Fundamentals

of Business
Statistics
6E
Slides by

John
Sweeney Loucks
Williams St. Edward’s
Anderson University

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 11
Comparisons Involving Proportions
and a Test of Independence
 Inferences About the Difference Between
Two Population Proportions
 Hypothesis Test for Proportions
of a Multinomial Population
 Test of Independence

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 Inferences About the Difference Between
Two Population Proportions
 Interval Estimation of p1 - p2
 Hypothesis Tests About p1 - p2

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Sampling Distribution of p1  p2

 Expected Value
E ( p1  p2 )  p1  p2

 Standard Deviation (Standard Error)

p1 (1  p1 ) p2 (1  p2 )
 p1  p2  
n1 n2

where: n1 = size of sample taken from population 1

n2 = size of sample taken from population 2

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 Sampling Distribution of p1  p2

If
If the
the sample
sample sizes
sizes are
are large,
large, the
the sampling
sampling distribution
distribution
of p1  p2 can
of can be
be approximated
approximated by by aa normal
normal probability
probability
distribution.
distribution.

The
The sample
sample sizes
sizes are
are sufficiently
sufficiently large
large if
if all
all of
of these
these
conditions
conditions are
are met:
met:
n1p1 > 5 n1(1 - p1) > 5

n2p2 > 5 n2(1 - p2) > 5

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 Sampling Distribution of p1  p2

p1 (1  p1 ) p2 (1  p2 )
 p1  p2  
n1 n2

p1  p2
p1 – p2

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 Interval Estimation of p1 - p2

 Interval Estimate

p1 (1 p1 ) p2 (1 p2 )
p1  p2  z / 2 
n1 n2

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 Interval Estimation of p1 - p2

 Example: Market Research Associates

Market Research Associates is conducting research to
evaluate the effectiveness of a client’s new advertising
campaign. Before the new campaign began, a telephone
survey of 150 households in the test market area showed
60 households “aware” of the client’s product.
The new campaign has been initiated with TV and
newspaper advertisements running for three weeks.

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 Interval Estimation of p1 - p2

 Example: Market Research Associates

A survey conducted immediately after the new
campaign showed 120 of 250 households “aware” of
the client’s product.
Does the data support the position that the
advertising campaign has provided an increased
awareness of the client’s product?

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Point Estimator of the Difference Between
Two Population Proportions
p1 = proportion of the population of households
“aware” of the product after the new campaign
p2 = proportion of the population of households
“aware” of the product before the new campaign
p1 = sample proportion of households “aware” of the
product after the new campaign
p2 = sample proportion of households “aware” of the
product before the new campaign

120 60
p1  p 2    .48  .40  .08
250 150

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 Interval Estimation of p1 - p2

For = .05, z.025 = 1.96:

.48(.52) .40(.60)
.48  .40  1.96 
250 150
.08 + 1.96(.0510)
.08 + .10

Hence, the 95% confidence interval for the difference

in before and after awareness of the product is
-.02 to +.18.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Hypothesis Tests about p1 - p2

 Hypotheses
We focus on tests involving no difference between
the two population proportions (i.e. p1 = p2)

H0 : p1  p2  0 H
H00:: pp11 -pp22 < 00 H0: p1  p2  0
Ha: p1  p2  0 H
Ha:: pp1 -pp2 > 00 Ha: p1  p2  0
a 1 2

Left-tailed Right-tailed Two-tailed

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 Hypothesis Tests about p1 - p2

 Standard Error of p1  p2 when p1 = p2 = p

1 1
 p1 p2  p(1 p)   
 n1 n2 

 Pooled Estimator of p when p1 = p2 = p

n1 p1  n2 p2
p
n1  n2

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 Hypothesis Tests about p1 - p2

 Test Statistic

( p1  p2 )
z
 1 1 
p (1  p )   
n
 1 n 2 

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 Hypothesis Tests about p1 - p2

 Example: Market Research Associates

Can we conclude, using a .05 level of significance,
that the proportion of households aware of the client’s
product increased after the new advertising campaign?

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Hypothesis Tests about p1 - p2

 p -Value and Critical Value Approaches

1. Develop the hypotheses. H0: p1 - p2 < 0

Ha: p1 - p2 > 0
p1 = proportion of the population of households
“aware” of the product after the new campaign
p2 = proportion of the population of households
“aware” of the product before the new campaign

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Hypothesis Tests about p1 - p2

 p -Value and Critical Value Approaches

2. Specify the level of significance. a = .05

3. Compute the value of the test statistic.

250(. 48)  150(. 40) 180
p  . 45
250  150 400

s p1  p2  . 45(. 55)( 1  1 ) . 0514

250 150
(.48  .40)  0 .08
z   1.56
.0514 .0514

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 Hypothesis Tests about p1 - p2

 p –Value Approach
4. Compute the p –value.

For z = 1.56, the p–value = .0594

5. Determine whether to reject H0.

Because p–value > a = .05, we cannot reject H0.
We cannot conclude that the proportion of households
aware of the client’s product increased after the new
campaign.

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 Hypothesis Tests about p1 - p2

 Critical Value Approach

4. Determine the critical value and rejection rule.

For a = .05, z.05 = 1.645

Reject H0 if z > 1.645

5. Determine whether to reject H0.

Because 1.56 < 1.645, we cannot reject H0.
We cannot conclude that the proportion of households
aware of the client’s product increased after the new
campaign.
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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Hypothesis Test for
Proportions of a Multinomial Population
1. Set up the null and alternative hypotheses.
2. Select a random sample and record the observed
frequency, fi , for each of the k categories.
3. Assuming H0 is true, compute the expected
frequency, ei , in each category by multiplying the
category probability by the sample size.

