RESEARCH METHODOLOGY
LESSON 20:
PRINCIPLE OF HYPOTHESIS TESTING
So far we have talked about estimating a confidence interval along
with the probability (the confidence level) that the true population
statistic lies within this interval under repeated sampling. We now
examine the principles of statistical inference to hypotheses testing.
By the end of this chapter you should be able to
• Understand what is hypothesis testing
• Examine issues relating to the determination of level of
significance
• Apply tests of hypotheses to large to management
Situations
• Use of SPSS package to carry out hypotheses test and
interpretation of computer output including p- values
What is Hypothesis Testing?
What is a Hypothesis?
A hypothesis is the assumption that we make about the
population parameter. This can be any assumption about a
population parameter not necessarily based on statistical data. For
example it can also be based on the gut feel of a manager. Managerial
hypotheses are based on intuition; the market place decides whether
the manager’s intuitions were in fact correct.
In fact managers propose and test hypotheses all the time. For
example:
• If a manager says ‘if we drop the price of this car model by
Rs15000 , we’ll increase sales by 25000 units’ is a hypothesis.
To test it in reality we have to wait to the end of the year to
and count sales.
• A manager estimates that sales per territory will grow on
average by 30% in the next quarter is also an assumption or
hypotheses.
How would the manager go about testing this assumption?
Suppose he has 70 territories under him.
• One option for him is to audit the results of all 70 territories
and determine whether the average is growth is greater than
or less than 30%. This is a time consuming and expensive
procedure.
• Another way is to take a sample of territories and audit sales
results for them. Once we have our sales growth figure, it is
likely that it will differ somewhat from our assumed rate. For
example we may get a sample rate of 27%. The manager is
then faced with the problem of determining whether his
assumption or hypothesized rate of growth of sales is
correct or the sample rate of growth is more representative.
To test the validity of our assumption about the population we
collect sample data and determine the sample value of the statistic.
We then determine whether the sample data supports our
hypotheses assumption regarding the average sales growth.
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How is this Done?
If the difference between our hypothesized value and the sample
value is small, then it is more likely that our hypothesized value of
the mean is correct. The larger the difference the smaller the
probability that the hypothesized value is correct.
In practice however very rarely is the difference between the sample
mean and the hypothesized population value larger enough or
small enough for us to be able to accept or reject the hypothesis
prima-facie. We cannot accept or reject a hypothesis about a
parameter simply on intuition; instead we need to use objective
criteria based on sampling theory to accept or reject the hypothesis.
Hypotheses testing is the process of making inferences about a
population based on a sample. The key question therefore in
hypotheses testing is: how likely is it that a population such as
one we have hypothesized to produce a sample such as the one
we are looking at.
Hypotheses Testing-The theory
Null Hypothesis
In testing our hypotheses we must state the assumed or
hypothesized value of the population parameter before we begin
sampling. The assumption we wish to test is called the Null
Hypotheses and is symbolized by Ho.
For example if we want to test the hypotheses that the population
mean is 500. We would write it as:
Ho: µ=500
If we use the hypothesized value of a population mean in a
problem we represent it symbolically as: µHo.
The term null hypotheses has its origins in pharmaceutical testing
where the null hypotheses is that the drug has no effect, i.e., there
is no difference between a sample treated with the drug and
untreated samples.
Alternative Hypothesis
If our sample results fail to support the hypotheses we must
conclude that something else must be true. Whenever we reject
the null hypothesis the alternative hypothesis is the one we have
to accept. This symbolized by Ha .
There are three possible alternative hypotheses for any Ho., i.e.:
Ha: µ≠500(the alternative hypothesis is not equal to 500)
Ha: µ>500(the alternative hypothesis is greater than 500)
Ha: µ<500( the alternative hypothesis is less than 500)
Understanding Level of Significance
The purpose of testing a hypothesis is not to question the
computed value of the sample statistics but to make a judgment
about the difference between the sample statistic and the
hypothesized population parameter. Therefore the next step, after
stating our null and alternative hypotheses, is to decide what
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 criterion do we use for deciding whether to accept or reject the null
RESEARCH METHODOLOGY
hypothesis.
How do We use Sampling to Accept or Reject Hypothesis?
Again we go back to the normal sampling distribution. We use
the result that there is a certain fixed probability associated with
intervals from the mean defined in terms of number of standard
deviations from the mean. Therefore our problem of testing a
hypothesis reduces to determining the probability that a sample
statistic such as the one we have obtained could have arisen from
a population with a hypothesized mean m.
In the hypothesis tests we need two numbers to make our decision
whether to accept or reject the null hypothesis:
• an observed value or computed from the sample
• a critical value defining the boundary between the acceptance
and rejection region .
Instead of measuring the variables in original units we calculate a
standardized z variable for a standard normal distribution with
mean µ=0.The z statistic tells us how many how many standard
deviations above or below the mean standardized mean (z,<0,
z>0) our observation falls.
We can convert our observed data into the standardized scale
using the transformation
x −µ
z=
σx
The z statistic measures the number of standard deviations away
from the hypothesized mean the sample mean lies. From the
standard normal tables we can calculate the probability of the
sample mean differing from the true population mean by a
specified number of standard deviations. For example:
• we can find the probability that the sample mean differs
from the population mean by two or more standard
deviations.
It is this probability value that will tell us how likely it is that
a given sample mean can be obtained from a population
with a hypothesized mean m. .
• If the probability is low for example less than 5% , perhaps
it can be reasonably concluded that the difference between
the sample mean and hypothesized population mean is too
large and the chance that the population would produce such
a random sample is too low.
What probability constitutes too low or acceptable level is a
judgment for decision makers to make. Certain situations demand
that decision makers be very sure about the characteristics of the
items being tested and even a 2% probability that the population
produces such a sample is too high. In other situations there is
greater latitude and a decision maker may be wiling to accept a
hypothesis with a 5% probability of chance variation.
In each situation what needs to be determined are the costs
resulting from an incorrect decision and the exact level of risk we
are willing to assume. Our minimum standard for an acceptable
probability, say, 5%, is also the risk we run of rejecting a hypothesis
that is true.
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The Process of Hypothesis Testing
