You might think that if you looked at the first digit in randomly selected numbers that the distribution would be uniform. Actually, it is not! Simon Newcomb and later Frank Benford both discovered that the digits occur according to the following distribution: (digit, probability)
(1,0.301),(2,0.176),(3,0.125),(4,0.097),(5,0.079),(6,0.067),(7,0.058),(8,0.051),(9,0.046)(1,0.301),(2,0.176),(3,0.125),(4,0.097),(5,0.079),(6,0.067),(7,0.058),(8,0.051),(9,0.046)
The IRS currently uses Benford's Law to detect fraudulent
tax data. Suppose you work for the IRS and are investigating an
individual suspected of embezzling. The first digit of 145 checks
to a supposed company are as follows:
Digit | Observed Frequency |
---|---|
1 | 31 |
2 | 18 |
3 | 25 |
4 | 18 |
5 | 12 |
6 | 15 |
7 | 7 |
8 | 7 |
9 | 12 |
a. State the appropriate null and alternative hypotheses
for this test.
b. Explain why ?=0.01?=0.01 is an appropriate choice for
the level of significance in this situation.
c. What is the P-Value? Report answer to 4 decimal
places
P-Value = .0300
d. What is your decision?
Reject the Null Hypothesis
OR
Fail to reject the Null Hypothesis (answer)
e. Write a statement to the law enforcement officials that
will use it to decide whether to pursue the case further or not.
Structure your essay as follows: Given a brief explanation of what
a Goodness of Fit test is. Explain why a Goodness of Fit test
should be applied in this situation. State the hypotheses for this
situation Interpret the answer to part c Use the answer to part c
to justify the decision in part d Use the decision in part d to
make a conclusion about whether the individual is likely to have
embezzled. Use this to then tell the law enforcement officials
whether they should pursue the case or not.
Need help with A, B, and E please
a. The appropriate null and alternative hypotheses for this test is
H0: Data comes from the specified distribution.
H1 : Data does not come from a specified distribution.
b. Small the significance level, the change of rejection of null hypothesis is more.
test statistic is
Digit | Observed(O) | Probability | Expected(E) | (O-E)^2/E |
1 | 31 | 0.301 | 43.645 | 3.663559 |
2 | 18 | 0.176 | 25.52 | 2.215925 |
3 | 25 | 0.125 | 18.125 | 2.607759 |
4 | 18 | 0.097 | 14.065 | 1.100905 |
5 | 12 | 0.079 | 11.455 | 0.02593 |
6 | 15 | 0.067 | 9.715 | 2.875062 |
7 | 7 | 0.058 | 8.41 | 0.236397 |
8 | 7 | 0.051 | 7.395 | 0.021099 |
9 | 12 | 0.046 | 6.67 | 4.259205 |
Total | 145 |
c. The p-value is used as an alternative to rejection points to provide the smallest level of significance at which the null hypothesis would be rejected.
p-value = 0.03
d. The p-value is greater than 0.01, we fail to reject the null hypothesis .
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