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 Hypothesis Test for
Proportions of a Multinomial Population
4. Compute the value of the test statistic.
2
k ( f  e )
2   i i
i 1 ei

where:
fi = observed frequency for category i
ei = expected frequency for category i
k = number of categories
Note: The test statistic has a chi-square distribution
with k – 1 df provided that the expected frequencies
are 5 or more for all categories.

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 Hypothesis Test for
Proportions of a Multinomial Population
5. Rejection rule:
p-value approach: Reject H0 if p-value < a

Critical value approach: Reject H0 if  2

  2


where  is the significance level and

there are k - 1 degrees of freedom

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Multinomial Distribution Goodness of Fit Test

 Example: Finger Lakes Homes (A)

Finger Lakes Homes manufactures four models of
prefabricated homes, a two-story colonial, a log cabin,
a split-level, and an A-frame. To help in production
planning, management would like to determine if
previous customer purchases indicate that there is a
preference in the style selected.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Multinomial Distribution Goodness of Fit Test

 Example: Finger Lakes Homes (A)

The number of homes sold of each model for 100
sales over the past two years is shown below.

Model Colonial Log Split-Level A-Frame

# Sold 30 20 35 15

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 Multinomial Distribution Goodness of Fit Test

 Hypotheses

H0: pC = pL = pS = pA = .25
Ha: The population proportions are not
pC = .25, pL = .25, pS = .25, and pA = .25
where:
pC = population proportion that purchase a colonial
pL = population proportion that purchase a log cabin
pS = population proportion that purchase a split-level
pA = population proportion that purchase an A-frame

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 Multinomial Distribution Goodness of Fit Test

 Rejection Rule

Reject H0 if p-value < .05 or c2 > 7.815.

With  = .05 and

k-1=4-1=3
degrees of freedom

Do Not Reject H0 Reject H0

2
7.815

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 Multinomial Distribution Goodness of Fit Test

 Expected Frequencies

e1 = .25(100) = 25 e2 = .25(100) = 25
e3 = .25(100) = 25 e4 = .25(100) = 25
 Test Statistic

2 2 2 2
( 30  25) ( 20  25) ( 35  25) (15  25)
2    
25 25 25 25
=1+1+4+4
= 10

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 Multinomial Distribution Goodness of Fit Test

 Conclusion Using the p-Value Approach

Area in Upper Tail .10 .05 .025 .01 .005

c2 Value (df = 3) 6.251 7.815 9.348 11.345 12.838

Because c2 = 10 is between 9.348 and 11.345, the

area in the upper tail of the distribution is between
.025 and .01.
The p-value < a . We can reject the null hypothesis.

Note: A precise p-value can be found using

Minitab or Excel.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 Multinomial Distribution Goodness of Fit Test

 Conclusion Using the Critical Value Approach

c2 = 10 > 7.815

We reject, at the .05 level of significance,

the assumption that there is no home style
preference.

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 Test of Independence: Contingency Tables

1. Set up the null and alternative hypotheses.

2. Select a random sample and record the observed
frequency, fij , for each cell of the contingency table.
3. Compute the expected frequency, eij , for each cell.

(Row i Total )(Column j Total )

eij 
Sample Size

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 Test of Independence: Contingency Tables

4. Compute the test statistic.

( f ij  eij ) 2
2   
i j eij

5. Determine the rejection rule.

Reject H0 if p -value < a or  2

  2
.

where  is the significance level and,

with n rows and m columns, there are
(n - 1)(m - 1) degrees of freedom.

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 Contingency Table (Independence) Test

 Example: Finger Lakes Homes (B)

Each home sold by Finger Lakes Homes can be
classified according to price and to style. Finger
Lakes’ manager would like to determine if the price
of the home and the style of the home are
independent variables.

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 Contingency Table (Independence) Test

 Example: Finger Lakes Homes (B)

The number of homes sold for each model and
price for the past two years is shown below. For
convenience, the price of the home is listed as either
$99,000 or less or more than $99,000.

Price Colonial Log Split-Level A-Frame

< $99,000 18 6 19 12
> $99,000 12 14 16 3

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 Contingency Table (Independence) Test

 Hypotheses

H0: Price of the home is independent of the

style of the home that is purchased
Ha: Price of the home is not independent of the
style of the home that is purchased

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 Contingency Table (Independence) Test

 Expected Frequencies

Price Colonial Log Split-Level A-Frame Total

< $99K 18 6 19 12 55
> $99K 12 14 16 3 45
Total 30 20 35 15 100

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 Contingency Table (Independence) Test

 Rejection Rule
With  = .05 and (2 - 1)(4 - 1) = 3 d.f., .05  7.815
2

Reject H0 if p-value < .05 or 2 > 7.815

 Test Statistic
2 2 2
(18  16. 5) ( 6  11) ( 3  6 . 75)
2    ... 
16.5 11 6. 75
= .1364 + 2.2727 + . . . + 2.0833 = 9.149

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 Contingency Table (Independence) Test

 Conclusion Using the p-Value Approach

Area in Upper Tail .10 .05 .025 .01 .005

c2 Value (df = 3) 6.251 7.815 9.348 11.345 12.838

Because c2 = 9.145 is between 7.815 and 9.348, the

area in the upper tail of the distribution is between
.05 and .025.
The p-value < a . We can reject the null hypothesis.

Note: A precise p-value can be found using

Minitab or Excel.

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 Contingency Table (Independence) Test

 Conclusion Using the Critical Value Approach

c2 = 9.145 > 7.815

We reject, at the .05 level of significance,

the assumption that the price of the home is
independent of the style of home that is
purchased.

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or duplicated, or posted to a publicly accessible website, in whole or in part.
 End of Chapter 11

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