We now look at the process of hypothesis testing. An example
will help clarify the issues involved:
Aluminum sheets have to have an average thickness of .04inches
or they are useless. A contractor takes a sample of 100 sheets and
determines mean sample thickness as .0408 inches. On the basis
of past experience he knows that the population standard deviation
for these sheets is .04 inches. The issue the contractor faces is
whether he should , on the basis of sample evidence, accept or
reject a batch of 10,000 aluminum sheets.
In terms of hypotheses testing the issue is :
• If the true mean is .04inches and the standard deviation is
.004 inches, what are the chances of getting a sample mean
that differs from the population mean (.04 inches) by
.0008inches or more?
To find this out we need to calculate the probability that a random
sample with mean .408 will be selected from a population with
µ =.04 and a standard deviation= .004 If this probability is too
low we must conclude that the aluminum company’s statement
is false and the mean thickness of the consignment supplied is
not .04inches.
Once we have stated out hypothesis we have to decide on a criterion
to be used to accept or reject Ho. The level of significance represents
the criterion used by the decision maker to accept or reject a
hypothesis. For example if the manager wishes to allow for a 5%
level of significance. This means that we reject the null hypothesis
when the observed difference between the sample mean and
population mean is such that it or a larger difference would only
occur 5 or less times in every 100 samples when the hypothesized
value of the population parameter is correct.It therefore indicates
the permissible extent of sampling variation we are willing to
allow whilst accepting the null hypothesis. In statistical terms 5%
is called the level of significance and is denoted by a=.05
We now write our data systematically :
ΗΟ:µ=.04, Ha:µ≠.04 a=.045 s =.004
Our sample data is as follows:
n=100, =.0408
To test any hypothesis we need to calculate the standard error of
the mean from the population standard deviation
Next we calculate the z statistic to determine how many standard
errors away from the true mean our sample mean is. This gives us
our observed value of z which can then be compared with the z
critical from the normal tables.
x −µ
z=
σx
= .0408-.04/.0004=2
This is demonstrated in the figure 1 below.
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Figure1
1. We have now determined that our calculated value of z
indicates that the sample mean lies two standard errors(SE)
to the right of the hypothesized population mean on the
standard normal scale.
2. Our level of significance is 5%. We now determine the critical
value of z at 0.05 level of significance. This value is 1.96.
3. A comparison between the observed z and the z permissible
by our given level of significance :observed z: 2 Critical z
:1.96
4. Since the observed value of z is greater than the critical value
of z we can infer that the difference between the value of the
sample mean and the hypothesized population mean is too
large at the 5% level of significance to be attributed to
sampling variation. Hence we reject the null hypothesis. The
manager would reject the consignment of aluminum sheets
as not meeting the required specification level.
Example 2
How many standard errors around the hypothesized value should
we use to be 99.44 certain that we accept the hypothesis when it is
true?
This problem requires that we leave a probability 1-.994 =.0056 in
the tail. Since it is two tailed test we have to halve this probability
to determine z such that there is .0056/2 =.0028 area in each tail.
Area under one half of the normal curve =.5-.0028=.4972
Looking up the normal tables we find for positive values of z , a
probability of .4972 is associated with a z =2.77 this is illustrated
in the figure 2 below.
Activities
1. What do we mean when we reject a hypothesis on the basis
of a sample?
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Interpreting the Level of Significance
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The level of significance is demonstrated diagrammatically below
in figure 3. Here .95 of the area under the curve is where we would
accept the null hypotheses. The two coloured parts under the
curve representing a total of 5% of the area under the curve are
the regions where we would reject the null hypotheses.
Figure 3
A word of caution regarding areas of acceptance and rejection.
Even if our sample statistic does not fall in the non shaded region
this does not prove that our Ho is true. The sample results merely
do not provide statistical evidence to reject the hypothesis. This is
because the only way a hypothesis can be accepted or rejected with
certainty is for us to know the true population parameter.
Therefore we say the sample data is such as to cause us to not reject
null hypotheses.
Selecting a Level of Significance
There is no standard or externally given level of significance for
testing hypotheses. The level of significance at which we want to
test a hypothesis is set externally by the manager based on his
evaluation of the costs and benefits associated with acceptance or
rejection of a null hypothesis. We can however not a few points
regarding this issue:
1. The higher the level of significance the greater the probability
of rejecting Ho when it is true.
This is illustrated in the figure 4 below, which shows three levels
of significance: .01, .1, .50. The location of the sample statistic is
also shown in each of the three distributions. It obviously remains
the same.
• In fig 4a &b we would accept Ho that the sample mean does
not differ significantly from the population mean.
• In fig4c we would reject Ho.
Why? Because out level of significance of .5 is so high that we
would rarely accept Ho when it is true and frequently reject Ho
when it is true.
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figure 4a, 4b, 4c
Type 1 and Type2 Errors
Type 1 Error: defined as the probability of rejecting Ho when it
is true. This is also the probability of the level of significance. It is
symbolized by a.
Type2 error: This is the probability of accepting Ho when it is
false. It is symbolized by ß .
There exists a tradeoff between these two errors: To get a low
we have to have a higher ß.
We can reduce the probability of making a type 1 error if we are
willing to increase the probability of making a type 2 error. With
reference to the earlier figure, in figure 3 we illustrate a 50% level
of significance. Here we have reduced the acceptance region . Thus
we will rarely accept a Ho when it is not true. The price that we have
to pay for this higher level of certainty is that we will frequently
reject Ho when it is true.
To deal with this tradeoff, a manager has to weigh the costs and
benefits involved with each type of error before setting the level
of significance. This is best seen with a example.
Example of a Tradeoff
Suppose a type 1 error involves the time and trouble of working
a batch of chemicals that should have been accepted. (rejecting Ho
when it is true.)
Type2 error means that an entire group of users may be poisoned!!
( accepting Ho when it is false).In this situation the company
would prefer to minimize type 2 error and will set a high level of
significance. That is it will set very high levels of significance (
possibly >50%) to get low ßs.
Consider another Scenario
Type 1 error( rejecting Ho when it is true):
The costs associated with a type 1 error involves disassembling an
entire engine at the factory-i.e., it is associated with high production
costs. This happens, for example, if a random test sample of
products throws up product specifications, which are on the
