3) A study was conducted to estimate hospital costs for accident victims who wor

Question

3) A study was conducted to estimate hospital costs for accident victims who wore seat belts. Twenty randomly selected cases have a distribution that appears to be bell-shaped with a mean of $9004 and a standard deviation of $5629.

a) Construct the 99% confidence interval for the mean of all such costs and write a sentence that interprets the interval.

b) Based on the confidence interval, if you are a manager for an insurance company that provides lower rates for drivers who wear seat belts, and you want a conservative estimate for a worst case scenario, what amount should you use as the possible hospital cost for an accident victim who wears seat belts?

Explanation / Answer

Ans:

Given that

sample mean=9004

sample standard deviatiom=5629

sample size,n=20

df=20-1=19

t value for 99% CI and df=19 is 2.861

99% confidence interval for mean costs

=9004+/-2.861*5629/sqrt(20)

=9004+/-3601.09

=(5402.91, 12605.09)

b)As,true mean costs lie between 5402.91 and 12605.09,to be conservative you should consider maximum limit as 12605.09 as possible cost.

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