Slides by:

Andrew Stephenson
Georgia Gwinnett College
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Chapter 10
10.2
Introduction to Estimation

• Concepts of Estimation

• Estimating the Population Mean When the

Population Standard Deviation Is Known

• Selecting the Sample Size

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Where we have been…
10.3
Chapter 7 and 8:
Binomial, Poisson, normal, and exponential distributions
allow us to make probability statements about X (a member
of the population).

To do so we need the population parameters.

Binomial: p
Poisson: µ
Normal: µ and σ
Exponential: λ or µ

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Where we have been…
10.4
Chapter 9:
Sampling distributions allow us to make probability
statements about statistics.

We need the population parameters.

Sample mean: µ and σ
Sample proportion: p
Difference between sample means: µ1,σ1 ,µ2, and σ2

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Where we are going…
10.5
However, in almost all realistic situations parameters are
unknown.

We will use the sampling distribution to draw inferences

about the unknown population parameters.

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 Statistical Inference…
Statistical inference is the process by which we acquire 10.6
information and draw conclusions about populations from
samples.

Statistics

Data Information

Population

Sample

Inference

Statistic
Parameter

In order to do inference, we require the skills and knowledge of

descriptive statistics, probability distributions, and sampling
distributions.

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Estimation…
10.7
There are two types of inference: estimation and
hypothesis testing; estimation is introduced first.

The objective of estimation is to determine the

approximate value of a population parameter on
the basis of a sample statistic.

E.g., the sample mean ( ) is employed to estimate

the population mean (μ).

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Estimation…
10.8
The objective of estimation is to determine the
approximate value of a population parameter on the
basis of a sample statistic.

There are two types of estimators:

Point Estimator

Interval Estimator

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Point Estimator…
10.9
A point estimator draws inferences about a population
by estimating the value of an unknown parameter using a
single value or point.

We saw earlier that point probabilities in continuous

distributions were virtually zero. Likewise, we’d expect
that the point estimator gets closer to the parameter
value with an increased sample size, but point estimators
don’t reflect the effects of larger sample sizes. Hence we
will employ the interval estimator to estimate
population parameters…

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Interval Estimator…
10.10
An interval estimator draws inferences about a
population by estimating the value of an unknown
parameter using an interval.

That is we say (with some ___% certainty) that the

population parameter of interest is between some lower
and upper bounds.

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Point & Interval Estimation…
10.11
For example, suppose we want to estimate the
mean summer income of a class of business
students. For n = 25 students, is calculated to be
400 $/week.

point estimate interval estimate

An alternative statement is:

The mean income is between 380 and 420 $/week.

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Qualities of Estimators…
10.12
Qualities desirable in estimators include unbiasedness,
consistency, and relative efficiency:

An unbiased estimator of a population parameter is an

estimator whose expected value is equal to that
parameter.

An unbiased estimator is said to be consistent if the

difference between the estimator and the parameter
grows smaller as the sample size grows larger.

If there are two unbiased estimators of a parameter, the one

whose variance is smaller is said to be relatively
efficient.

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Unbiased Estimators…
10.13
An unbiased estimator of a population parameter is
an estimator whose expected value is equal to that
parameter.

E.g. the sample mean is an unbiased estimator of

the population mean µ , since:

E( ) = µ

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 Unbiased Estimators…
10.14
An unbiased estimator of a population parameter is
an estimator whose expected value is equal to that
parameter.

E.g. the sample median is an unbiased estimator of

the population mean µ since:

E(Sample median) = µ

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Consistency…
10.15
An unbiased estimator is said to be consistent if the
difference between the estimator and the
parameter grows smaller as the sample size grows
larger.

E.g. is a consistent estimator of µ because:

V( ) is σ2/n

That is, as n grows larger, the variance of grows

smaller.

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Consistency…
10.16
An unbiased estimator is said to be consistent if the
difference between the estimator and the
parameter grows smaller as the sample size grows
larger.

E.g. Sample median is a consistent estimator of µ

because:

V(Sample median) is 1.57σ2/n

That is, as n grows larger, the variance of the sample

median grows smaller.

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Relative Efficiency…
10.17
If there are two unbiased estimators of a parameter,
the one whose variance is smaller is said to be
relatively efficient.

