Question

The mean operating cost per hour for the current production method at S-E Electronics equals $220. A new production method will be implemented if ahypothesis test based on sample data suggests the new method reduces (v. the current method) the mean operating cost per hour.

Required:
a. State the null and alternative hypotheses associated with the test.
b. What is the Type I Error for the test and what are the business consequences of a Type I Error?

Answer 1

H0 : μ = 220

H0 : μ < 220

Rejecting the null when it is actually true

We incorrectly drop a better method.

Explanation:

The null hypothesis, H0

H0 : μ = 220

H0 : μ < 220

A type 1 error is committed when a true null hypothesis is incorrectly rejected. This means that we conclude that new method reduces the mean operating cost per hour when in fact it hasn't.

The impact of this on business is that the new method is adopted in place of the old method thinking it works better Than the old method.