2 Questions on Hypothesis. Answer both in 150-200 Words
1.) What is the five-step process for hypothesis testing? Is the order important? Why or why
not? Why do alphas differ among industries? How do ethics affect your chosen level of
significance? Can you not reject and reject the null hypothesis? Why or why not?
2.) Why is it said that hypothesis testing involves a double negative logic?
1. The five steps in hypothesis testing are
1. Specify the null hypothesis
2. Specify the alternative hypothesis
3. Set the significance level (𝛼)
4. Calculate the test statistic and the corresponding p-value
5. Drawing a conclusion
The order is important.
The alternative hypothesis can be specified only after the null hypothesis is specified. This is because
the alternative hypothesis is the hypothesis which is accepted as a consequence of the rejection of
the null hypothesis. The alternative hypothesis is usually of the form “ the null hypothesis is not
true”.
The level of significance can be decided only after specifying the null and alternative hypotheses.
This is because 𝛼 is the maximum probability of type I error. The nature of type I error depends on
the null and alternative hypotheses. The specification of 𝛼 is based on how serious the type I error is.
The process of testing starts only after the first three steps. The first three steps is concerned with
the precise formulation of the problem. Taking the sample, deciding the test statistic, computation
of the test statistic and the corresponding p-value are all done in the fourth step.
The 5th step is the final step which is comparing the p-value and the significance level 𝛼. If p-vqlue is
less than 𝛼, the null hypothesis is rejected. Otherwise we do not reject the null hypothesis.
2). Hypothesis testing involves a double negative logic. We will never accept the null hypothesis.
Either we reject the null hypothesis or we do not reject the null hypothesis.
We will maintain the status quo until it is proved wrong. Suppose we have an existing production
process in an industry. Also suppose that a new production process is suggested as an improvement
of the existing one.
We will stick on to the existing one until the alternative is proved to be good beyond reasonable
doubt. Our null hypothesis is that the existing process is the better one. The alternative is that the
new process is the better one.
We will collect a sample from the new process. If it gives sufficient evidence that the new process is
better than the existing one, we will reject our null hypothesis. But if the evidence in favour of the
alternative is not sufficient we will not reject the null hypothesis. That means we are not accepting
the null hypothesis. We are only waiting for further evidence.