Constructing Confidence

Intervals
s_
x
a/2 1-a a/2
_
X
Course 2 Econometrics
Professor Erika Marin
 Chapter Topics
• The estimation process
•Confidence Interval Estimation for the Mean
(s Known)
•Confidence Interval Estimation for the Mean
(s Unknown)
•Confidence Interval Estimation for the Proportion
•The Situation of Finite Populations
•Sample Size Estimation
 Introduction
 Statistical inference is the process by
which we acquire information about
populations from samples.
 There are two types of inference:
 Estimation
 Hypotheses testing
 Concepts of Estimation
 The objective of estimation is to determine the
value of a population parameter on the basis of a
sample statistic.
 There are two types of estimators:
Point Estimator
Interval estimator
 Estimation Process

Population Random Sample

I am 95%
Mean confident that m
Mean, m, is is between 40 &
unknown X = 50
60.

Sample
 Point Estimator
A point estimator draws inference about a
population by estimating the value of an
unknown parameter using a single value
or point.
 Point Estimator
A point estimator draws inference about a
population by estimating the value of an
unknown parameter using a single value
or point.
Parameter
Population distribution

Sampling distribution

Point estimator
 Interval Estimator
An interval estimator draws inferences
about a population by estimating the value
of an unknown parameter using an
interval.
Population distribution Parameter

Sample distribution

Interval estimator
 Population Parameters
Estimated
Estimate Population with Sample
Parameter... Statistic
_
Mean m X
Proportion p ps

s 2 2
Variance s
_ _
Difference m - m x - x
1 2 1 2
Confidence Interval Estimation

 Provides Range of Values

 Based on Observations from 1 Sample

 Gives Information about Closeness to

Unknown Population Parameter
 Stated in terms of Probability
Never 100% Sure
 Elements of Confidence
Interval Estimation

A Probability That the Population Parameter

Falls Somewhere Within the Interval.
Confidence Interval Sample
Statistic

Confidence Limit Confidence Limit

(Lower) (Upper)
 Level of Confidence
 Probability that the unknown population parameter falls
within the interval

 Denoted (1 - a) % = level of confidence

 e.g. 90%, 95%, 99%

 a Is Probability That the Parameter Is Not Within the

Interval
The Confidence Interval for m
( s is known)
 Three commonly used confidence levels

Confidence
level a a/2 za/2
0,90 0,10 0,05 1,645
0,95 0,05 0,025 1,96
0,99 0,01 0,005 2,58
 Confidence Intervals
s
X  Z s X  X  Z 
n sx_
_
X
m  1.645 s x m  1.645 s x
90% Samples

m  1 . 96 s x m  1 . 96 s x
95% Samples

m  2 .58s x m  2 .58s x
99% Samples
 Intervals &
Level of Confidence
Sampling
Distribution of s_
x
the Mean a/2 1-a a/2
_
X
Intervals mX  m
Extend from
(1 - a) % of
X  Zs X Intervals
Contain m.
to
a % Do Not.
X  Zs X
Confidence Intervals
 Factors Affecting
Interval Width
 Data Variation
Intervals Extend from
measured by s
X - Zs to X + Z s
x x
 Sample Size

sX sX / n
 Level of Confidence
(1 - a)

© 1984-1994 T/Maker Co.

Confidence Interval Estimates

Confidence
Intervals

Mean Proportion

Finite
s Known s Unknown Population
Confidence Intervals (s Known)

 Assumptions
 Population Standard Deviation Is Known
 Population Is Normally Distributed
 If Not Normal, use large samples

 Confidence Interval Estimate

s s
X  Za / 2 
n
m X  Za / 2 
n
 The Confidence Interval for m
( s is known)
 Example
 Doll Computer Company delivers computers directly
to its customers who order via the Internet.
 To reduce inventory costs in its warehouses Doll
employs an inventory model, that requires the
estimate of the mean demand during lead time.
 It is found that lead time demand is normally
distributed with a standard deviation of 75 computers
per lead time.
 Estimate the lead time demand with 95% confidence,
knowing that the sample mean is 370.16.
 The Confidence Interval for m
( s is known)
 Example – Solution
 The parameter to be estimated is m, the mean demand
during lead time.
 We need to compute the interval estimation for m.
 The sample mean is
x  370.16.
Since 1 - a =.95, a = .05.
s 75
x  za 2  370.16  z .025 Thus a/2 = .025. Z.025 = 1.96
n 25
75
 370.16  1.96  370.16  29.40  340.76, 399.56
25
Confidence Interval Estimates

