Business Statistics

Level 3

Model Answers
Series 3 2008 (Code 3009)

Business Statistics Level 3
Series 3 2008

How to use this booklet Model Answers have been developed by Education Development International plc (EDI) to offer additional information and guidance to Centres, teachers and candidates as they prepare for LCCI International Qualifications. The contents of this booklet are divided into 3 elements: (1) (2) Questions Model Answers – reproduced from the printed examination paper – summary of the main points that the Chief Examiner expected to see in the answers to each question in the examination paper, plus a fully worked example or sample answer (where applicable) – where appropriate, additional guidance relating to individual questions or to examination technique

(3)

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QUESTION 1 (a) Describe the main characteristics of the normal distribution. (4 marks)

The weights of containers used by a company have a normal distribution with mean 50 grams and standard deviation 5 grams. (b) The containers are supplied in batches of 100. Calculate the probability that a randomly selected batch will have a total weight of less than 5120 grams. (8 marks) The weight of the contents put in the containers is also normally distributed with mean 250 grams and standard deviation 6 grams. The weight of the container and contents are independent of each other. (c) Calculate the probability that the weight of a randomly selected filled container will be more than 318 grams. (8 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 1 (a) Symmetrical, bell shaped curve with mean, median and mode equal. (b) Mean weight of pack = n × x = 100 x 50 = 5000 Standard deviation for the pack =

n × sd 2 = 100 × 52 = 50

z=

x − x 5120 − 5000 = = 2.4 sd 50

Table probability for z = 2.4 = 0.992 (c) Weight of pack and container = Joint Standard deviation =

x1+ 2 = x1 + x 2 = 50 + 250 = 300

2 sd12 + sd 2 = 52 + 62 = 61 = 7.81

z=

x − x 318 − 300 18 = = = 2.30 sd 7.81 7.81

Table probability = 0.989 Required probability 1 – 0.989 = 0.011

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QUESTION 2 (a) Explain what is meant by the sampling distribution of the sample proportion. (4 marks)

The manufacturer of a long life battery is testing a new additive to the process. Before the new additive was used a random sample of 12 items was selected and tested to destruction. Following the change in additive a second random sample, of 10 items, was tested to destruction. The results were as follows: Before new additive After new additive 25 29 28 36 36 28 29 31 27 25 Life in hours 26 31 26 32 40 27 25 38 36 25 28 (12 marks) 22

(b) Test whether the new additive has increased the life of the batteries.

(c) Explain what is meant by a type 2 error. State whether a type 2 error may have been committed in your conclusions to part (b). Explain your answer. (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 2 (a) If a large number of samples of a given size are taken the proportions for samples of size 30 or more will be normally distributed with the mean of the proportion equal to population proportion and the standard deviation of the sample proportion. (standard error) =

p (1 − p ) where n is the sample size. n

(b) Null hypothesis: There has been no change in the life of the batteries. Alternative hypothesis: The life of the batteries has been increased. Degrees of freedom = n + m –2 = 12 + 10 –2 = 20 Critical t value = 1.72/2.53 x 25 28 36 29 27 26 31 40 25 36 28 22 353 Σx 29.42 297 Σy 29.70 y 29 36 28 31 25 26 32 27 38 25 x2 625 784 1296 841 729 676 961 1600 625 1296 784 484 10701 Σx2 9005 Σy2 y2 841 1296 784 961 625 676 1024 729 1444 625

(x − x ) (y − y )
2

2

19.51 2.01 43.34 0.17 5.84 11.67 2.51 112.01 9.51 43.34 2.01 55.01 316.917 Σ x−x

0.49 39.69 2.89 1.69 22.09 13.69 5.29 7.29 68.89 22.09

(

) Σ (y − y )
2

184.1

2

Σ x−x +Σ y− y s= n+m−2
t= x −y 1 1 + s n m

(

)

2

(

)

2

=

316.9 + 184.1 12 + 10 − 2

= 5.01

=

29.42 − 29.70 1 1 5.01 + 12 10

=

− 0.28 2.14

= 0.13

Conclusion: the calculated value of t is less than the critical value of t at both the 5% and 1% significance level, there is insufficient evidence to reject the null hypothesis. The additive does not increase the average life of the batteries. (c) A type 2 error is when the null hypothesis is not rejected when it is in fact untrue. A type 2 error might have been made as the null hypothesis was accepted.

