Department of Management

CHAPTER-THREE
HYPOTHESIS TESTING
3.1 Introduction
Managers have to make decisions with minimum risk in an environment characterized by
uncertainty. Acceptance or rejection of a decision depends on acceptance or rejection of a
hypothesis. For example, a marketing manager is facing a decision whether to introduce a new
product in the market or not. If his company could get a market share of 15 percent or more, then
the new product would be introduced in the market. A suitable hypothesis formulation and testing
it would help the manager take the right decision. This chapter covers the various tests of
hypothesis that are useful in making sound decisions.
Definition of key words
Hypothesis is a statement about a population developed for the purpose of testing.
Test statistic: is a statistic whose value serves to determine whether to reject or accept the
hypothesis to be tested.
A given statement concerning a parameter could be true or false. Hence we have two
complementary hypotheses, namely null hypothesis and alternative hypothesis.
a) Null hypothesis (H0): It is the hypothesis to be tested for possible rejection under the
assumption that it is true and it is the hypothesis of equality or the hypothesis of no difference.
b) Alternative hypothesis (Ha): It is hypothesis which is the complementary to the null
hypothesis. It may be accepted if H0 is rejected or be rejected if H0 is accepted.

3.2 Errors in hypothesis testing

Reject Ho
Decision Accept Ho

Ho true Correct decision with confidence Type I error (𝜶)

(1-𝛼)
Ho false 𝑻𝒚𝒑𝒆 𝑰𝑰 𝒆𝒓𝒓𝒐𝒓 (𝜷)) Correct decision (1-𝛽)

 Type I error is committed when the null hypothesis /Ho/ is rejected when in fact it is true.
 Type II error is committed when a null hypothesis /Ho/ is accepted when in fact it was not
true

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The probability of making Type I error, denoted by 𝛼 (alpha), is referred to as the level of
significance. The probability level of this error is decided by the decision maker before the
hypothesis test is performed and is based on this tolerance in terms of the risk of rejecting the null
hypothesis/Ho/. The complement (1-𝛼) of the probability of Type I error measures the probability
level of not rejecting a true null hypothesis. It is also refereed as confidence level.

The probability of making a Type II error, denoted by 𝛽 (beta), is due to a decision to accept a
false null hypothesis. The probability level of this error varies with the actual values of the
population parameter being tested when Ho is false. The complement (1-𝛽) of the probability of
Type II error measures the probability of rejecting the false null hypothesis.
3.4 One tailed and two tailed test

A hypothesis could be directional or non-directional. A directional hypothesis is one in which the

population parameter is structured to be greater than or equal to or less than or equal to a specified
value.
This is known as a one-tailed test (one-sided test) in the parlance of statistical hypothesis. A non-
directional hypothesis is one in which the population parameter is structured to be equal to a
specified value. This is known as a two-tailed test (two-sided test).
i. Null hypothesis /Ho/ and alternative hypothesis /H1/ stated as;
Ho: 𝜇 = 𝜇𝑜 𝑎𝑛𝑑 𝐻1: 𝜇 ≠ 𝜇𝑜
Imply that any deviation (either on the lower side or the higher side) of the calculated value of the
test statistic from a hypothesized value 𝜇o leads to the rejection of the null hypothesis. This type
of test is two tailed test.
ii. Null hypothesis /Ho/ and alternative hypothesis /H1/ stated as;
Ho: 𝜇 ≤ 𝜇𝑜 𝑎𝑛𝑑 𝐻1: 𝜇 > 𝜇𝑜 (𝑟𝑖𝑔ℎ𝑡 𝑡𝑎𝑖𝑙𝑒𝑑 𝑡𝑒𝑠𝑡) OR
Ho: 𝜇 ≥ 𝜇𝑜 𝑎𝑛𝑑 𝐻1: 𝜇 < 𝜇𝑜 (𝑙𝑒𝑓𝑡 𝑡𝑎𝑖𝑙𝑒𝑑 𝑡𝑒𝑠𝑡)

Rejection region Rejection region

Left-tailed Ho: 𝜇 ≥ 𝜇𝑜; Ha: 𝜇 < 𝜇𝑜 b) Right tailed test Ho: 𝜇 ≤ 𝜇𝑜; 𝐻𝑎: 𝜇 > 𝜇𝑜

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3.3 . Steps in hypothesis testing

1. State the null hypothesis (Ho) as well as the alternative hypothesis (Ha) - the null hypothesis
(Ho) refers to a hypothesized numerical value or range of values of the population parameter.