borderlines of acceptability.
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116
Type2 (Accepting ho When it is False)
This involves accepting products with defective specifications i.e,
that some customers may get a somewhat defective product. The
costs associated with this maybe recalling the defective parts or
offering a involves giving a special warranty to repair the defect.
Offering a repair warranty is a relatively less costly option.
In this case the manufacturer will set lower levels of significance to
minimize type 1 errors. For example he may set 95% 05 99% level
of significance.
Activities
1. Explain why there is no single level of probability used to
accept or reject a hypothesis.
2. If we reject a hypothesis because it differs from a sample
statistic by more than 1.75 SE, what is the probability that
we have rejected a hypothesis that is in fact true?
3. Define Type1 and 2 errors.
4. In a criminal trial, the null hypothesis is that an individual is
innocent of a certain crime. Would the legal system prefer to
commit a type1 or type2 error with this hypothesis.
5. If out goal is to accept a null hypothesis that µ =36.5 with
96% certainty when it is true. Our sample size is 50 .
Diagram the acceptance and rejection regions for the
following hypothesis:
µ≠36.5
µ>36.5
µ<36.5
6. Your null hypothesis is that the battery for a heart pacemaker
has an average life of 300 days, with the alternative
hypothesis being that the battery life is more than 300 days.
You are the quality control engineer for the battery
manufacturer.
a. Would you rather make a type 1 or type 2 errors?
b. Based on your answer to a. would you choose a high
or low level of significance.
One Tailed Tests
So far we have discussed two tailed tests where the sample statistic
can differ from the hypothesized mean i.e., it can either be more
than the hypothesized mean or less than the hypothesized mean.
Thus a 5 % level overall level of significance implies that we can
test whether 2.5% probability whether it lies above the
hypothesized mean and 2.5% probability whether it lies below it.
However there may be many cases where we have some prior
information which enables us to test whether the sample statistic
is significantly more than or less than the true population statistic.
In this case we go in for a one-tail test.
The null hypothesis continues to be that of no difference. The
alternative hypothesis can be one of two:
a. Ho: µ=500
b. Ha: µ>500 – Upper tailed test
or
c. Ha:µ<500 – lower tailed test
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In this case if we wish to accept or reject a hypotheses at 5% level
we then determine z critical such that the entire 5% lies on either
the right side (upper tailed test) or on the left side ( lower tailed
test).This is illustrated by the coloured regions in figures 5a&5b.
Figure 5a
Figure5b
The procedure for testing the hypothesis remains the same as in
the two tailed case. The only difference will be in the value of the
z critical, which is determined by the entire level of significance on
only one side of the normal distribution.
An Example will Clarify the Situation
A hospital uses large quantities of packaged doses of a particular
drug. Excessive doses will pass harmlessly out of the system.
Insufficient doses do not produce the desired medical treatment.
The hospital has purchased the drug from the same manufacturer
for many years. The hospital inspects 50 doses randomly and
finds the mean dose to be 99.75cc. The population standard
deviation of doses is 2cc.
Our problem suggests that the hospital faces a problem if doses
are significantly less than 100cc as patient’s treatment will be affected.
However if the dose is more than 100cc there appears to be no
major problem. Therefore the null hypotheses remains unchanged,
we are only interested in testing as the alternative hypotheses
whether the sample mean strength is significantly below 100cc.
The hypotheses can be stated as follows:
Ho: µ=100cc
Ha: µ<100cc
This is a left tailed test and the coloured region corresponds to .10
level of significance. The acceptance region consists of 40% on
the left side of the distribution plus the entire 50% on the right
side for a total area of 90%. This is shown in figure5a&5b.
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We can calcu late the SE of sample mean dose:
RESEARCH METHODOLOGY
σ 2
SE = = = 0.28
n 50
We can now calculate the standardized z statistic:
x − µ 99.75 − 100
z= = = 0.88
SE 0.0289
z. critical= 1.28
Therefore since -.88<1.28, the sample mean lies within the
acceptance region and the hospital can accept the null hypothesis:
the observed mean of the sample is not significantly different
from the hypothesized mean dose.
Applications of One Tailed Tests
Many managerial situations call for a one tailed test. Typically if a
problem requires you to test whether the sample statistic is:
• More than a given population statistic
• Less than a given population statistic a one tailed test is
appropriate.
If the problem requires us to assess whether the sample statistic is
not equal to a population statistic then we use a two tailed test.
Example
1. A highway safety engineer decides to test the load bearing
capacity of a bridge that is 20 years old. Considerable data are
available from similar tests on the same type of bridges.
Which type of hypothesis is appropriate one or two tail test
If the minimum load bearing capacity of this bridge must
be 10 tons , what are the null and alternative hypotheses?
The engineer would be interested in whether a bridge of this
age could withstand minimum load bearing capacities
necessary for safety purposes . She therefore wants its capacity
to be above a certain minimum level; so a one tailed test, i.e.,
a right tailed test would be used.
The hypotheses are:
Ho: µ=10 tons Ha: µ>10 tons
2. Hinton press hypothesizes that the average life of its press is
14500 hours. The standard deviation of a press life is 2100
hours. From a sample of 25 presses the company finds
sample mean life to be 13000 hours. At a .001 significance
level should the company conclude that the average life of
the press life is less than the hypothesized 14500 hours.
Our problem requires us to assess whether average press life is
significantly less than the hypothesized press life. Therefore it is
a one tail test.
Ho: µ=14500 Ha: µ<14500 n=25, s =2100 µ=.01
SE= 2100/ √25=420
Z = 13000-14500/420= - 3.57
z. critical for a one tail test= -2.33
-3.57<-2.33 implies we should reject Ho. The average life is
significantly less than the hypothesized life.
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1. Aaj Ka films is a film distribution company. They know that
a hit movie runs for an average of 84 days in a city with a
standard deviation of 10 days. The manager of a South
Eastern district is interested in comparing the movies
popularity in his region as compared to the all India average.
He randomly selects 75 theatres in his region and finds they
ran the movie for an average of 81.5 days. The manager
wants to know whether mean running time in the South
East is below that of the national average. Test the
appropriate hypothesis at .01 level of significance.
2. Atlas Sporting goods has implemented a special trade
promotion policy for its stoves. They think the promotion
should result in a significant price change for customers.
Before the promotion began the average retail price of a
stove was $44.95 with a standard deviation of $5.75. After
the promotion they sample 25 retailers and finds mean price
to be $42.95. At a .02 level of significance does Atlas have
reason to believe the average retail price to consumers ahs
decreased?
3. Under what conditions is it appropriate to use a one tailed
test? A two tailed test?
4. The statistics department installed energy efficient lights,
