Question

A report on consumer financial literacy summarized data from a representative sample of 1,570 adult Americans. Based on data from this sample, it was reported that over half of U.S. adults would give themselves a grade of A or B on their knowledge of personal finance. This statement was based on observing that 820 people in the sample would have given themselves a grade of A or B.

Required:

a. Construct and interpret a 95% confidence interval for the proportion of all adult Americans who would give themselves a grade of A or B on their financial knowledge of personal finance.
b. Is the confidence interval from part (a) consistent with the statement that a majority of adult Americans would give themselves a grade of A or B? Explain why or why not. Because this confidence interval , the interval consistent with the statement that a majority of adult Americans would give themselves a grade of A or B.

Answer 1

a) 95% confidence interval for the proportion of all adult Americans who would give themselves a grade of A or B on their financial knowledge of personal finance = (0.498, 0.547)

This means we are 95% confident that the true proportion all adult Americans who would give themselves a grade of A or B on their financial knowledge of personal finance is within the range 49.8% and 54.7%.

b) The confidence interval from part (a) is consistent with the statement that a majority of adult Americans would give themselves a grade of A or B because the interval obtained contains proportions that are greater than 50% indicating that there is significant evidence that the true proportion of all adult Americans who would give themselves a grade of A or B on their financial knowledge of personal finance is more than half of the total population.

Explanation:

Confidence Interval for the population proportion is basically an interval of range of values where the true population proportion can be found with a certain level of confidence.

Mathematically,

Confidence Interval = (Sample proportion) ± (Margin of error)

Sample proportion = (820/1570) = 0.5223

Margin of Error is the width of the confidence interval about the mean.

It is given mathematically as,

Margin of Error = (Critical value) × (standard Error)

Critical value at 95% confidence interval for sample size of 1570 is obtained from the z-tables.

Critical value = 1.960

Standard error of the mean = σₓ = √[p(1-p)/n]

p = sample proportion = 0.5223

n = sample size = 1570

σₓ = √(0.5223×0.4777/1570) = 0.0126063049 = 0.01261

95% Confidence Interval = (Sample proportion) ± [(Critical value) × (standard Error)]

CI = 0.5223 ± (1.96 × 0.01261)

CI = 0.5223 ± 0.02471

95% CI = (0.4975916424, 0.5470083576)

95% Confidence interval = (0.4976, 0.5470)

We are 95% confident that the true proportion all adult Americans who would give themselves a grade of A or B on their financial knowledge of personal finance is within the range 49.8% and 54.7%.

b) The confidence interval from part (a) is consistent with the statement that a majority of adult Americans would give themselves a grade of A or B because the interval obtained contains proportions that are greater than 50% indicating that there is significant evidence that the true proportion of all adult Americans who would give themselves a grade of A or B on their financial knowledge of personal finance is more than half of the total population.

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