Null hypothesis designated Ho and read “H subzero." The capital letter H stands for hypothesis
and the subscript zero implies "no difference."
The null hypothesis Ho is always expressed in the form of an equation making a claim regarding
the specific value of the population parameter. I.e. Ho: 𝜇 = 𝜇o. Where 𝜇 is a population mean and
𝜇o represents hypothesized parameter value. Generally speaking, the null hypothesis is developed
for the purpose of testing and either reject or accept null hypothesis.

The alternate hypothesis describes what you will conclude if you reject the null hypothesis. It is
written H1 and is read “H sub one." It is often called the research hypothesis.

An alternative hypothesis H1 is the logical opposite of the null hypothesis, i.e. an alternative
hypothesis must be true when the null hypothesis is found to be false. That means, the alternative
hypothesis states that specific population parameter value is not equal to the value stated in the
null hypothesis Ho and written as; H0: 𝜇 ≠ 𝜇o OR
Ha: 𝜇 < 𝜇o or 𝜇 > 𝜇o
2. State the Decision rule

The decision rule for null hypothesis is as follows;

 If /Z test statistic/ > /Z table/, Reject Ho, otherwise accept the Ho
 Therefore, it is applicable /used for both the t-distribution and Z-distribution.
3. Determine the critical Value/ rejection region =Za/2 Value

➢ State the level of significance (a) alpha for the test

➢ Level of significance is the probability of rejecting the null hypothesis when it is

true

➢ sample space of the experiments which corresponds to the area under the sampling
distribution curve of the test statistic is divided in to two mutually exclusive
regions; these regions are;

➢ The acceptance region and

➢ The critical or rejection region.

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Eg: A 5% critical region is given as follows;

4. Calculate the suitable of test statistic- the value of test statistic is calculated from the
distribution of sample statistic by using the following formula:
Test statistic = Value of sample statistic – Value of hypothesized population parameter
Standard error of the sample statistic
Zcal = X - 𝜇o or Zcal X - 𝜇o
𝜎𝑥 𝜎 √𝑛
Choice of probability distribution is as follows
 𝜎 is known and a sample size is large i.e. n≥30 ---------use Z distribution table
 𝜎 is known and a sample size is small i.e. n<30------------ use Z distribution table
 𝜎 is un known and a sample size is large i.e. n≥30-------- use Z distribution table
 𝜎 is un known and a sample size is small i.e. n<30----------- use t distribution table

5. Decision making /reach on a conclusion-compare the calculated value of the test statistic with
the critical value (also called the standard table value of the test statistic).

The decision rule for null hypothesis is as follows;

 /Z cal/ ≥ /Ztable/: Reject Ho

 /Zcal /< /Z table/: Accept Ho
Therefore, it is applicable /used for both the t-distribution and Z-distribution.

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3.5 Tests about a population mean large-Sample Case (n>30)

Summary of Hypothesis Testing and Critical Values

 value Critical value
0.1 -1.28
Left tailed
0.05 -1.645
0.01 -2.33
0.1 1.28
Right tailed 0.05 1.645
0.01 2.33
0.1 +1.645
Two tailed 0.05 +1.96
0.01 +2.575
Example 1

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The marketing manager of a large restaurant has been asked to conduct a survey of its customers
belonging to a particular income class. The president of the restaurant is interested in the mean
income of its customers. He is further interested in comparing this mean income with that of a
recently concluded census study by the government. The government study shows a mean income
of $ 300,000 per year for this class of customers with a standard deviation of $ 30,000. The
president is desirous of finding out whether the population mean of its customers in this category
is $ 300,000 per year or not. The marketing manager has picked up a random sample of 100
customers of this class from the customer database.

