Question

For the given significance test, explain the meaning of a Type I error, a Type II error, or a correct decision as specified. A health insurer has determined that the "reasonable and customary" fee for a certain medical procedure is $1200. They suspect that the average fee charged by one particular clinic for this procedure is higher than $1200. The insurer performs a significance test to determine whether their suspicion is correct using α = 0.05. The hypotheses are:

H0: μ = $1200

Ha: μ > $1200

If the P-value is 0.09 and a decision error is made, what type of error is it? Explain.

		Type II error. We conclude that the average fee charged for the procedure is not higher than $1200 when it actually is higher.
		Type I error. We conclude that the average fee charged for the procedure is not higher than $1200 when it actually is higher.
		Type II error. We conclude that the average fee charged for the procedure is higher than $1200 when it actually is not higher.
		Type I error. We conclude that the average fee charged for the procedure is higher than $1200 when it actually is not higher.

Answer 1

Answer: Type II error. We conclude that the average fee charged for the procedure is not higher than $1200 when it actually is higher.

Explanation: The Type II error is accepting null hypothesis when it is false. The p-value is 0.09. This p-value is greater than 0.05. Hence we accept null hypothesis and conclude that the average fee charged for the procedure is not higher than $1200. But the actually the average fee charged for the procedure is higher than $1200. Hence the Type – II error is made.