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The rejection region is shaded in the next two slides. The level of
significance of the test is 5%.
CRITICAL REGIONS
CRITICAL REGIONS
CRITICAL REGIONS
Example: The manager of a department store is thinking about establishing a new
billing system for the store’s credit customers. After a thorough financial analysis,
she determines that the new system will be cost-effective only if the mean
monthly account is more than $170. The manager knows that the accounts are
approximately normally distributed with a standard deviation of $65. Can the
manager conclude from this at a significance level of 5% that the new system will
be cost-effective?
Solution:
To conclude that the system will be cost-effective, requires
to show that the mean account for all customers will be more
than $170. Consequently, this must be the alternate
hypothesis:
𝐻1 : 𝜇 > 170 (𝐼𝑛𝑠𝑡𝑎𝑙𝑙 𝑁𝑒𝑤 𝑆𝑦𝑠𝑡𝑒𝑚)
If the mean is less than or equal to 170, then the system will
not be cost-effective.
We test the Null hypothesis
𝐻0 : 𝜇 ≤ 170
As a result we may convert 𝑥 into the standard normal random
variable and obtain
𝑥−𝜇 𝑥𝐿 −𝜇 𝑥𝐿 −𝜇
𝑃 𝜎 > 𝜎 =𝑃 𝑍> 𝜎 =𝛼
𝑛 𝑛 𝑛
𝜎 = 65 and 𝑛 = 400, α = 5%
Suppose the Null hypothesis was true then 𝜇 = 170.
that 𝛼 is 𝑧𝛼 = 𝑧0.5 = 1.645.
𝑥𝐿 −𝜇
We can now calculate the value of 𝑥𝐿 : 𝜎 = 𝑧𝛼
𝑛
𝑥𝐿 −170
Hence, 65 = 1.645 ⟹ 𝑥𝐿 = 175.34
400