The sample data show a mean income of $ 293,000 per year. Perform a comprehensive statistical
hypothesis testing procedure and state your conclusions.
Step 1: Formulate the null and the alternative hypothesis.
H0:  = 300,000 (the mean income of the population is equal to $300,000)
H1:   300000 (the mean income of the population is not equal to $300,000)
Step 2: State the Decision rule
If /Z test statistic/ > /Z table/, reject Ho , otherwise accept the Ho
Step 3: Determine the critical values and draw the region rejection
At α = 0.05, The critical values are Z= ±1.96.
Decide on the level of significance. When the value of the level of significance is not
specified in a problem, it is a convention to set the value equal to 0.05.What we are saying
is that only 5% of the time we make the mistake of rejecting the null hypothesis when it is

true.

Step 4: Compute the test statistic based on sample data. The formula to be used is

 
 
X − μ
Z = 
 σ 
 
 n 
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Under the assumption of the null hypothesis being true, you can substitute the value $300,000 in
the place of μ and X =290,000. n =100. σ = 10000.

 
 
293000 − 300000
Z = 
 30000  = -2.33
 
 100 

Step 5: Determine the Critical Value for the chosen level of significance. Here,  =0.05. The
critical value corresponding to the two-tailed test where each tail contains an area of /2 can be
easily determined. Here, /2 =0.025. The critical value of Z =1.96 for positive Z and –1.96 for
negative results.

Decision: computed value of Z (take just the positive value) 2.33 is greater than the critical value
of Z =1.96. Hence, it falls in the rejection region. Reject H0 and accept H1.

Interpretation of the Results for our example

We have rejected H0and accepted H1 what does this mean? This means that the population means
income of the category of interest to the president of the restaurant is not equal to $300,000 per
year at 5% level of significance. Is it more than or less than $300,000? The sample mean suggests
that it may be less than $300,000 per year

Example 2: Assume that in a certain district the mean systolic blood pressure of persons aged 20
to 40 is 130 mm Hg with a standard deviation of 10 mm Hg. A random sample of 64 persons aged
20 to 40 from village x of the same district has a mean systolic blood pressure of 132 mm Hg.
Does the mean systolic blood pressure of the dwellers of the village (aged 20 to 40) differ from
that of the inhabitants of the district (aged 20 to 40) in general, at a 5% level of significance?

Solution: H 0 :  = 130 H1 :   130  = 0.05 and hence  / 2 = 0.025 .

Z0.025 = 1.96

x − 0 132 − 130 2
ZC = = = = 1.6.
/ n 10 / 64 1.25

Critical Region Acceptance Region Critical Region


2 
2

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- Z 0.025 =-1.96 Z 0.025 =1.96

Since Zc = 1.6 is in the acceptance region, H 0 is accepted. That is, the systolic blood pressure

of persons (aged 20 to 40) living in village x is the same as the mean systolic blood pressure of
the inhabitants (aged 20 to 40) of the district.

3.6 Tests about the a population mean Small-Sample Case (n < 30)

Test Statistic 𝝈 Known 𝝈 Unknown

z = x − 0
t = x − 0

/ n s/ n
This test statistic has a t distribution with n - 1 degrees of freedom.
Example 1: An investigator took a random sample of eight pieces of aluminum die-castings and
observed the sample mean strength to be 31.5. Before taking the measurement, the investigator
knew that the population means strength for an older type of aluminum die-casting was 33. The
standard deviation of the sample measurements was 1.3. The investigator would like to know
whether the population means strength of the aluminum die-casting is 33. State the hypothesis?

Solution:
This is a small sample case with unknown population standard deviation. The appropriate
test is the t test. Please note also from the wording of the problem, you need to perform a
two-tailed test. Just like the normal distribution, t is also symmetrical and it is enough if
you compare the positive value of the computed t with the critical t for n-1d.f at 5% level
of significance.