heaters, ACs. Now they want to determine whether the
average monthly energy usage has decreased. Should they
perform a one or two tail test? If their previous average
monthly usage was 3124 KW hours, what are the null and
alternative hypotheses?
In the last lecture we learnt about the general principles of
hypothesis testing and how to carryout a test a sample statistic
with a hypothesized population value. We now extend the principles
of hypothesis testing to include testing of hypothesis to sample
proportions vis a vis a hypothesized population proportion. We
will also learn to test for the differences between two samples.
That is do two separate samples differ significantly from each
other. Similarly we try to determine whether the two different
sample proportions differ significantly from each other.
Hypothesis Testing of Proportions
So far we have talked about the principles of hypothesis testing
where we have compared a sample mean with a hypothesized or
population mean.
We can also apply the principles of hypothesis testing already
determined to testing for differences between proportions of
occurrence in a sample with a hypothesized level of occurrence.
Theoretically the binomial distribution is the correct distribution
to use when dealing with proportions. As sample size increases
the binomial distribution approaches a normal distribution in
terms of characteristics. Therefore we can use the normal
distribution to approximate the sampling distribution. To do
this we need to satisfy the following conditions:
np>5, nq>5
where p is the proportion of successes
q: proportion of failures.
Testing of Hypothesis for Proportions
When testing significance of hypotheses for proportions we begin
with a similar procedure to the earlier case:
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First we define various proportions or percentages of occurrence
of a event:
pHo: the population or hypothesized population of success
qHo Hypothesized value of the population proportion of failures
p: sample proportion of successes
q: sample proportion of failures
Again we calculate a z statistic
p − pH0
z=
σp
where p is the standard error of the proportion which is
calculated using the hypothesized population proportion .
pH0 qH0
σp =
n
We can then check the calculated z with z critical for the appropriate
level of significance to determine whether to accept or reject Ho.
An example shall make the process clearer..A ketchup manufacturer
is in the process of deciding whether to produce a new extra spicy
ketchup. The company’s marketing research department used a
national telephone survey of 6000 households and found that
335 would purchase extra spicy ketchup. A much more extensive
study made two years ago found showed that 5% of households
would purchase would purchase the brand then. At a two percent
level of significance should the company conclude that there is an
increased interest in the extra spicy flavour?
z critical for a one tailed test is 2.05 Since the observed z > z critical
we should reject Ho and current levels of interest are significantly
greater than interest two years ago.
Activities
1. Steve Cutter sells lawn mowers . He is interested in
comparing the reliability of his lawn mowers with an
international brand. He knows only 15% of the international
brands require repairs. A sample of 120 of Steve’s customers
shows that 22 of them required repairs. At .02 level of
significance is there evidence that Steve’s mowers differ from
the international brand.
Ans. Observed z value=1.03< 2.33(z critical) Therefore we accept
Ho.
2. Grant Inc., a manufacturer of women’s dress blouses knows
that its brand is carried in 19% of the women’s clothing
stores in Delhi. Grant recently samples 85 women’s clothing
stores in Chandigarh and found that 14.12% of the stores
carried the brand. At .04 level of significance is there evidence
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Delhi? x2 and vice versa. By constructing a distribution of all possible
sample differences –x1 - –x2 we end up with a distribution of the
3. Macroswift estimated last year that 35% of its potential
difference between sample means shown below in figure 6c.
software buyer were planning to wait to purchase the new
operating system Window Panes, until an upgrade has been
released. After an advertising campaign to reassure the public
, Macroswift surveyed 3000 people and found 950 who were
still skeptical. At the 5% level of significance can the company
conclude the proportion of skeptical people has decreased?
Hypothesis Tests of Differences between Means
So far we have examined the case where we are testing the results
of a sample against a hypothesized value of a population statistic.
We now turn to case where we wish to compare the parameters for
two different populations and determine whether these differ
from each other. In this case we are not really interested in the
actual value of the two parameters but the relation between the
two parameter, i.e. is there a significant difference between them.
Example of hypothesis of this type are: Figure 1a&1b
• Whether female employees earn less than males for the same
work.
• A drug manufacturer may need to compare reactions of one
group of animals administered the drug and the control
group.
• A company may want to see if the proportion of Figure 1c
promotable employees in one installation is different from
another.
In each case we are not interested in the specific values of the
individual parameters as the relation between the two parameters.
The mean of this distribution is
The core problem reduces to one of determining whether the
means from two samples taken from two different populations The standard deviation of the distribution of the difference
is significantly different from each other. If they are not, we can between sample means is called the standard error of the difference
hypothesize that the two samples are not significantly different between two means.
from each other.
Theoretical Basis
Shown below are three different but related distributions. The testing procedure for a hypothesis is similar to the earlier
Figure 1a shows the population distribution for two different cases.
populations 1 and 2. They have respectively the following (µ1 - µ2) Ho: µ1 = µ2
characteristics:
Ha: µ1≠ µ2 a=.05
Mean s 1 and s 2 and standard deviations s 1 and s 2.
The z statistic = (–x1 - –x2 ) – (µ1 - µ2) Ho / s –x1 - –x2
Figure 1b shows the respective sampling distribution of sample.
Since we will usually we will be testing for equality between the
This distribution is defined by the following statistics:
two population means hence:
Mean of sampling distribution of sample means : µ1
(µ1 - µ2) Ho =0 since µ1 = µ2
and µ2
An example will make the process clearer:
Standard deviation of sampling distribution of mean or the
A manpower statistician is asked to determine whether hourly
standard error of sampling mean: s ¯x1 and s ¯x2.
wages of semi skilled labour are the same in two cities. The result
We have two populations 1, 2 with mean µ1 and µ2 with standard of the survey is given in the table below. The company wants to
deviation s 1 and s 2. The associated sampling distribution for test the hypothesis at .05 level of significance that there is no
sampling means –x1 and –x 2. However what we are now interested significant difference between the hourly wage rate across the two
in is the difference between the two values of the sampling means. cities.
i.e., the sampling distribution of the difference between the
sampling means –x1 - –x2. How do we derive this distribution ?
Suppose we take a random sample from the distribution of
Population 1 and another random sample from the distribution
of Population 2. If we then subtract the two sample means, we

