CONFIDENCE INTERVAL

Objectives: Upon successful completion of this lesson, you will be able to:
1. State the reason(s) for estimating with confidence interval.
2. Calculate confidence intervals for population proportions and means,
3. Interpret a confidence interval.
4. Compute sample sizes for different sample sizes for estimating the population mean.

Concept: A Confidence Interval is a range of values we are fairly sure our true value lies in.

Calculating the Confidence Interval

Step 1: Find the sample size n, calculate the mean 𝑥̅ , and the standard deviation s of the sample.

a. If standard deviation is known then , Z distribution is used as the critical value. This value
is only dependent on the confidence level for the test.
b. If the standard deviation is unknown then Student's t distribution is used as the critical
value. This value is dependent on the confidence level (C) for the test and degrees of
freedom. The degrees of freedom is found by subtracting one from the number of
observations, n − 1.

Step 2: Decide what Confidence Interval we want. 90%, 95% and 99% are common choices.
𝜎 𝑠
Step 3: Use the formula for the Confidence Interval: 𝑋̅ ± 𝑍𝛼 𝑛 or 𝑥̅ ± 𝑡𝛼 𝑛
2 √ 2 √

a. The value after the ± is called the margin of error

b. 𝑍𝛼 or 𝑡𝛼 is the confidence coefficient
2 2
c. The probability 1 − 𝛼 is called the confidence level
𝜎 𝑠
d. 𝑋̅ + 𝑍𝛼 𝑛 or 𝑥̅ + 𝑡𝛼 𝑛 is called the Upper Confidence Level(UCL)
2 √ 2 √
𝜎 𝑠
e. 𝑋̅−𝑍𝛼 or 𝑥̅ − 𝑡𝛼 is called the Lower Confidence Level(LCL)
2 √𝑛 2 √𝑛

Confidence Interval for Population Mean when the Population Standard Deviation is
known

A (1 − 𝛼)100% confidence interval for 𝜇 when 𝜎 is known and sampling is done from a normal
𝜎
population, or with a large sample, n is: 𝑥̅ ± 𝑍𝛼 𝑛. ……………………………. (A)
2 √

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Thus, for a 95% confidence interval for 𝜇 we have
(1 − 𝛼)100% = 95%

⇒ 1 − 𝛼=0.95

⇒ 𝛼 = 1 − 0.95

⇒ 𝛼 = 0.05
𝛼
∴ = 0.025
2
From the normal table, we find 𝑍𝛼 = 1.96 . this is the value we substitute in (A).
2

Example:

Suppose we want an 80% confidence interval for 𝜇. Assume we have n=25, 𝑥̅ = 122 𝑎𝑛𝑑 𝜎 =
20. Then

⇒ 1 − 𝛼= 0.80

⇒ 𝛼 = 1 − 0.80

⇒ 𝛼 = 0.20
𝛼
∴ = 0.10
2
From the normal table, we find 𝑍0.10 = 1.28 . this is the value we substitute in (A)
𝜎 20
𝑥̅ ± 𝑍𝛼 = 1.22 ± 1.28 = 1.22 ± 5.12 =[116.88,127.12]
2 √𝑛 √25

Confidence Interval for Population Mean when the Population Standard Deviation is
unknown

A (1 − 𝛼)100% confidence interval for 𝜇 when 𝜎 is unknown and sampling is done from a normal
𝑠
population, or with a large sample, n is: 𝑥̅ ± 𝑡𝛼 𝑛. (B), where 𝑡𝛼 is the value of the t distribution
2 √ 2
𝛼
with n-1 degrees of freedom that cuts off a tail area of to its right.
2

Example:
A stock market analyst wants to estimate the average return on a certain stock. A random sample
of 15 days yields an average return of 𝑥̅ = 10.37% and a standard deviation of s=3.5%. assuming
a normal population of returns, give a 95% confidence interval for the average return on this stock.

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We know that
𝛼
(1 − 𝛼)100% = 95% ∴ = 0.025
2

Since n=15, we need to use the distribution with n-1=14 degrees of freedom. From t-distribution
table, 𝑡0.025 = 2.145
𝜎 3.5
∴ 𝑥̅ ± 𝑡𝛼 = 10.37 ± 2.145 =[8.43,12.31]
2 √𝑛 √15

Confidence Interval for Population Proportion

𝑝̂𝑞̂
A (1 − 𝛼)100% confidence interval for 𝑡ℎ𝑒 Population Proportion, p is: 𝑝̂ ± 𝑍𝛼 √ 𝑛 where
2

the sample proportion 𝑝̂ is equal to the number of successes in the sample x, divided by the
number of trials (the sample size) n, and 𝑞̂ = 1 − 𝑝̂

Example:
A marketing research firm wants to estimate the share that foreign companies have in the US
market for certain products. A random sample of 100 consumers is obtained, and it is found that
34 people in the sample are users of foreign made products, the rest are users of domestic products.
Give a 95% confidence interval for the share of foreign products in this market.
We have x= 34 and n = 100
𝑥 34
∴ 𝑝̂ = = = 0.34
𝑛 100
(1 − 𝛼)100% = 95%
𝛼
∴ = 0.025
2
From the normal table, we find 𝑍𝛼 = 1.96.
2

𝑝̂ 𝑞̂ (0.34)(0.66)
𝑝̂ ± 𝑍𝛼 √ = 0.34 ± 1.96√
2 𝑛 100

=0.34 ± 1.96(0.04737)=[0.2472,0.4328]

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 Confidence Intervals and Confidence Levels

A confidence interval an estimated range of values that is likely to include the population
parameter being calculated. For instance, instead of estimating the mean age of a certain population
to be a single value like 25.5 years, we could say that the mean age is somewhere between 23 and
28. This confidence interval contains the single value we are estimating, yet it gives us a wider net
to be right.

When we use confidence intervals to estimate a number or population parameter, we can also
estimate just how accurate our estimate is. The likelihood that our confidence interval will
contain the population parameter is called the confidence level. For example, how confident
are we that our confidence interval of 23 – 28 years of age contains the mean age of our population?
If this range of ages was calculated with a 95 percent confidence level, we could say that we are
95 percent confident that the mean age of our population is between 23 and 28 years. Or, the
chances are 95 out of 100 that the mean age of the population falls between 23 and 28 years.

Confidence levels can be constructed for any level of confidence, however, the most commonly
used are 90 percent, 95 percent, and 99 percent. The larger the confidence level is, the narrower
the confidence interval. For instance, when we used a 95 percent confidence level, our confidence
interval was 23 – 28 years of age.

If we use a 90 percent confidence level to calculate the confidence level for the mean age of our
population, our confidence interval might be 25 – 26 years of age. Conversely, if we use a 99
percent confidence level, our confidence interval might be 21 – 30 years of age.

Note:
1. The area under the curve excluding the tails, 1 − 𝛼, is called the confidence coefficient.
2. The combined area in both tails is called the error probability,
3. The confidence coefficient multiplied by 100, expressed as a percentage is the confidence
level

Trial Questions
1. An economist wants to estimate the average amount in checking accounts at banks in a
given region. A random sample of 100 accounts gives 𝑥̅ =$357.60 and s=$140.00. Give a
95% confidence interval for 𝜇, the average amount in any checking account at a bank in
the given region
2. A large drugstore wants to estimate average weekly sales for a brand of soap. A random
sample of 13 weeks give the following figures: 123, 110, 95, 120, 87, 89, 100, 105, 98, 88,
75, 125, 101. Give a 95% confidence interval for the average weekly sales.

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