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QUESTION 3 (a) Explain the factors which should be taken into consideration when constructing a general price index such as the Retail Price Index or Consumer Price Index. (10 marks) (b) Explain two sampling methods you might use to choose the representative sample of items to include in the consumer price index. For each sampling method give an advantage and a disadvantage for using this method compared with other sampling methods. (10 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 3 (a) Prices: It is unlikely that except for a minority of goods and services that a single price exists. Thus, an average price needs to be constructed based upon a notional average price calculated by the proportion of consumption made at the different prices. Choice of Items: Not all the possible items available for consumption can be included in the index as the processing would be too time complex and time consuming. A representative sample of items has to taken which reflects the general pattern of consumption. This may be based upon a survey of consumer expenditure in the preceding year. Weights: The relative consumption of items needs to be reflected by the index. This can be dealt with through the survey of consumer expenditure which will show the proportion of expenditure in each consumption category. Choice of Index: A wide variety of indices are available and one needs to be chosen. Generally, a current weighted index based on present consumption patterns and prices is compared with a historical pattern of consumption and prices. Similar to that below:

ΣWn Pn x100 ΣWn Po
Choice of Base Year: The year in which the index is to begin has to be chosen. It is possible to choose a year which after a period of significant price increases which reduces the apparent increases in prices. The reverse is also true if a year is chosen which is just before a period of significant price increases. (b) Some form of random or non-random (quota) stratified sampling would seem the best approach. Explain how a stratified random sample would be taken by allotting all the relevant items of the sampling frame to different strata depending on characteristics eg food, fuel, etc. Selection of a random sample in each strata. Advantages the sampling error can be calculated, the result can be used in further statistical calculation and it reduces the sampling error. Disadvantages a sampling frame is necessary, the relevant characteristics need to be identified the sample may be drawn from a widely dispersed range of products. Quota sampling involves taking a sample with a given number of people. Quota controls ie the characteristics that the items should have are employed. These might relate to the “typical” family and income. The advantages are that the sample is relatively cheap, there is no need for a sampling frame and no need for call-backs. The disadvantages are there may be bias in the choice of items, theoretically the standard error cannot be calculated so more complex statistical work is not possible.

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QUESTION 4 A company records its electricity consumption against the temperature for 10 days. Electricity Consumption (Kilowatt hours 000) 37 42 46 35 49 58 29 63 76 45 Temperature 0C

12 19 14 17 15 10 22 11 8 14

(a) Calculate and state the regression equation for electricity consumption based on temperature. (10 marks) The calculated value of the Coefficient of Determination is 68.69%. (b) (i) Explain what the Coefficient of Determination measures and interpret the above figure. (4 marks)

The critical value of the correlation coefficient at the 0.05 significance level for a sample of 10 items is 0.4733. (ii) Use the result for the Coefficient of Determination to calculate the correlation coefficient and test whether the correlation coefficient differs significantly from zero. (6 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 4 (a)
o

Cx

KwH 000 y 37 42 46 35 49 58 29 63 76 45 480 Σy

x2 144 361 196 289 225 100 484 121 64 196 2180 Σx
2

xy 444 798 644 595 735 580 638 693 608 630 6365 Σxy

12 19 14 17 15 10 22 11 8 14 142 Σx
b=

n ∑ xy − (∑ x )(∑ y ) n ∑ x 2 − (∑ x )2

b=

10 × 6365 − 142 × 480 10 × 2180 − 142 2 −4510 = -2.76 1636 ∑y ∑x −b n n a= 480 142 − −2.76 10 10

b=

a=

a = 48.0 − −39.15 = 87.15

y = 87.15 - 2.76x (b) (i) The coefficient of determination measures the percentage of change in one variable associated with the change in the other variable. In this instance it means that 68.89% of the change in electricity consumption is associated with the change in temperature (over the range of temperatures in question). The correlation coefficient =

(ii)

0.6869 = −0.83

Null hypothesis: the correlation coefficient does not differ from zero. Alternative hypothesis: the correlation coefficient does differ from zero. The calculated value of the correlation coefficient is greater that the critical value of the correlation coefficient therefore reject the null hypothesis. The correlation coefficient does differ from zero.