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City Mean Standard Size of

hourly deviation sample 1. In 1993, the Financial Accounting Standards Board (FASB)
wage of was considering a proposal to require companies to report
sample the potential effect of employees’ stock options on earnings
apex $8.95 $.4 200 per share (EPS. A random sample of 41 high-technology
Eden $9.10 $.6 175 firms revealed that the new proposal would reduce EPS by
Since standard deviation of the two populations are not known an average of 13.8 percent with a standard deviation of 18.9
we estimate s ˆ1 and s ˆ2 by using the sample standard deviation s1 %. A random sample of 35 producers of consumer goods
and Ho: µ1 = µ2 showed that the proposal would reduce EPS by 9.hpercent
Ha: µ1 ≠ µ2 a=.05 on average, with a standard deviation of 8:7 percent. On the
basis of these samples, is it reasonable for the FASB to
The estimated standard error of the difference between the two conclude (at a=.10) that the FASB proposal will cause a
means is greater reduction in EPS for high technology firms than for
–x1 - –x2
=√( s 12/n 1+ s 22 /n 2) =√( (.4)2/200+ (.6)2 /175)=$.053 producers of consumer goods?
We then calculate the z statistic: 2. A sample of 32 money market funds was chosen on Jan 1.
z. =(–x 1 - –x2 ) – ( - ) 1996, and the average annual rate of return over the past 30
1 2 Ho / –x1 - –x2
days was found to be 3.23% and the sample standard
8.95-9.10-0/.053=-2.83
deviation was.51% . A year earlier , a sample of 38 money
We can mark the standardized difference on a sketch of the market funds showed an average rate of return of 4.36% and
sampling distribution and compare with the critical value of the sample standard deviation was .84%. Is it reasonable to
z=±1.96 in figure 7 As we can see the calculated z lies outside the conclude (at =.05) that money m arket interest rates
acceptance region. Therefore we reject the null hypothesis. declined during 1995?
3. Despite the Equal pay act it still appeared that in 1993 men
earned more than women in similar jobs. A random sample
of 38 male machine tool operators found a mean hourly
wage of $11.38, and a sample standard deviation was $1.84.
A random sample of 45 female operators found their mean
wage to be $8.42 and the sample standard deviation was
$1.31. On the basis of these samples is it reasonable to
conclude (at a=.01) that the male operators are earning over
$2.00 more per hour than the female operators?
Tests for differences between proportions for large samples
Figure 2 The analysis for testing differences in proportions of two samples
Example 2 is broadly similar to earlier case. As long as samples are greater
than 30 we can use the normal approximation to binomial.
1. Two independent samples of observations were collected.
For the first sample of 60 elements, the mean was 86 and Suppose we have two sample proportions p 1 and p 1 which measure
the standard deviation 6. The second sample of 75 elements the probability of occurrence of an event or characteristic in two
had a mean of 82 and a standard deviation of 9. samples. We wish to test whether the probability of occurrence is
significantly different across the two samples.
a. Compute the estimated standard error of the
difference between the two means. p1: sample proportion of success in sample 1

b. Using a = 0.01, test whether the two samples can p2: sample proportion of success in sample 2
reasonably be considered to have come from n1 : sample size 1
populations with the same mean. n2 : sample size 1
Standard error of the difference between two proportions
Since we do not know the population proportions, we need to
estimate them from sample statistics:
We hypothesize that there is no difference between the two
proportions. In which case our best estimate of the overall
population proportion successes is the combined proportion of
successes in both samples. This can be calculated from the
following formula:
= (86-82)-0/1.296=3.09
Since 3.09>2.58, we reject Ho and it is reasonable to conclude that
the two samples come from different populations.

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120 11.556
 Once we have the estimated proportion of successes in two
populations. The estimated standard error of the difference
between two proportions is as follows:
The standard z statistic in this case is calculated as :
This can be best illustrated with the help of an example:
A pharmaceutical company tests two new compounds to reduce
blood pressure. They are administered to two different groups of
lab animals. In group1 71 of 100 animals respond to drug1 with
lower BPS. In group2 58 of 90 animals showed lower BP levels.
The company wants to test at .05 level of significance whether
there is a difference between the two drugs.
p1: .71 (sample proportion of success in sample 1)
q1: .29 n1 : 100
p2: .644 (sample proportion of success in sample 2)
q2: .356 n2 : 90 Ho: p1= p2 Ha: : p1≠ p2 a =.05
The overall population or hypothesized percentage of occurrence
assumes that there is no difference between the two population
proportions. We therefore estimate it as the combined proportion
of successes in both samples.
ˆp=100(.71)+90(.644)/190=.6789
The estimated standard error of the difference between two sample
proportions is:
The observed z statistic is:
z= (.71-.644)-0/.0678=.973
z. critical for .o5 level of significance is 1.96. Since observed z is
less than z critical we accept Ho. This is shown in the figure 3
below:
Figure 3
Example 2
For tax purposes a city government requires two methods of
listing property. One requires property owner to appear in person
before a tax lister. The second one allows the form to be mailed.
The manager thinks the personal appearance method leads to
lower fewer mistakes. She authorizes an examination of 50
personal appearances, and 75 mail forms. The results show that
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11.556
10% of personal appearances have errors whereas 13.3 % of mails
RESEARCH METHODOLOGY
forms had errors. The manager wants to test at the .15 level of
significance, the hypothesis that that personal appearance method
produces lower errors. The hypothesis is a one tailed test. The
procedure for this as the same as for carrying out a one tailed test
for comparing sample means. The data is as follows:
Since it is a one tail test we do not divide the level of significance
on both sides of the normal curve. A .15 level of significance
implies we determine z critical for area under one side of the
normal curve i.e., .35 (.5-.15). Specifically it is a left tailed test as the
manager wishes to test that method 1 , i.e., personal appearances,
result in significantly lower errors. This is shown by the marked
of region in the figure4
Figure 4
therefore calculated z <critical z we accept the null hypotheses.
Hint: If a test is concerned with whether one proportion is
significantly different from another, use a two-tailed test. If the
test asks whether one proportion is significantly higher or lower
than the other, a one tailed test is appropriate.
Activities
1. A large hotel chain is trying to decide whether to convert more
of its roe=.: to nonsmoking rooms. In a random sample of
400 guests last year, 166 have requested nonsmoking rooms.
This year, 205 guests in a sample of 38C preferred the
nonsmoking rooms. Would you recommend that the hotel
chain convert more rooms to nonsmoking? Support your
recommendation: testing the appropriate hypotheses at a 0.01
level of significance.
121
 Ans:z calculated = -3.48< -z critical=-2.33 Therefore reject Ho. compute mean and ask: suppose Ho were true what is the
RESEARCH METHODOLOGY

