Chapter 21, Problem 17E

(a)

To determine

To explain what is meant by the power of the test in this context.

Explanation of Solution

It is given in the question that before lending someone money, banks must decide whether they believe the applicant will repay the loan. The strategy used is a point system. And the loan score method a bank uses to decide which applicants it will lend money. