Sub: Statistics Topic: Chi-Square

Question:
With double-digit annual percentage increases in the cost of health insurance, more and more
workers are likely to lack health insurance coverage (USA Today, January 23, 2004).

ClassOf1 provides exert guidance for College, Graduate and High school homework and live online tutoring on subjects like
Finance, Marketing, Statistics, Economics and others. Check out more solved problems in our Solution Library.

The following sample data provide a comparison of workers with and without health insurance
coverage for small, medium, and large companies. For the purpose of this study, small
companies are companies that have fewer than 100 employees. Medium companies have 100
to 99 employees, and large companies have 1000 or more employees. Sample data are
reported for 50 employees of small companies, 75 employees of medium companies, and 100
employees of large companies.

Statgraphics or Excel is recommended for this problem.

Health Insurance

Size of Company Yes No Total

Small 36 14 50

Medium 65 10 75

Large 88 12 100

a. Conduct a test of independence to determine whether employee health insurance coverage

is independent of the size of the company. Use α= .05.

www.classof1.com
Sub: Statistics Topic: Chi-Square

Compute the value of the x2 test statistic ( to 2 decimals).

What is the p-value?

What is your conclusion?

b. The USA Today article indicated employees of small companies are more likely to lack health
insurance coverage. Calculate the percentages of employees without health insurance based on
company side (0 decimals).

Small ________ %

Medium ________%

Large ___________ %

Based on the percentages calculated above, what can you conclude?

Solution:
Null Hypothesis: H0: The employee Insurance coverage is independent of the size of the
company
Alternate Hypothesis: H1: The employ Insurance coverage is not independent of the size of the
company
Level of significance:  = 0.05
In order to test the above hypotheses, we have to apply the Chi-square test and the test
statistic is given below:
Test Statistic:

 (Oi  Ei ) 2 
2 = i  E 
 i 

www.classof1.com
Sub: Statistics Topic: Chi-Square

where the observed frequencies ( O i ) and the expected frequencies (Ei) are given below:

Observed frequency table

Health Insurance

Size of company yes no Total

Small 36 14 50
Medium 65 10 75
Large 88 12 100
Total 189 36 225

On the assumption that H0 is true, the expected frequencies Ei are calculated as follows:

Rowi * Column j
E i, j = , where Rowi = ith row total,
Grand .Total

Column j = jth column total, and Grand Total = 225

For instance, from the given observed frequency table, we have

50 * 189
E1, 1 = = 42
225
Similarly, for all other cells, we have calculated the expected frequencies and are presented in
the following table:

www.classof1.com
Sub: Statistics Topic: Chi-Square

The Expected frequencies:

Health Insurance

Size of company Total

yes no
Small 42 8 50
Medium 63 12 75
Large 84 16 100
Total 189 36 225

Using the above observed and expected frequency table, we can find the value of Chi-square.
The calculation of chi-square is given in the following table:

Oi Ei Oi-Ei (Oi-Ei)2 (Oi-Ei)2/ Ei

36 42 -6 36 0.8571
14 8 6 36 4.5
65 63 2 4 0.0635
10 12 -2 4 0.3333
88 84 4 16 0.19048
12 16 -4 16 1
225 225 0 112 6.944444

www.classof1.com
Sub: Statistics Topic: Chi-Square

Thus, the value of Chi-square statistic is given by

 (Oi  Ei ) 2 
2 = i  E  = 6.9444
 i 
Let c = number of columns = 2
r = number of rows = 3
Degrees of freedom: v = (c – 1) * (r -1)
= (2 – 1)* (3 – 1) = 2 d.f

P-value:
The p-value of the test statistic is given by
P [  2 > 6.944] = 0.031 [=chidist(6.944,2) and enter]

Conclusion:
Since the p-value (0.031) is less than 0.05 there is sufficient evidence to reject
the null hypothesis at 5% level. Hence, we conclude that the employ Insurance coverage is not
independent of the size of the company.

www.classof1.com
 Sub: Statistics Topic: Chi-Square

b)

yes no Total
small Observed 36 14 50
% of column 19.0% 38.9% 22.2%
medium Observed 65 10 75
% of column 34.4% 27.8% 33.3%
large Observed 88 12 100
% of column 46.6% 33.3% 44.4%
Total Observed 189 36 225
% of column 100.0% 100.0% 100.0%

SMALL - WITHOUT INSURANCE  39.9%

MEDIUM - WITHOUT INSURANCE  27.8%
LARGE - WITHOUT INSURANCE  33.3%
By comparing the above percentages, it is seen that the percentage of employees without
insurance coverage is maximum in small companies (39.9%). Hence we conclude that the
employees of small companies are more likely to lack health insurance coverage.

** End of the Solution **

ClassOf1 provides exert guidance for College, Graduate and High school homework and live online tutoring on subjects like
Finance, Marketing, Statistics, Economics and others. Check out more solved problems in our Solution Library.

www.classof1.com