National open university of nigeria introduction to econometrics I eco 355

 
 
 
 
 
 
 
 
 
 
 
 
 

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UNIT TWO: The Level of Significance 
 
CONTENTS 
1.0
Introduction 
2.0
Objectives 
3.0 Main content 
3.1.
Analysis of Level of significance 
3.2.
The exact level of significance: the 
P
value
3.3.
Significance Analysis 
3.4.
The Choice between confidence-interval and test-of-significance
Approaches to hypothesis testing 
4.0
Conclusion 
5.0 
Summary 
6.0 
Tutor-Marked Assignment 
7.0. References
 
 
 
 
1.0.
 
INTRODUCTION 
The significance level, also denoted as alpha or α, is the probability of rejecting the null 
hypothesis when it is true. For example, a significance level of 0.05 indicates a 5% risk of 
concluding that a difference exists when there is no actual difference. However, a type I 

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error occurs when the researcher rejects a null hypothesis when it is true. The probability 
of committing a Type I error is called the significance level, and is often denoted by α. 
2.0.
 
OBJECTIVES 
At the end of this unit, you should be able to: 

understand the meaning of Level of significance 

understand the Choice between confidence-interval and test-of-significance 
Approaches to hypothesis testing