2. Two different areas of a large Eastern city are being considered probabilityofgettingasamplemeanthisfarawayfro µm
Ho.

as sites for day-care centers. of 200 households surveyed in This is called a probability value or p- value of the sample mean.
one section, the proportion in which the mother’s worked full- The two methods are equivalent and essentially represent two
time was 0.52. In another section of the city 40 percent of the sides of a coin.
150 households surveyed had mothers working at fulltime
• In the earlier case we prespecify a level of probability and
jobs. At the 0.04 level of significance is there a significant
compare the observed probability of getting a sample
difference in the proportions of working mothers in the two
statistic with the prespecified level of probability( a ).
areas of the city?
• We now ask what is the probability value of getting such a
Ans:z calculated =2.23>z critical=2.05. Therefore reject Ho.
result. This is termed the p- value of a statistic.
4. On Friday 11 stocks in a sample of 40 of the 2500 stocks
Once the p- value is determined the decision maker can then
traded on the BBSE advanced, i.e., their price of their shares
weigh all relevant factors and decide whether to accept/reject Ho
increases. In a sample of 60 BSE stocks on Thursday , 24 had
without being bound by a prespecified level of significance.
advanced At α =.10 , can you conclude that a smaller proportion
of BSE stocks advanced on Friday than did on Thursday? The p- value can also be more informative. For example if we
reject a Ho at a=.05, we only know that the observed value was
5. A coal fired power plant is considering two different systems
atleast 1.96 SE away from the mean. A p- value tells us the exact
for reducing pollution. The first system has reduced the
probability of the getting a sample mean 1.96SE away from the
emission of pollutants to acceptable levels68% as
mean.
determined from 200 air samples. The second more
expensive system has reduced the emission of pollutants to The concept will be made clearer with the help of an example.
acceptable levels 76% of the time as determined on the basis Example
of 250 air samples. If the expensive system is significantly A machine is used to cut Swiss Cheese into blocks of specified
more effective than the inexpensive system, the management weight. On the basis of experience the weight of a block has a
of the power plant will install the inexpensive system. Which standard deviation of .3gm. The machine is currently set to cut
system will be installed if the management uses a significance blocks of 12 gm. A sample of 25 blocks is found to have an
level of .02 in making its decisions? average weight of 12.25g. Should we conclude the machine needs
In this chapter we will wrap up our analysis of hypothesis testing to be recalibrated?
for large samples. By now you should have a good idea how to Since this is a two tailed test we need to determine the probability
apply the principles of hypothesis testing to different types of of observing a value of >x atleast as far away from 12 as 12.25 or
managerial problems. However these days any management 11.75gm if Ho is true.
problem that we may wish to analyze generates such a large
We therefore need to calculate the probability
volume of data that it is virtually impossible to analyze and test
hypotheses manually. Given the widespread availability of P(x>12.25 or x<d 11.75) if Ho is true.
computers and statistical packages we can easily run such tests on Our hypothesis can be stated as :
the computer. Therefore it becomes important to understand Ho: µ=12 Ha: µ≠12
and interpret how these tests are run on the computer.
s =.3 n=25 >x=12.15
Obviously the basic theory and principles of statistical analysis do
s >x = s / √n=.3/5=.06
not change when a test is carried out on computer. However there
are some differences in the way the level of significance is presented. We can then convert >x to a standard z score.
Computer outputs usually present the prob value or p-value. We
shall look at what prob values mean and compare them with
conventional tests of significance. From the normal tables we can find the probability that a z greater
We shall also look at what is considered a good hypothesis test. than 2.5 is .5-.4938=.0062
This is done by measuring the power of a test. This concept will Since this is a two tailed test the p- value is 2*.0062=.0124 this
also be presented in detail. information is shown in the figure 1 below;
Probability Values
So far we have tested a hypothesis at a given level of significance.
In other words before we take the sample we specify how unlikely
the observed result will have to be in order for us to reject Ho. For
example we test the hypothesis that observing a sample mean
this far away from the true population mean is less than 5%,
where %% is our externally given level of significance.
There is another way to approach the decision whether to accept or
reject Ho which does not require us to prespecify the level of
significance before taking a sample. In this case we take a sample,

