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Question #

This part is for the use of the GRADER ONLY
Question #
I II III IV
TOTAL
Part #
A B C D A B C A B C D A B C D
Full
Marks
7 7 4 2 4 8 7 7 6 5 7 2 6 2 6 80
Obtained
Marks



Indian Institute of Management Bangalore
Introduction to Statistical Methods
Final Examination
Time: 3 Hrs. Name:___________________
Max Points: 80 Roll No.:_________________

Do not seek any clarifications. Answer all questions showing necessary calculations in the
space provided (if necessary, use the left/back pages with question numbers). Do not attach
any additional sheets. Encircle/underline your final answer to each part.


Question I.

INtelligent INitiatives for INternet (Popularly known as TIN, short for Three IN) was testing two
different training methodologies (Method A and Method B) for training their employees. To
evaluate the effectiveness of the two methods, the employees who were sent to these training
programmes were given a test and the test scores are given below:

S. No. 1 2 3 4 5 6 7 8 9 10 11 12
Method A 54 56 50 68 48 68 72 59 56 70 72 58
Method B 52 56 49 57 51 54 59 55 53 57 54

A. Test whether there is a significant difference (at 5% level) between the two methods,
using an appropriate non-parametric test.
[7]

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B. Test whether there is a significant difference (at 5% level) between the two methods,
using ANOVA.
[7]

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C. State clearly, the assumptions required to be made in parts A and B.
[4]

















D. Did you expect the conclusions from the above two tests (in parts A and B) to be the
same? Briefly explain or justify your findings.
[2]









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Question II
Bruce is concerned with the sales of his product. He thinks that the main possible
contributing factors are the number of major competing products (COMP) and expenses on
advertising (ADV), as well as promotion (PRO). He collected data from the last 18 months. In his
judgment, promotion and advertisement expenses take about a month to take effect, and so he
lined up these expenses from the previous month in the table compiled below:
Sales ADV PRO COMP
('000) (lakh) (lakh) (no.)
March, 2000 17.87 3.37 0.93 2
April, 2000 17.98 3.59 1.25 2
May, 2000 18.18 3.60 1.44 2
June, 2000 19.26 3.77 1.50 2
July, 2000 19.46 3.89 1.59 2
August, 2000 19.50 3.96 1.76 2
September, 2000 17.86 4.07 1.80 3
October, 2000 17.33 4.07 1.88 4
November, 2000 22.64 4.09 1.89 3
December, 2000 19.62 3.79 1.91 5
January, 2001 19.99 3.84 2.10 5
February, 2001 20.30 4.12 2.20 5
March, 2001 20.53 4.14 2.26 5
April, 2001 20.54 4.17 2.31 5
May, 2001 20.77 4.36 2.51 5
June, 2001 21.24 4.42 2.59 5
July, 2001 21.65 3.91 2.63 5
August, 2001 19.61 3.92 3.09 6
Mean 19.685 3.949 1.979 3.778
standard deviation 1.450 0.266 0.540 1.478
sum-product with sales 1403.0602 709.214 1356.162

Few summary statistics are also provided in the above table. For next month, the advertising and
promotional budgets are Rs. 4 lakh and Rs. 3 lakh, respectively. The number of major
competitors is not likely to change in the next couple of months.

A. Find the correlation between sales and each of the three possible independent variables.
Which of these are statistically significant at 2% level of significance?
[4]





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B. When all three independent variables were entered using the ENTER method of SPSS
regression, the following output popped up:
ANOVA
Sum of Squares df Mean Square F Sig.
Regression 14.521 3 4.840 3.196 .056
Residual 21.202 14 1.514
Total 35.723 17
a Predictors: (Constant), COMP, ADV, PRO
b Dependent Variable: SALES

Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
(Constant) 11.604 5.247 2.211 .044
ADV 1.454 1.584 .268 .918 .374
PRO 1.474 1.359 .550 1.085 .296
COMP -.153 .433 -.156 -.354 .729