Confidence
Intervals

Mean Proportion

Finite
s Known s Unknown Population
Confidence Intervals (s Unknown)
 Assumptions
 Population Standard Deviation Is Unknown
 Population Must Be Normally Distributed
 Use Student’s t Distribution
 Confidence Interval Estimate

S S
X  ta / 2,n 1  m X  ta / 2,n 1 
n
n
 Student’s t Distribution

Standard
Normal

Bell-Shaped t (df = 13)

Symmetric
‘Fatter’ Tails t (df = 5)

Z
t
0
 Degrees of Freedom (df)

 Number of Observations that Are Free

to Vary After Sample Mean Has Been
Calculated
 Example degrees of freedom =
 Mean of 3 Numbers Is 2 n -1
X1 = 1 (or Any Number) = 3 -1
X2 = 2 (or Any Number) =2
X3 = 3 (Cannot Vary)
Mean = 2
 Student’s t Table

a/2 Assume: n = 3 df
=n-1=2
Upper Tail Area
a = .10
df .25 .10 .05 a/2 =.05

1 1.000 3.078 6.314

2 0.817 1.886 2.920 .05

3 0.765 1.638 2.353
0 t
t Values 2.920
 Example: Interval Estimation
s Unknown

A random sample of n = 25 has the average = 50 and

s = 8. Set up a 95% confidence interval estimate for m.
S
X  ta / 2, n 1 
n m X  ta / 2,n 1 
S
n

50  2.0639 
8
25
 m
m
 50  2.0639 
8
25

46 . 69  m  53 . 30
Confidence Interval Estimates

Confidence
Intervals

Mean Proportion

Finite
s Known s Unknown Population
 Estimation for
Finite Populations
 Assumptions
 Sample Is Large Relative to Population

 n / N > .05
 Use Finite Population Correction Factor
 Confidence Interval (Mean, sX Unknown)

 m X  X  ta / 2,n 1  S  N  n
S N n
X  ta / 2,n 1  
n N 1 n N 1
Confidence Interval Estimates

Confidence
Intervals

Mean Proportion

Finite
s Known s Unknown Population
 Confidence Interval Estimate
Proportion
 Assumptions
 Two Categorical Outcomes

 Population Follows Binomial Distribution

 Normal Approximation Can Be Used

 n·p  5 & n·(1 - p)  5

 Confidence Interval Estimate

ps (1  ps ) ps (1  ps )
p s  Za / 2   p  p s  Za / 2 
n n
 Example: Estimating Proportion

A random sample of 400 Voters showed 32 preferred

Candidate A. Set up a 95% confidence interval
estimate for p.

ps (1  ps ) ps (1  ps )
p s  Za / 2   p p s  Za / 2 
n n

.08(1  .08) .08(1  .08)

.08  1.96   p .08  1.96 
400 400

.053  p  .107
 Sample Size

Too Big: Too Small:

•Requires too •Won’t do
much resources the job
 Example: Sample Size
for Mean
What sample size is needed to be 90% confident of
being correct within ± 5? A pilot study suggested that
the standard deviation is 45.

2 2
Z s
2 2
1645
. 45
n   219.2 @ 220
2 2
Error 5
Round Up
 Example: Sample Size
for Proportion
What sample size is needed to be within ± 5 with 90%
confidence? Out of a population of 1,000, we randomly
selected 100 of which 30 were defective.

Z p(1  p) 1.645 (.30)(. 70)

2 2
n 2
 2
 227.3
error .05

@ 228
Round Up
 Example: Sample Size
for Mean Using fpc
What sample size is needed to be 90% confident of
being correct within ± 5? Suppose the population size
N = 500.

n0 N 219.2  500
n   152.6
n0  ( N  1) 219.2  (500  1)
@ 153
where Z s2 2 Round Up
n0  2
 219.2
error