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Suppose that you are a loan officer at a small regional bank responsible for issuing personal...

Suppose that you are a loan officer at a small regional bank responsible for issuing personal lines of credit. You are required to conduct a hypothesis test to determine whether or not a new loan applicant should be given a personal line of credit. You set up the following hypotheses: Ho: The applicant should not be given the line of credit. (applicant is not qualified) Ha: The applicant SHOULD be given the line of credit. (applicant is qualified) Regulations require that you conduct the hypothesis test at the 1% significance level.What is the probability of making a Type I error when conducting this hypothesis test?What would be the consequences of making a Type I error in this situation?

Math   Statistics-And-Probability   
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Answer #1

Ans type 1 error is the rejection of true null hypothesis. In this context, type 1 error means to claim that the applicant should be given the line of credit when in fact he should not

The probability of making a type 1 error when conducting this hypothesis test is equal to the value of alpha which is 0.01

In this situation, the consequences of type 1 error will be a unqualified applicant will receive the personal line of credit which might result in the non repayment of loan amount and hence will be a loss or non perfoming asset for the bank

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