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QUESTION 5 (a) Explain what is meant by and give a business example of: (i) (ii) mutually exclusive events conditional probability. (4 marks) A company decides to advertise its service on 2 or 3 television channels which have national coverage. Viewer statistics show that 48% of the population view channel A, 30% view channel B and 25% view channel C. 12% view channels A and B, 4% view channels A and C and 2% view channels B and C. 1% view all three channels. (b) If an advertisement was placed on all three channels, using a Venn diagram or otherwise, find the percentage of the population that would be able to: (i) (ii) have the opportunity to see the advertisement see the advert on only one channel. (7 marks) (c) If the company only had sufficient funds available to place the advert on 2 channels, assuming the intention is to maximise the audience, which 2 should it choose and what percentage of the population would be able to see the advertisement. (3 marks) All three channels show a free phone number where viewers can contact the firm for more information. The number called identifies the channel that the viewer was watching and records identify whether the caller bought the service. This analysis shows channel A calls represented 40% of respondents and 20% of these bought the service. For channel B the percentages were 35% and 30% respectively and for channel C 25% and 25% respectively. (d) (i) (ii) Of those that called what percentage bought the service? (3 marks)

If a person bought the service what is the probability it was a person calling the channel A number? (3 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 5 (a) (i) Mutually exclusive events are events where the occurrence of one event prevents the occurrence of a second event. For example, a business project cannot be both successful and unsuccessful. Conditional probability is where the outcome of one event depends upon the outcome of another event. For example, the probability that a person will be on sick leave may depend upon their age.

(ii)

(b) A 33 11 1 B 17 1 C 20 3

(i) (ii)

P ( A ∪ B ∪ C ) = 86% P (one only) 33+17+20 = 70%

(c) P( A ∪ B ) = 66% P( A ∪ C ) = 69% P( B ∪ C ) = 53% Therefore, A and C should be chosen (d) (i) (ii) 0.4 x 0.2 + 0.35 x 0.3 + 0.25 x 0.25 0.08 + 0.105 + 0.0625 = 0.2475 or 24.75% Probability bought on Channel A = 0.08 = 0.32 Probability bought 0.2475

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QUESTION 6 (a) Explain when you would use the Chi-squared test of significance. (4 marks)

A random sample of consumers was carried out to investigate if there was any relationship between the type of television bought and the social class of the purchaser. The results were as follows: Type of Television LCD 45 70 120 85

Social Class A B C D&E

CRT 60 65 155 120

Plasma 25 45 130 80

(b) Test whether there is any association between the type of television bought and the social class of the purchaser. (12 marks) (c) By combining the data for the number of people who bought plasma televisions estimate the 99% confidence interval for the population proportion for plasma televisions bought. (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 6 (a) The chi square test tests the degree of association between two variables or randomness goodness of fit to a known distribution. It is based on the differences between observed data and data that could be expected to occur. (b) Null hypothesis: there is no association between the type of television and social class. Alternative hypothesis: there is association between the type of television and social class. Degrees of freedom = (R-1)(C-1) = (4-1)(3-1) = 6 Critical chi-squared = 12.59/16.81 Observed data Totals 60 65 155 120 Totals 400 45 70 120 85 320 25 45 130 80 280 130 180 405 285 1000 52 72 162 114 41.6 57.6 129.6 91.2 36.4 50.4 113.4 79.8 Expected frequencies

Contributions to chi-squared 1.231 0.681 0.302 0.316 0.278 2.669 0.711 0.421 3.570 0.579 2.430 0.001 chi-squared = 13.189