Use the output to answer the following questions:
i) Predict the sales for September 2001.
[2]



ii) What percentage of variation in sales can be explained by the three independent
variables? What is it popularly known as?
[2]




iii) Find an interval that is likely to contain (with 95% certainty) the average
decrease in sales for every additional major competitor.
[2]







iv) Explain the difference in sign between the (estimated) intercept parameters and
the correlation you computed in A) for the same independent variable (with
SALES)?
[2]

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C. For this part assume that the first step of a stepwise regression is being implemented for
the above problem.

i) Which of the independent variables would be selected first, and why?
[1]




ii) Write down the ANOVA table for this step (only) of the model.
[3]



















iii) Find an interval that would contain the next months sale with 95% certainty
(For this step only).
[3]


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Question III

Bestpharm is a Bangalore-based pharmaceutical company. One of their key products is a
500mg capsule, and Bestpharm manufactures as many as 20,000 capsule per production cycle.
Typically, Bestpharm runs 2 or 3 cycles in a day. Each capsule is supposed to contain 100mg of
the medicine and 400mg of filler (a form of sugar); but because of variation in the production
process, a 5% variation in the medicine content of a typical capsule has been traditionally
permitted by the Federal Drug Regulation Authority (FDRA). Bestpharm used to take pride in
announcing that 100% of its products meet the regulation of FDRA.
In each production cycle, Bestpharm uses 2 kg of the medicine and 8 kg filler; so it has
good reasons to feel confident about the average medicine content level in their capsules.
However, that in itself, does not guarantee that Bestpharm is able to follow a new directive issued
by FDRA and this is of great concern to Bestpharm, specially Mr. Krishnarajan, the man-in-
charge of this capsule at Bestpharm. This new directive states that appropriate protocol must be
followed so as to ensure that not more than 1% of the capsules manufactured fail to have the
medicine content within 2.5% of the desired level. Krishnarajan decided to use a new blending
machine (on trial basis) that a vendor has been trying to push for quite some time. He decided to
exactly measure the medicine content of 50 capsules produced using the new blender (the rest of
the production process being unaltered). He also arranged to measure the medicine contents of 30
capsules manufactured using his earlier blender. The collected data with respective means and
standard deviations are reported below:

Medicine contents in 30 tablets using the old blender (after sorting):

97.9 98.3 98.4 98.7 98.9 98.9 99.0 99.0 99.3 99.3
99.3 99.5 99.6 99.6 99.6 99.6 99.8 99.9 99.9 100.0
100.5 100.6 100.7 100.8 100.9 101.2 101.3 101.4 101.7 102.2

Mean = 99.860 standard deviation = 1.0695



Medicine contents in 50 tablets using the new blender (after sorting):

98.1 98.4 98.5 98.6 98.7 98.7 99.0 99.1 99.1
99.1 99.3 99.3 99.4 99.5 99.5 99.5 99.5 99.6 99.6
99.7 99.8 99.8 99.8 99.8 99.9 99.9 99.9 100.0 100.1
100.1 100.1 100.1 100.2 100.3 100.3 100.4 100.4 100.4 100.6
100.6 100.6 100.6 100.7 100.8 101.0 101.1 101.2 101.3 101.3

Mean = 99.826 standard deviation = 0.8201


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Question #

A. What probability distribution can Krishnarajan reasonably assume regarding the medicine
content of the capsules? Group the data from old blender into five classes (specified below) and
use the grouped data to formally test at 1% level of significance whether such an assumption
makes sense. Also compute the average and standard deviation from this grouped data and
comment on why your computed values possibly defer from those reported in the previous page?
(Is it due to sampling fluctuations?)
[1+4+2]
Medicine content
>

99
99 100
100 101
101 102
102
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B. If the new criterion set by FDRA is being barely met by Bestpharm using the old blender
itself,

i) what must be the true variance of the medicine contents of these capsules
using the old blender?
[3]



















ii) how likely it is that the sample variance of medicine contents of thirty
capsules would be no higher than what it has been in the collected sample?
[3]





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C. When Krishnarajan fed the data from both the blenders into the SPSS package and ran
Analyze-Compare Means-Independent sample T-test menu. Part of the output looked
like this:



Levene's Test for
Equality of Variances t-test for Equality of Means
F Sig. T df
Sig.
(2-tailed)
Mean
Difference
Std. Error
Difference