E.g. both the sample median and sample mean are

unbiased estimators of the population mean,
however, the sample median has a greater variance
than the sample mean, so we choose since it is
relatively efficient when compared to the sample
median.

Thus, the sample mean is the “best” estimator of a

population mean µ.

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Estimating μ when σ is known…
10.18
In Chapter 8 we produced the following general
probability statement about

P(Z/ 2  Z  Z/ 2 )  1 

And from Chapter 9 the sampling distribution of is

approximately normal with mean µ and standard
deviation  / n .

Thus X 
Z
/ n

is (approximately) standard normally distributed.

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Estimating μ when σ is known…
10.19
Thus, substituting Z we produce

x 
P( z  / 2   z / 2 )  1  
/ n
In Chapter 9 (with a little bit of algebra) we expressed
the following
  
P  z/ 2  x    z/ 2  1  
 n n

With a little different algebra we have

   
P x  z/2    x  z/2 1 
 n n 
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Estimating μ when σ is known…
10.20
This is still a probability statement about
   
P x  z  / 2    x  z / 2  1 
 n n
However, the statement is also a confidence interval estimator of
µ

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Estimating μ when σ is known…
10.21
The interval can also be expressed as

  
Lower confidence limit =  x  z / 2 
 n 

  
Upper confidence limit =  x  z  / 2 
 n 

The probability 1 – α is the confidence level, which is a

measure of how frequently the interval will actually include
µ.

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Example 10.1…
10.22
The Doll Computer Company makes its own computers
and delivers them directly to customers who order them
via the Internet.

To achieve its objective of speed, Doll makes each of its

five most popular computers and transports them to
warehouses from which it generally takes 1 day to deliver
a computer to the customer.

This strategy requires high levels of inventory that add

considerably to the cost.

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Example 10.1…
10.23
To lower these costs the operations manager wants
to use an inventory model. He notes demand during
lead time is normally distributed and he needs to
know the mean to compute the optimum inventory
level.

He observes 25 lead time periods and records the

demand during each period.
The manager would like a 95% confidence interval
estimate of the mean demand during lead time.
Assume that the manager knows that the standard
deviation is 75 computers.

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Example 10.1…
10.24

235 374 309 499 253

421 361 514 462 369
394 439 348 344 330
261 374 302 466 535
386 316 296 332 334

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Example 10.1… IDENTIFY
10.25

“We want to estimate the mean demand over lead

time with 95% confidence in order to set inventory
levels…”

Thus, the parameter to be estimated is the

population mean: µ.

And so our confidence interval estimator will be:

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Example 10.1… COMPUTE
10.26
Manually:
In order to use our confidence interval estimator, we need the
following pieces of data:

370.16 Calculated from the data…

1.96

75 Given

n 25

therefore:

The lower and upper confidence limits are 340.76 and 399.56.
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Example 10.1… COMPUTE
10.27

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Example 10.1… COMPUTE
10.28

Instructions
1. Type or import the data into one column. (Open Xm10-01.)
2. Click XLSTAT and One-sample t-test and z-test.
3. In the Data: dialog box type the input range (A1:A26). Click Column labels
if the first row contains the name of the variable (as in this example). Check
z-test and do not check Student’s t-test.
4. Click the Options tab and choose Mean ≠ Theoretical mean in the
Alternative hypothesis: box. Type the value of α (in percent) in the
Significance: box (5). If there are blanks in the column (usually used to
represent missing data) click Missing data, Remove the observations.
For the Variance for z-test: check User defined: Variance: and type the
value of σ2 (5625). Click OK and then Continue.

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 Example 10.1… INTERPRET
10.29
The estimation for the mean demand during lead
time lies between 340.76 and 399.56 — we can use
this as input in developing an inventory policy.

That is, we estimated that the mean demand during

lead time falls between 340.76 and 399.56, and this
type of estimator is correct 95% of the time. That also
means that 5% of the time the estimator will be
incorrect.

Incidentally, the media often refer to the 95% figure

as “19 times out of 20,” which emphasizes the long-
run aspect of the confidence level.

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Interpreting the confidence Interval Estimator
10.30
Some people erroneously interpret the confidence
interval estimate in Example 10.1 to mean that there
is a 95% probability that the population mean lies
between 340.76 and 399.56.