Conclusion: the calculated value of chi-squared is greater than the critical value of chisquared at 0.05 significance level reject the null hypothesis there is evidence to show association between type of television and social class. However, the calculated value of chisquared is less than the critical value of chi-squared at 0.01 significance level there is insufficient evidence to show an association. (c) Proportion of Plasma Televisions: p = 280/1000 = 0.28

ci = p ± 2.58

p (1 − p ) 0.28(1 − 0.28) = 0.28 ± 2.58 n 1000

= 0.28 ± 0.037 = 0.253 to 0.317

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QUESTION 7 (a) Explain the difference between a 1 tailed and a 2 tailed test of significance. (4 marks)

A company has two forms of packaging, A and B for its product. It conducted two random samples of the customers who had returned the product as damaged identified by type of packaging. Packaging A 27 1000 Packaging B 22 750 (12 marks) (c) If a 1 tailed test had been carried out, would the conclusion you have reached in part (b) remain the same? Explain your answer. (4 marks) (Total 20 marks)

Items returned Sample size

(b) Test whether the proportion returned differs due to the type of packaging used.

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MODEL ANSWER TO QUESTION 7 (a) A one tail test of significance states the alternative hypothesis in terms of the direction of change either greater than or less than. A two tail test states the alternative hypothesis without specifying the direction of change “differs from”. (b) Null hypothesis: there is no difference in the proportion of items returned due to the type of packaging. Alternative hypothesis: there is a difference in the proportion of items returned due to the type of packaging. Critical z value 1.96/2.58 p1 = 27/1000 = 0.027, Pooled value of p = p2 = 22/750 = 0.02933

27 + 22 49 = = 0.028 1000 + 750 1750
=

z=

0.027 − 0.02933 1 ⎞ ⎛ 1 0.028(1 − 0.028)⎜ + ⎟ ⎝ 1000 750 ⎠

− 0.00223 = -0.28 0.02722(0.02233)

Conclusion the calculated value of z is less than the critical value of z. There is insufficient evidence to reject the null hypothesis. The proportion returned does not differ due to the packaging. (c) A one tail test would test at z = 1.65, and the solution would fall within the acceptance area. The conclusion would be the same. The proportion returned does not differ due to the packaging.

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QUESTION 8 (a) Explain the circumstance in which a t test is used in preference to a normal distribution based z test, when testing for the mean of one sample. (4 marks) The mean weight of a random sample of 12 bags of sugar is 0.988 kg with standard deviation 0.015 kg. (b) Test, at the 0.01 significance level, whether the mean weight of the sample is significantly less than the specified mean weight of the bags of sugar given as 1.0 kg. (8 marks) (c) If the company introduces a new production technique which reduces the standard deviation to 0.09 kg, and assuming the sample size remains 12, what weight should the company set as the target weight so that 99% of the time the sample mean weight of the bags exceeds 1 kg? (4 marks) (d) Explain the impact of a larger sample size upon the value of the standard error. (4 marks) (Total 20 marks)

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MODEL ANSWER TO QUESTION 8 (a) A ‘t’ test is used when the sample size is small less than 30 and the population standard deviation unknown compared with a large sample with known population standard deviation. Null hypothesis: the mean weight of bags does not differ from 1.0 kg. Alternative hypothesis: the mean weight of bags is less than 1.0 kg. Degrees of freedom = n-1 = 11 Critical t value = 2.72

t=

− 0.012 0.988 − 1.000 x−μ = = = -2.77 0.00433 0.015 12 σ n

Conclusions: the calculated value of t is greater than the critical value of t. Reject the null hypothesis, there is evidence to suggest the mean weight of bags is less than 1.0 kg. (c) Target weight = mean + t × se = 1.0 + 2.72 × .0026 = 1.0 + 0.007 = 1.007kg

(d) As the standard error,

se =

σ
n

or p(1 − p)
n

, the larger the sample size the smaller

will be the standard error. For example, the sample size increases by a factor of 4 the SE will half.

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