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122 11.556
Figure 1
Given the above information the cheese packer can now decide
whether to recalibrate the machine or not. As we can see the p –
value is very low and he probably will not go in for recalibration.
If he had he carried out a conventional hypotheses test at .05 level
of significance is also illustrated in the figure 1.On the basis of the
z test he would have rejected the Ho 5 % level. However at a
significance level of .01 we would have accepted the hypotheses, as
the critical z value would have been 2.58.
The p- value tells us the largest significance level at which we
would have accepted Ho, i.e, .0124 and the associated z value
(±2.5). Thus at any level of significance above .0124 we would
reject Ho.
Uses of p- values
Use of p values saves the tedium of looking up tables. The smaller
the probability value, the greater the significance of the finding.
The simple rule of thumb is: As long as µ>p reject Ho.
For example if we have a p-value=.01 and µ=.05 . Then this
means that the probability of getting our sample result is .01. We
compare this with our standard of accepting/ rejecting Ho which
is .05. since .05>.01 we reject Ho as the probability of getting such
a result is much lower than our level of significance.
Example 2
The Coffee Institute has claimed that more than 40% of American
adults regularly have a cup of coffee with breakfast. A random
sample of 450 individuals showed that 200 of them were regular
coffee drinkers at breakfast. What is the prob value of a test of
hypotheses seeking to show that the Coffee Institute’s claim was
correct.
Activities
1. A car retailer Hunks that a 40000 mile claim for tyre life by the
manufacturer is too high. She carefully records the mileage
obtained from a sample of 64 such tyres. The mean turns
out to be 38,500 miles. The standard deviation of the life of
all tyres of this type has previously been calculated by the
manufacturer to be 7,600 miles. Assuming that the mileage
is normally distributed, determine the largest significance
level at which we would accept the manufacturer’s mileage
claim, that is, at which we would not conclude the mileage is
significantly less than 40,000 miles.
2. The North Carolina Department of Transportation has
claimed that at most, 18 percent of passenger cars exceed 70
mph on Interstate 40 between Raleigh and Durham. A
random sample of 300 cars found 48 cars exceeding 70 mph.
What is the prob value for a test of hypothesis seeking to
show the NCDOT’s claim is correct?
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3. Kelly’s machine shop uses a machine-controlled metal saw to
RESEARCH METHODOLOGY
cut sections of tubing used in pressure-measuring devices.
The length of the sections is normally distributed with a
standard deviation of 0.06". Twenty-five pieces have been cut
with the machine set to cut sections 5.00" long. When these
pieces were measured, their mean length was found to be
4.97". Use prob values to determine whether the machine
should be recalibrated because the mean length is
significantly different from 5.00".
3. SAT Services advertises that 80 percent of the time, its
preparatory course will increase an individual’s score on the
College Board exams by at least 50 points on the combined
verbal and quantitative total score. Lisle Johns, SAT’s
marketing director, wants to see whether this is a reasonable
claim. Lisle has reviewed the records of 125 students who
took the course and found that 94 of them did, indeed,
increase their scores by at least 50 points. Use prob values to
determine whether SAT’s ads should be changed because the
percentage of students whose scores increase by 50 or more
points is significantly different from 80 percent.
Using the computer to Test the Hypotheses
These days in actual managerial situations hypotheses tests are
rarely done manually. Therefore it is important that students can
interpret computer output generated for hypotheses tests by
various standard statistical analysis packages. The most popular
of these packages are SPSS and Minitab. Broadly all programmes
follow the same principles. Instead of a comparing the calculated
z value with a predetermined level of significance, most packages
display the prob values or p- values.
To accept or reject an hypotheses we compare the level of significance
(a ) and the p- value. If a >p- value we reject Ho at the relevant level
of significance and vice versa.
An example will help show how computer outputs results for
hypotheses testing.
Example
While designing a test it was expected that the average grade would
be 75%, i.e., 56.25 out of 75. This hypotheses was tested against
actual test results for a sample of 199 students.
Ho: µ=56.25 Ha: µ≠56.25
This hypotheses was tested at a =.05
The computer output for this test is shown below using the
Minitab package. The observed t value for this test was -15.45,
with an associated (two-tailed) prob value of 0.0000. Because this
prob value is less than our significance level of a = 0.05, we must
reject Ho and conclude that the test did not achieve the desired
level of difficulty.
This is shown in Table 1
T test for a mean
Test for µ=56.25 vs µ≠56.25
Varaible N Mean Stdev SEMean T P-value
Result 199 45.281 10.014 .710 -15.45 0.00
Table1
T test for difference between two sample means
Here we test hypotheses of equality of two means.
123
 The university had been receiving many complaints about the which the alternative hypothesis is true, there is a different
RESEARCH METHODOLOGY

caliber of teaching being done by the graduate-student teaching probability of incorrectly accepting the null hypothesis.
assistants. As a result, they decided to test whether students in Of course, we would like this ß (the probability of accepting a null
sections taught by the graduate TAs really did worse in the exam hypothesis when it is false) to be as small as possible or we would
than those students in sections taught by the faculty. like 1-ß (the probability of rejecting a null hypothesis when it is
If we let the TAs’ sections be sample 1 and the faculty’s sections false) to be as large as possible.
be sample 2, then the appropriate hypotheses for testing this Therefore a high value of 1-ß(something near 1.0) means the test
concern are is working quite well ( i.e it is rejecting the null hypothesis when it
Ho: µ1 = µ2 is false); a low value of 1-ß (something near 0.0) means that the
test is working very poorly( i.e. not rejecting the null hypotheses
Ha: µ1< µ2 when it is false).
The underlying population is assumed to be equal for both The value of 1-ß is a measure of how well the test is working and
samples. is known as the power of the test. If we plot the values of 1-ß for
The Minitab output for doing this test is given below. The test each value of for which the alternative hypothesis is true, the
results are reported assuming that the two population variances resulting curve is known as a power curve. This can be explained
are equal. If we can assume that the two variances are equal, then better with the help of an example.
the test reported by Minitab is the test using a pooled estimate for Example
s 2. This is shown in table 2 We were deciding whether to accept a drug shipment. Our test
Table2 indicates that we should reject the null hypothesis if the
Two sample T- Test standardized sample mean is less than - 1.28, that is, if sample
mean dosage is less than 100.00 - 1.28 (0.2829), or 99.64 cc.
Instrnum N Mean stdev SE mean In Figure 9a, we show a left-tailed test. In Figure 9b, we show
the power curve which is plotted by computing the values of 1
1 89 44.93 9.76 1.0

2 110 45.6 10.2 .98

T test µ1 = µ2 vs µ1< µ2 : T=-.44 P=.33 Df =197

Both use pooled stdev=10.0

What does the data tell us regarding the efficacy of TA ? The prob
value is quite high, i.e., .33. Therefore if we compare this with a
level of significance of .05 (a = 0.05) we would accept the null
hypotheses that there is no difference in results between TAs and
faculty. In this case we would accept the null hypotheses at any
level of significance up to .33.
Measuring the Power of a Test
What should a good hypothesis test do ?
Ideally and (the probabilities of Type I and Type 2 errors) should Figure 2a
both be small. A Type I error occurs when we reject a null
hypothesis that is true. a (the significance level of the test) is the
probability of making a Type I error. Once we decide on the
significance level, there is nothing else we can do about a.
A Type 2 error occurs when we accept a null hypothesis that is
false; the probability of a Type 2 error is ß. Ideally a manager
would want a hypothesis to reject a null hypothesis when it is
false. Suppose the null hypothesis is false. Then managers would
like the hypothesis test to reject it all the time. Unfortunately,
hypothesis tests cannot be foolproof; sometimes when the null
hypothesis is false, a test does not reject it, and a Type 2 error is
made.
When the null hypothesis is false, µ (the true population mean)
does not equal µHo (the hypothesized population mean);
instead,equals some other value. For each possible value of for

