Question

In: Statistics and Probability

  The CEO of the firm you work for is reading some research about the market you...

  1.   The CEO of the firm you work for is reading some research about the market you firm is in. He keeps coming across this concept of p-value and is perplexed by what it means. He asks you to explain it to him in a way he can understand it.. Write up an explanation of p-value and use an example that will clearly explain this concept to him.

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Expert Solution

A p-value is used in hypothesis testing to help you support or reject the null hypothesis. The p-value is the evidence against a null hypothesis. The smaller the p-value, the stronger the evidence that you should reject the null hypothesis.

For example, suppose a pizza place claims their delivery times are 30 minutes or less on average but you think it’s more than that. You conduct a hypothesis test because you believe the null hypothesis, Ho, that the mean delivery time is 30 minutes max, is incorrect. Your alternative hypothesis (Ha) is that the meantime is greater than 30 minutes. You randomly sample some delivery times and run the data through the hypothesis test, and your p-value turns out to be 0.001, which is much less than 0.05. In real terms, there is a probability of 0.05 that you will mistakenly reject the pizza place’s claim that their delivery time is less than or equal to 30 minutes. Since typically we are willing to reject the null hypothesis when this probability is less than 0.05, you conclude that the pizza place is wrong; their delivery times are in fact more than 30 minutes on average, and you want to know what they’re gonna do about it!


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