Question

An insurance company is reviewing its current policy rates. When originally setting the rates, they believed that the average claim amount was $1,800. They are concerned that the true mean is actually higher than this because they could potentially lose a lot of money. They randomly select 40 claims and calculate a sample mean of $1,950. Assuming that the standard deviation of claims is $500, and set α= 0.05; α= 0.1, test to see if the insurance company should be concerned.

Answer 1

Reject There is sufficient evidence to support the claim that true mean is actually higher than the claim amount $1800.

Explanation:

Based on the decision rule, the test statistic is lies in the rejection region. So reject the null hypothesis at 5% level of significance.

There is sufficient evidence to support the claim that the true mean is actually higher than the claim amount $1800.

Solution is attached below