ECON 140 Lecture 5
ECONOMICS 140
Professor Glenn Woroch
2/3/09
Lecture 5
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ANNOUNCEMENTS
First problem set is due this Thursday Feb. 5th in lecture. LECTURE
We are going to take a look at hypothesis testing. Up till now, we have been reviewing random variables. RVs have certain properties such as mean that measures the center, and variance that measures the dispersion. We would like to make claims about these properties and test them using statistical methods. Over the past years, Wall Street has been very interested in the volatility of the stocks. In this case, we would want to make sound claims about variances.
We start with a null hypothesis Ho, which is the claim that we will test. It looks as such:
In this case, we are making the claim that the mean (expected value) of Y is μx.
Say, we want to check the inflation rate in
2008. We first make a hypothesis that it is 3.4% after we went into some randomly chosen stores and bought a “typical” consumer basket.
Let Y be the inflation rate of 2008. So, the hypothesis we want to test is:
DO
When we test a hypothesis, we need an alternative to test it against. We can either choose a two-sided alternative: or a one-sided alternative:
.
Suppose we want to test the elasticity of slope of (gasoline) demand (Y) being negative. We would like to test:
After we get our hypothesis, how do we know whether to accept or reject it? We perform test using a “decision rule.” The outcome could land in four possible situations because: Ho could be either true or false, and we can either accept or reject Ho.
We could be happy if:
(1) Ho is
Professor Glenn Woroch
2/3/09
Lecture 5
ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence.
These notes are copyrighted by the University of California and are for your personal use only.
ANNOUNCEMENTS
First problem set is due this Thursday Feb. 5th in lecture. LECTURE
We are going to take a look at hypothesis testing. Up till now, we have been reviewing random variables. RVs have certain properties such as mean that measures the center, and variance that measures the dispersion. We would like to make claims about these properties and test them using statistical methods. Over the past years, Wall Street has been very interested in the volatility of the stocks. In this case, we would want to make sound claims about variances.
We start with a null hypothesis Ho, which is the claim that we will test. It looks as such:
In this case, we are making the claim that the mean (expected value) of Y is μx.
Say, we want to check the inflation rate in
2008. We first make a hypothesis that it is 3.4% after we went into some randomly chosen stores and bought a “typical” consumer basket.
Let Y be the inflation rate of 2008. So, the hypothesis we want to test is:
DO
When we test a hypothesis, we need an alternative to test it against. We can either choose a two-sided alternative: or a one-sided alternative:
.
Suppose we want to test the elasticity of slope of (gasoline) demand (Y) being negative. We would like to test:
After we get our hypothesis, how do we know whether to accept or reject it? We perform test using a “decision rule.” The outcome could land in four possible situations because: Ho could be either true or false, and we can either accept or reject Ho.
We could be happy if:
(1) Ho is