This interpretation is wrong because it implies that

the population mean is a variable about which we
can make probability statements.

In fact, the population mean is a fixed but unknown

quantity. Consequently, we cannot interpret the
confidence interval estimate of µ as a probability
statement about µ.

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Interpreting the confidence Interval Estimator
10.31
To translate the confidence interval estimate
properly, we must remember that the confidence
interval estimator was derived from the sampling
distribution of the sample mean.

We used the sampling distribution to make

probability statements about the sample mean.

Although the form has changed, the confidence

interval estimator is also a probability statement
about the sample mean.

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Interpreting the confidence Interval Estimator
10.32
It states that there is 1 - α probability that the sample
mean will be equal to a value such that the interval

     
 x  z / 2  to  x  z / 2 
 n   n 

will include the population mean. Once the sample

mean is computed, the interval acts as the lower and
upper limits of the interval estimate of the population
mean.

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Interpreting the Confidence Interval Estimator
10.33
As an illustration, suppose we want to estimate the
mean value of the distribution resulting from the
throw of a fair die.

Because we know the distribution, we also know that

µ = 3.5 and σ = 1.71.

Pretend now that we know only that σ = 1.71, that µ

is unknown, and that we want to estimate its value.

To estimate , we draw a sample of size n = 100 and

calculate. The confidence interval estimator of μ is
 
x  z/ 2
n

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Interpreting the Confidence Interval Estimator
10.34
The 90% confidence interval estimator is

 1.71
x  z / 2  x  1.645  x  .281
n 100

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Interpreting the Confidence Interval Estimator
10.35
This notation means that, if we repeatedly draw
samples of size 100 from this population, 90% of the
values of will be such that µ would lie
somewhere between

x  .281 and x  .281

and that 10% of the values of will produce

intervals that would not include µ .
Now, imagine that we draw 40 samples of 100
observations each. The values of and the resulting
confidence interval estimates of are shown in
Table 10.2.
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Interval Width…
10.36
A wide interval provides little information.
For example, suppose we estimate with 95%
confidence that an accountant’s average starting
salary is between $15,000 and $100,000.

Contrast this with: a 95% confidence interval

estimate of starting salaries between $42,000 and
$45,000.

The second estimate is much narrower, providing

accounting students more precise information about
starting salaries.

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Interval Width…
10.37

The width of the confidence interval estimate is a

function of the confidence level, the population
standard deviation, and the sample size…

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Interval Width…
10.38
The width of the confidence interval estimate is a
function of the confidence level, the population
standard deviation, and the sample size…

A larger confidence level

produces a wider
confidence interval.

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Interval Width…
10.39
The width of the confidence interval estimate is a
function of the confidence level, the population
standard deviation, and the sample size…

Larger values of σ
produce w i d e r
confidence intervals.

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Interval Width…
10.40

The width of the confidence interval estimate is a

function of the confidence level, the population
standard deviation, and the sample size…

Increasing the sample size decreases the width of

the confidence interval while the confidence level
can remain unchanged.

Note: this also increases the cost of obtaining

additional data

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Selecting the Sample Size…
10.41
In Chapter 5 we pointed out that sampling error is
the difference between an estimator and a
parameter.

We can also define this difference as the error of

estimation.

In this chapter this can be expressed as the

difference between and µ.

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Selecting the Sample Size…
10.42
The bound on the error of estimation is


B = Z / 2
n
With a little algebra we find the sample size to
estimate a mean.

2
 z / 2 
n   
 B 

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Selecting the Sample Size…
10.43
To illustrate suppose that in Example 10.1 before
gathering the data the manager had decided that
he needed to estimate the mean demand during
lead time to with 16 units, which is the bound on the
error of estimation.

We also have 1 –α = .95 and σ = 75. We calculate

2 2
 z / 2   (1.96)(75) 
n        84.41
 B   16 

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Selecting the Sample Size…
10.44
Because n must be an integer and because we
want the bound on the error of estimation to be no
more than 16 any non-integer value must be
rounded up.

Thus, the value of n is rounded to 85, which means

that to be 95% confident that the error of estimation
will be no larger than 16, we need to randomly
sample 85 lead time intervals.

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