H0:  =33
H1:  33

(X − μ) (31.5 − 33)
t = = = -3.26. The positive value of the computed t =3.26
S 1.3
n 8

The critical t value for 7d.f(n-1 =8-1) at 5% level of significance from Excel paste
function is 2.36(2 places of decimal). Since the calculated t value is greater than the
critical t, reject H0 an accept H1. The conclusion is that the mean strength of aluminum
die casting of the population is not 32 at 5% level of significance.

Example2: A sample of 16 students gave an average mark of 53.8 with a standard deviation of
5.2. Can you we that the population means of marks are 50 at  = 0.05 ?

Solution: H 0 :  = 50 H1 :   50

 = 0.05 Hence  / 2 = 0.025

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t / 2,n−1 = t0.025, 15 = 2.131.

x − 0 53.8 − 50 3 .8
tC = = = = 2.92.
s/ n 5.2 / 16 1.3

Since tc = 2.92  2.131, H 0 is rejected. I.e. the population mean mark is significantly different

from 50 at  = 0.05.

3.7 Hypothesis testing about Population proportion

Hypothesis tests about a population proportion are based on the difference between the sample proportion

p and the hypothesized population proportion p0. The methods used to conduct the hypothesis test are

similar to those used for hypothesis tests about a population mean. The only difference is that we use the

sample proportion and its standard error to compute the test statistic.

p−P
Z =
P(1 − P)
n

Example 1: A marketing manager of an enterprise is facing a decision whether to introduce a new

product into the market or not. Consumer acceptance measured in a blind comparison test is agreed
upon as an appropriate basis for evaluation. Marketing of the new product will be pursued only if
the acceptance rate exceeds 30%. Otherwise, the new product will not be introduced in the market.
A random sample of 200 consumers reveals that the acceptance rate is 32%. Using a level of
significance of 0.05, perform the hypothesis testing and recommend your action.
Solution: This is a classical hypothesis-testing problem of the population proportion. This is also
a one-tailed test. This involves a large sample in which n =200. The Z test for the proportion is the
appropriate test.

H0: P  0.30 (The population proportion of consumer acceptance is less than or equal to 0.30)

H1: P > 0.30 (The population proportion of consumer acceptance is greater than 0.30)

The Z test for proportion is to be used here. It is given by Z = p−P .

P(1 − P)
n

Under the null hypothesis being true, P=0.30. p=0.32. Substituting, we have

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0.32 − 0.30
Z= = 0.62.
0.30(1− 0.30)
200

The critical value of Z for a one-tailed test is 1.65. Since, the computed Z is less than critical Z,
accept H0. What do you conclude? We have no evidence to reject the null hypothesis based on the
sample data at 5% level of significance. In this case even at 1% level of significance, we cannot
reject H0. This implies that you accept H0 and conclude that the population proportion of consumer
acceptance is less than or equal to30%. Hence, the manager should not introduce the new product
in the market. You may wonder how come when the sample proportion is 32%, you say that you
should not introduce the new product? Is not 32% better than the 30% stipulated? Yes, but you see
statistically speaking, 32% sample proportion has arisen due to chance and not a real one. This is
why you say statistically not significant. As long as statistical significance does not take place, you
cannot reject the null hypothesis. This is a real beauty of testing of hypothesis.

Example 2: A pharmaceutical company claims that a drug which it manufactures relieves cold
symptoms for a period of 10 hrs in 90% of those who take it. In random sample of 400 people with
colds who take the drug, 350 find relief for 10hrs. At a 0.05 level of significance, is the
manufacture’s correct? (One tailed left side)

Solution: P̂ = 350
400
= 0.875, P0 = 0.9, 1 − P0 = 0.10 , n = 400,  = 0.05 , − Z  = − Z 0.05 = -1.645

Ho: P ≥0.90 Vs H1: P < 0.90

Using the z statistic, we have

Pˆ − p 0 0.875 − 0.90
Zc = = = −1.67
p 0 (1 − p 0 ) / n 0.90(0.10) / 400
Since computed value of Zc = -1.67 is less than the critical value of −𝑍0.05 = −1.645, therefore,
the null hypothesis is rejected. The manufacture’s claim is not upheld.

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