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124 11.556
 Figure 2b
Point C on the power curve in Figure 2 b shows population
mean dosage is 99.42 cc. Given that the population mean is 99.42
cc, we must compute the probability that the mean of a random
sample of 50 doses from this population will be less than 99.64 cc
(the point below which we decided to reject the null hypothesis
i.e., the value of the dose at which we rejected the null hypothesis.
This shown in Figure 2c .
Figure 2 c
We had computed the standard error of the mean to be 0.2829 cc.
So 99.64 cc is (99.64- 99.42)/0.2829 = 0.78
Thus 99.64 is .78 SE above the true population mean when it
takes a value µ= 99.42 cc.
The probability of observing a sample mean less than 99.64 cc
and thus rejecting the null hypothesis is 0.7823, when we take the
true population mean to be µ= 99.42 cc. This is given by the
colored area in Figure 9c. Thus, the power of the test 1 - ß
at = 99.42 is 0.7823. This simply means that if = 99.42, the
probability that this test will reject the null hypothesis when it is
false is 0.7823.
Point D in Figure 9b shows that if the population mean dosage
is 99.61 cc. We then ask what is the probability that the mean of
a random sample of 50 doses from this population will be less
than 99.64cc and thus cause the test to reject the null hypothesis?
This is illustrated in Figure 2d. Here we see that 99.64 is (99.64 -
99.61)/0.2829, or 0.11 standard error above 99.61 cc. The
probability of observing a sample mean less than 99.64cc and
thus rejecting the null hypothesis is 0.5438, the colored area in
Figure 9d. Thus, the power of the test (1 - µ ) at µ= 99.61 cc is
0.5438.
Figure 2d
Using the same procedure at point E, we find the power of the
test at = 99.80 cc is 0.2843; this is illustrated as the colored area in
Figure 2e.
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11.556
RESEARCH METHODOLOGY
Figure 2e
As we can see the values of 1 - ß continue to decrease to the right
of point E. This is because as the population mean gets closer
and closer to 100.00 cc, the power of the test (1 - ß ) gets closer and
closer to the probability of rejecting the null hypothesis when the
population mean is exactly 100.00 cc. This probability is nothing
but the significance level of the test which in this case is 0.10. The
curve terminates at point F, which lies at a height of 0.10 directly
over the population mean.
What does the Power Curve in figure 2b Tell Us?
As the shipment becomes less satisfactory (as the doses in the
shipment become smaller), our test is more powerful (it has a
greater probability of recognizing that the shipment is
unsatisfactory). It also shows us, however, that because of
sampling error, when the dosage is only slightly less than 100.00
cc, the power of the test to recognize this situation is quite low.
Thus, if having any dosage below 100.00 cc is completely
unsatisfactory, the test we have been discussing would not be
appropriate.
Example:
Before the 1973 oil embargo and subsequent increase in oil price,
petrol usage in the US had grown at a seasonally adjusted rate of
.57% per month, with a standard deviation of of .10% per month.
In 15 randomly chosen months between 1975 and 1985, petrol
usage grew at an average rate of .33% per month. At a .01 level of
significance can you conclude that the growth in the use of gasoline
had decreased as a result of the embargo?Compute the power of
the test for =.50, .45 and .4% per month.
=.10 n=15,
Ho: µ=.57, Ha: µ<.57 At a =.01, the lower limit of the
acceptance region is :
µHo – 2.33 µ/ √n=.57-2.33(.10) / √15=.510
a. At µ=.50, the power of the test is :
P(>x<.510)=P(z<.510-.50/.10/ √15=
P(z<.39)=.5+.1517=.6517
b. At =.45, the pow er of the test is
P(>x<.510)=P(z<.510-.45/.10/”15=
P(z<2.32)=.5+.4898=.9898
c. At =.40, the power of th e testis
P(>x<.510)=P(z<.510-.40/.10/”15=
P(z<.4.26)=.5+.1517=1.00
125
 Problems alternative hypothesis states the direction of differences. If
RESEARCH METHODOLOGY

1. A manufacturer of petite women’s sportswear has no direction of difference is given, it is two tailed test.
hypothesized that the average weight of the women its • Choose the statistical test on the basis of the assumption
buying1.ts_clothing is 110 pounds. The company takes two about the population distribution and measurement level.
samples of its customers and finds one sample’s estimate of The form of the data can also be a factor. In light of these
the population mean is 98 pounds, and the other sample considerations, one typically chooses the test that has the
produces a mean weight of 122,pqunds. In the test of the general power efficiency or ability to reduce decision error.
company’s hypothesis that the population mean is 110 • Select the desired level of confidence. While α = 0.05 is
pounds versus the hypothesis that the mean does equal 110 the most frequently used level, many others are also used.
pounds, is one of these sample values more likely to lead The α is the significant level that we desire and is set in
accept the null hypothesis? Why or why not? advance of the study.
2. On an average day; about 5 percent of the stocks on the New • Compute the actual test value of the data.
York Stock set a new high for the year. On Friday Sept 18th ,
• Obtain the critical test value, usually by referring to a table for
1992 the Dow Jones closed at closed at 3,282,on a robust
the appropriate type of distribution.
volume of over 136 million shares traded. A random
sample of 120, stocks showed that 16 had set new annual • Interpret the result by comparing the actual test value with
highs that day. Using a significance level of 0.01, should we the critical test value.
conclude that more stocks than usual set new highs on that Notes
day?
3. A finance developed a theory that predicted that closed end
equity funds should sell at a premium of about 5% on
average. Assuming that the discount /premium population
is approximately normally distributed does the sample
information support his theory? Test at .05 level of
significance.
4. A company recently criticized for not paying women as much
as men claims that its average salary paid to all employees is
$23500. From a random sample of 29 women, the average
salary was calculated to be $23,000. If the population
standard deviation is known to be $1250 for these jobs
determine whether we could reasonably, within 2 standard
errors expect to find $23000 as the sample mean if, in fact ,
the company’s claim is true.
5. A manufacturer of vitamins for infants inserts a coupon for
a free sample of its production a package that is distributed
at hospitals to new parents. Historically about 185 of the
coupons have been redeemed. Given current trends for
having fewer children and starting families later, the firm
suspects that today’s parents are better educated on average
and as a result more likely to use vitamin supplements for
their infants. A sample of 1500 new parents redeemed 295
coupons. Does this support at a significance level of 2percent
the firm’s beliefs about today’s new parents.
6. From a sample of 10,200 loans made by a state employees
credit union in the most recent five year period, 350 were
sampled to determine what proportion was made to
women. This sample showed that 39% of the loans were
made to women employees. A complete census of loans 5
years ago showed that 41% were women borrowers. At a
significance level of .02 can you conclude that the proportion
of loans made to women has changed significantly in the last
five years?
Points to Ponder
• Hypothesis testing cab be viewed as a six-step procedure
• Establish a Null Hypothesis as well as alternative
Hypothesis. It is a one tail test of significance if the

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126 11.556