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OPRE 6301/SYSM 6303

Quantitative Introduction to Risk and
Uncertainty in Business
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Chapter Eleven
Introduction to Hypothesis Testing

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Concepts of Hypothesis Testing

Null hypothesis H0
Alternative hypothesis H1
Lets consider a non-statistical example:
A person is accused of a crime and faces a trial.
H0: The defendant is innocent
H1: The defendant is guilty
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Concepts of Hypothesis Testing

There are two possible outcomes:
Convict the defendant.
(Rejecting the null hypothesis in favor of the
alternative hypothesis.)
Acquit the defendant.
(Not rejecting the null hypothesis in favor of the
alternative hypothesis.)
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Concepts of Hypothesis Testing

Truth about the Defendant

Jury Decision

H0 True
Defendant is
Innocent

H0 False
Defendant is
Guilty

Reject H0
Convict Defendant

Type I Error
a

Correct
Decision

Do Not Reject H0
Acquit Defendant

Correct
Decision

Type II Error
b
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Concepts of Hypothesis Testing

1. There are two hypotheses.

One is called the null hypothesis, and the other is
called the alternative or research hypothesis.

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Concepts of Hypothesis Testing

2. The testing procedure begins with the

assumption that the null hypothesis is true.

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Concepts of Hypothesis Testing

3. The goal of the process is to determine whether

there is enough evidence to infer that the
alternative hypothesis is true.

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Concepts of Hypothesis Testing

4. There are two possible decisions:
Conclude there is enough evidence to support
the alternative hypothesis.
Conclude there is not enough evidence to
support the alternative hypothesis.

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Concepts of Hypothesis Testing

5. Two possible errors can be made in any test.
A Type I Error occurs when we reject a true null
hypothesis.
A Type II Error occurs when we dont reject a false
null hypothesis

P(Type I Error) a

P(Type II Error) b
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Concepts of Hypothesis Testing

Lets extend this to statistical hypothesis testing.

Assume our manager in Example 10.1 wants to

know if the population mean is different from 350.
Rephrase this as:
Is there enough evidence to conclude m is not
equal to 350?

H1 : 350

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Concepts of Hypothesis Testing

In a criminal trial, we begin with the assumption
that the defendant is innocent.
In similar fashion, we begin with the assumption
that the parameter equals the value we are
testing.

H0 : 350

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Concepts of Hypothesis Testing

Therefore, our hypothesis test is stated as:

H0 : 350
H1 : 350

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Concepts of Hypothesis Testing

If we believe the population mean has increased,
our hypothesis test would be

H0 : 350
H1 : 350

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Concepts of Hypothesis Testing

If we believe the population mean has
decreased, our hypothesis test would be

H0 : 350
H1 : 350

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Concepts of Hypothesis Testing

H0 : 350
H1 : 350

Two-tailed test

H0 : 350
H1 : 350

One-tailed test
(Upper tail)

H0 : 350
H1 : 350

One-tailed test
(Lower tail)
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Testing when s is known

Lets investigate Example 11.1

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Testing when s is known

Rejection Region
A range of values such that if the test statistic falls
into that range, we decide to reject the null
hypothesis in favor of the alternative hypothesis.

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Testing when s is known

Rejection Region

Define the value of the sample mean that is just

large enough to reject the null hypothesis as

xL

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Testing when s is known

Rejection Region

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Testing when s is known

Rejection Region

We know the sampling distribution of the sample

mean is approximately normal

x xL
x
P Z L
a
P

s n
s n s n

P Z za a
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Testing when s is known

Rejection Region

xL
za
s n

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Testing when s is known

Rejection Region

xL 170
1.645
65 400
xL 175.34
Therefore, the rejection region is

x 175.34
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Testing when s is known

Standardized test statistic

x
s n

Reject H0 if

z za

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Testing when s is known

Standardized test statistic

x 178 170

2.46
s n 65 400
za z0.05 1.645
Since

2.46 1.645
we reject H0
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Testing when s is known

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Testing when s is known

p-value

The probability of observing a test statistic

at least as extreme as the one computed given
the null hypothesis is true.

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Testing when s is known

p-value

p value P x 178
x 178 170

s n 65 400
P z 2.46

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Testing when s is known

p-value

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Testing when s is known

Interpreting the p-value

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Testing when s is known

Interpreting the p-value

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Testing when s is known

Interpreting the p-value

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Testing when s is known

Interpreting the p-value

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Testing when s is known

Lets investigate Example 11.1 again using our
tools in Excel

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Testing when s is known

Lets investigate a two-tailed test using
Example 11.2

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