An insurance company is reviewing its current policy rates. When originally sett

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 all claims is $500, and set alpha =.05, test to see if the insurance company should be concerned. H_0: H_a: Test Statistic: P-Value/Critical Values: Conclusion:

Explanation / Answer

here Ho: mean <=1800

Ha: mean >1800

std error =std deviaiton/(n)1/2 =79.057

hence test stat z=(X-mean)/std error =(1950-1800)/79.057 =1.8974

p value =0.0289

critical value =1.645

as p vlaue is less then 0.05 level and test stat is higher then critical value we reject Ho

we have sufficient evidence to conclude that average claim amount is higher then 1800 at 0.05 level

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