitab, &
JMP Confidence Interval Output
DCOVA

DCOVA
Confidence
Intervals
Mean Proportion
σ Known σ Unknown

Confidence Intervals for the
Population Proportion, π
DCOVA
 An interval estimate for the population

proportion ( π ) can be calculated by
adding an allowance for uncertainty to
the sample proportion (p).

Confidence Intervals for the
Population Proportion, π
(continued)
 Recall that the distribution of the sample DCOVA
proportion is approximately normal if the
sample size is large, with standard deviation:
 (1   )
σp 
n
 We will estimate this with sample data:
p(1 p)
n
Confidence Interval Endpoints
DCOVA
 Upper and lower confidence limits for the
population proportion are calculated with the
formula:
p(1  p)
p  Z α/2
n
 where
 Zα/2 is the standard normal value for the level of confidence desired
 p is the sample proportion
 n is the sample size.
 Note: must have np > 5 and n(1-p) > 5.

Example DCOVA
 A random sample of 100 people shows that 25 are

left-handed.
 Form a 95% confidence interval for the true
proportion of left-handers.

Example DCOVA
(continued)
 A random sample of 100 people shows that 25
are left-handed. Form a 95% confidence
interval for the true proportion of left-handers.
p  Z α/2 p(1  p)/n

 25/100  1.96 0.25(0.75)/100
 0.25  1.96(0.0433)
 0.1651    0.3349

Interpretation
DCOVA
 We are 95% confident that the true
percentage of left-handers in the population
is between
16.51% and 33.49%.
 Although the interval from 0.1651 to 0.3349

may or may not contain the true proportion,
95% of intervals formed from samples of
size 100 in this manner will contain the true
proportion.

QUIZ
10

Example of Excel, JMP, & Minitab
Confidence Interval for π DCOVA

Determining Sample Size
DCOVA
Determining
Sample Size
For the For the

Mean Proportion

Sampling Error
DCOVA
 The required sample size can be found to reach a

desired margin of error (e) with a specified level of
confidence (1 - ).
 The margin of error is also called sampling error:

 the amount of imprecision in the estimate of the
population parameter.
 the amount added and subtracted to the point estimate
to form the confidence interval.

DCOVA
Determining
Sample Size
For the
Mean Sampling error
(margin of error)
σ σ
X  Zα / 2 e  Zα / 2
n n

Determining Sample Size (continued)
DCOVA
Determining
Sample Size
For the
Mean
2 2
σ Z 
e  Zα / 2 Now solve
n  /2
for n to get 2
n e
Determining Sample Size (continued)
DCOVA
 To determine the required sample size for the

mean, you must know:
 The desired level of confidence (1 - ), which

determines the critical value, Zα/2.
 The acceptable sampling error, e.
 The standard deviation, σ.

Required Sample Size Example
DCOVA
If  = 45, what sample size is needed to
estimate the mean within ± 5 with 90%
confidence?
Z 2 σ 2 (1.645) 2 (45)2
n 2
 2
 219.19
e 5
So the required sample size is n = 220

(Always round up)

QUIZ
11

Example Excel & Minitab For Calculating
Sample Size For The Mean
DCOVA

If σ is unknown
DCOVA
 If unknown, σ can be estimated when

using the required sample size formula.
 Use a value for σ that is expected to be at
least as large as the true σ.
 Select a pilot sample and estimate σ with
the sample standard deviation, S.

(continued)
Determining DCOVA
Sample Size
For the
Proportion
π (1  π ) Now solve Z2 /2 π (1  π )

eZ for n to get n
n e 2

(continued)
 To determine the required sample size for the DCOVA

proportion, you must know:
 The desired level of confidence (1 - ), which determines the

critical value, Zα./2.
 The acceptable sampling error, e.
 The true proportion of events of interest, π.
 π can be estimated with a pilot sample if necessary (or
conservatively use 0.5 as an estimate of π.)

DCOVA
How large a sample would be necessary to estimate the true
proportion of sales invoices containing errors in a large
population within ±7%, with 95% confidence?
(Assume a pilot sample yields p = 0.15.)

(continued)
Solution: DCOVA
For 95% confidence, use Zα/2 = 1.96
e = 0.07
p = 0.15, so use this to estimate π.
2 2
Z π (1  π) (1.96) (0.15)(1  0.15)
n /2
2
 2
 99.96
e (0.03)
So use n = 100

QUIZ
12

Example Excel & Minitab Output For
Calculating Sample Size For A Proportion
DCOVA
Excel Uses A Normal Minitab Uses The Binomial
Approximation To Find n Distribution To Find n

Ethical Issues
 A confidence interval estimate (reflecting

sampling error) should always be included
when reporting a point estimate.
 The level of confidence should always be
reported.
 The sample size should be reported.
 An interpretation of the confidence interval
estimate should also be provided.

Chapter Summary
In this chapter we discussed:
 The construction and interpretation of confidence

interval estimates for the mean and the proportion.
 The determination of the sample size necessary to

develop a confidence interval for the mean and the
proportion.

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Chapter 8

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 1

In this chapter, you learn:

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 2

 Application of Confidence Interval Estimation In

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 3

Content of this chapter

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 4

 A point estimate is a single number.

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 5

We can estimate a with a Sample

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 6

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 7

True or False: A population parameter is used to estimate a

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 8

 How much uncertainty is associated with a

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 9

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 10

True or False: For a given data set, the confidence interval

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 11

 If you take a sample of size n = 25 you know:

 368 ± 1.96 * 15 / 25 = (362.12, 373.88) contains 95% of

But what about the intervals from other possible samples

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 12

1 362.30 356.42 368.18 Yes

2 369.50 363.62 375.38 Yes

3 360.00 354.12 365.88 No

4 362.12 356.24 368.00 Yes

5 373.88 368.00 379.76 Yes

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 13

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 14

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 16

Critical Value is a table value based on the sampling

Standard Error is the standard deviation of the point

 Confidence the interval will contain

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 18

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 19

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 20

 Population is normally distributed.

 If population is not normal, use large sample (n > 30).

 Confidence interval estimate:

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 21

True or False: Holding the sample size fixed, increasing the

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 22

Z units: Zα/2 = -1.96 0 Zα/2 = 1.96

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 23

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 24

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 25

 Determine a 95% confidence interval for the

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 26

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 27

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 28

Suppose a 95% confidence interval for turns out to be (1,000,

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 29

a) if all possible samples of size n are taken and confidence interval

b) we have 99% confidence that we have selected a sample whose interval

d) None of the above.

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 30

A L WAY S L E A R N I N G Copyright © 2020 Pearson Education Ltd. Slide 31