Equal variances
Assumed
2.872


0.094


0.160 78 0.873 0.034 0.213
Equal variances
not assumed 0.150 49.430 0.882 0.034 0.227



Krishnarajan is an alumni of IIMB and hence does not know what exactly is the Levenes Test.
How should he, then, interpret the number 0.094 in the above output? Carry out the appropriate
test procedure at 2% level of significance as an alternative to the Levenes test. (Clearly spell out
the null and the alternative hypothesis, critical region and decision.) Comment on the role of your
test procedure in the right half of the above table.
[1+3+1]
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D. Krishnarajan wants to test whether the capsules produced using the new blender would
meet the new directive without making use of any assumption regarding the probability
distribution of medicine contents in a capsule manufactured using the new blender.
However, he feels that making statistical validity of such a low probability is problematic
using only 50 samples that he has. This prompts him to test whether 80% or more
capsules have medicine content within 1.25% of the required specification [He argues
that validity of testing this hypothesis would be somewhat equivalent to the initial
problem; but you do not need to dwell on validity of the equivalence.] He thinks that it
would be proper to frame the null hypothesis that the criterion is not satisfied and look for
the possible evidence coming out of the sample outcome at 5% level of significance.

a. Formulate Krishnarajans problem at hand as a testing of hypothesis problem and
explicitly find the critical region of the above test.
[4]
















b. What would be the power of the above test if the new blender is so good that
only 4% of the capsules have medicine content level outside 1.25% of the
required specification?
[3]
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Question IV

Watergate Amex Ltd (WAL) has to decide on the pricing strategy for the coming month. This
month being the festive season is very important for the bottom line. Shivaram, who is the GM,
Sales and Marketing, decided that he has four possible options, namely (i) increase the price by
10%, (ii) increase the price by 5%, (iii) decrease the price by 5% and (iv) decrease the price by
10%. The final effect of the price increase or decrease depends on what the competitor, Indus
India Inc. (popularly known as I3). Shivaram has analyzed the past data and confirmed that the
possible strategies for I3 are same as that of WAL, i.e., increase the price by either 5% or 10%, or
decrease the price by 5% or 10%. Based on the analysis of the past data, Shivaram estimated an
equation to determine the profit of WAL, based on the pricing strategies of the two competitors.
The equation is as follows:

P=500+2.0(X) (Y) where P= the profit of WAL; X = % increase in the price by WAL and
Y = % increase in the price by I3. [For example, if I3 decrease its price by 5%, then Y = - 5.]

Based on the past data, the frequency distribution for all possible pricing combinations between
WAL and I3 is as given below:

WALs Strategy
I3 Strategy
Increase by 10% Increase by 5% Decrease by 5% Decrease by 10%
Increase by 10% 10 20 30 20
Increase by 5% 6 20 4 10
Decrease by 5% 10 2 6 2
Decrease by 10% 10 10 20 20

Based on the above information,
A. Calculate the payoff matrix for WAL.
[2]

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B. Identify the optimal strategy for WAL.
[6]



























C. Calculate the maximum amount that WAL will be willing to pay for any kind of
information.
[2]
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It was very clear to Shivaram that it is always good for his company when the price changes of
both the competitors are in the same direction. Accordingly, he decided that he increase his price
by 10% if I3 increases the price and if I3 decides to decrease the price, he will decrease his price
by 10%. Unfortunately, he has to guess what his competitor is likely to do. Instead of guessing,
he decided to hire the services of Indian Market Research Corporation (IMRC) to advise him.
IMRCs previous record in predicting I3s price change is summarized below:

IMRC predicts I3s actual price change
Increase by 10% Increase by 5% Decrease by 5% Decrease by 10%
Increase in I3s price 0.2 0.4 0.1 0.3
Decrease in I3s price 0.15 0.05 0.6 0.2

For example, 60% of the times when IMRC predicted a decrease in I3s price, I3 actually
decreased its price by 5%. The past record also shows that IMRC has been predicting an
increase in I3s price 60% of the times.

D. How much should Shivaram be willing to pay for the advise from IMRC? What is the
efficiency of IMRCs information?
[5+1]