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# Chapter 10

Introduction to Estimation

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.1

Statistical Inference
Statistical inference is the process by which we acquire information and draw conclusions about populations from samples.
Statistics Data
Population Sample
Inference

Information

Statistic Parameter

In order to do inference, we require the skills and knowledge of descriptive statistics, probability distributions, and sampling distributions.
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.2

Estimation
There are two types of inference: estimation and hypothesis testing; estimation is introduced first. The objective of estimation is to determine the approximate value of a population parameter on the basis of a sample statistic. E.g., the sample mean ( population mean ( ). ) is employed to estimate the

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.3

Estimation
The objective of estimation is to determine the approximate value of a population parameter on the basis of a sample statistic. There are two types of estimators: Point Estimator

Interval Estimator

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.4

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

We saw earlier that point probabilities in continuous distributions were virtually zero. Likewise, wed expect that the point estimator gets closer to the parameter value with an increased sample size, but point estimators dont reflect the effects of larger sample sizes. Hence we will employ the interval estimator to estimate population parameters
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.5

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

That is we say (with some ___% certainty) that the population parameter of interest is between some lower and upper bounds.

10.6

## Point & Interval Estimation

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

point estimate

interval estimate

An alternative statement is: The mean income is between 380 and 420 \$/week.
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.7

Qualities of Estimators
Qualities desirable in estimators include unbiasedness, consistency, and relative efficiency: An unbiased estimator of a population parameter is an estimator whose expected value is equal to that parameter. An unbiased estimator is said to be consistent if the difference between the estimator and the parameter grows smaller as the sample size grows larger. If there are two unbiased estimators of a parameter, the one whose variance is smaller is said to be relatively efficient.

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.8

Unbiased Estimators
An unbiased estimator of a population parameter is an estimator whose expected value is equal to that parameter. E.g. the sample mean X is an unbiased estimator of the population mean , since: E(X) =

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.9

Consistency
An unbiased estimator is said to be consistent if the difference between the estimator and the parameter grows smaller as the sample size grows larger. E.g. X is a consistent estimator of V(X) is because:

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.10

Relative Efficiency
If there are two unbiased estimators of a parameter, the one whose variance is smaller is said to be relatively efficient. E.g. both the the sample median and sample mean are unbiased estimators of the population mean, however, the sample median has a greater variance than the sample mean, so we choose since it is relatively efficient when compared to the sample median.

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.11

Estimating

when

is known

We can calculate an interval estimator from a sampling distribution, by: Drawing a sample of size n from the population Calculating its mean, And, by the central limit theorem, we know that X is normally (or approximately normally) distributed so

## will have a standard normal (or approximately normal) distribution.

Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.12

Estimating
Known, i.e. standard normal distribution

when

is known
Known, i.e. sample mean Unknown, i.e. we want to estimate the population mean

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.13

Estimating

when

is known
the confidence interval

We established in Chapter 9:

## contains the population mean is 1 confidence interval estimator for .

Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

. This is a

10.14

## Confidence Interval Estimator for

The probability 1
Usually represented with a plus/minus ( ) sign

## is called the confidence level.

upper confidence limit (UCL)

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.15

Graphically
here is the confidence interval for :

width
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.16

Graphically
the actual location of the population mean

may be here

or here

## or possibly even here

The population mean is a fixed but unknown quantity. Its incorrect to interpret the confidence interval estimate as a probability statement about . The interval acts as the lower and upper limits of the interval estimate of the population mean.
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.17

Confidence Level

## cut & keep handy!

Table 10.1
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.18

Example 10.1
A computer company samples demand during lead time over 25 time periods:
235 421 394 261 386 374 361 439 374 316 309 514 348 302 296 499 462 344 466 332 253 369 330 535 334

Its is known that the standard deviation of demand over lead time is 75 computers. We want to estimate the mean demand over lead time with 95% confidence in order to set inventory levels

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.19

Example 10.1
We want to estimate the mean demand over lead time with 95% confidence in order to set inventory levels
IDENTIFY

## Thus, the parameter to be estimated is the popn mean:

And so our confidence interval estimator will be:

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.20

Example 10.1

CALCULATE

In order to use our confidence interval estimator, we need the following pieces of data: 370.16 1.96 Calculated from the data

75

n
therefore:

Given

25

The lower and upper confidence limits are 340.76 and 399.56.
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.21

Using Excel

CALCULATE

By using the Data Analysis Plus toolset, on the Xm10-01 spreadsheet, we get the same answer with less effort
Tools > Data Analysis Plus > Z-Estimate: Mean

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.22

Example 10.1

INTERPRET

The estimation for the mean demand during lead time lies between 340.76 and 399.56 we can use this as input in developing an inventory policy. That is, we estimated that the mean demand during lead time falls between 340.76 and 399.56, and this type of estimator is correct 95% of the time. That also means that 5% of the time the estimator will be incorrect. Incidentally, the media often refer to the 95% figure as 19 times out of 20, which emphasizes the long-run aspect of the confidence level.
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.23

Interval Width
A wide interval provides little information. For example, suppose we estimate with 95% confidence that an accountants average starting salary is between \$15,000 and \$100,000. Contrast this with: a 95% confidence interval estimate of starting salaries between \$42,000 and \$45,000. The second estimate is much narrower, providing accounting students more precise information about starting salaries.

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.24

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

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.25

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

## A larger confidence level produces a w i d e r confidence interval:

Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.26

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

## Larger values of produce w i d e r confidence intervals

Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.27

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

Increasing the sample size decreases the width of the confidence interval while the confidence level can remain unchanged. Note: this also increases the cost of obtaining additional data
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.28

## Selecting the Sample Size

We can control the width of the interval by determining the sample size necessary to produce narrow intervals. Suppose we want to estimate the mean demand to within 5 units; i.e. we want to the interval estimate to be: Since:

It follows that
Solve for n to get requisite sample size!
Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.29

## Selecting the Sample Size

Solving the equation

that is, to produce a 95% confidence interval estimate of the mean (5 units), we need to sample 865 lead time periods (vs. the 25 data points we have currently).

10.30

## Sample Size to Estimate a Mean

The general formula for the sample size needed to estimate a population mean with an interval estimate of:

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.31

Example 10.2
A lumber company must estimate the mean diameter of trees to determine whether or not there is sufficient lumber to harvest an area of forest. They need to estimate this to within 1 inch at a confidence level of 99%. The tree diameters are normally distributed with a standard deviation of 6 inches. How many trees need to be sampled?

## Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.32

Example 10.2
Things we know: Confidence level = 99%, therefore =.01

## We want 1 , hence W=1. We are given that = 6.

Copyright 2005 Brooks/Cole, a division of Thomson Learning, Inc.

10.33

Example 10.2
We compute

That is, we will need to sample at least 239 trees to have a 99% confidence interval of 1

10.34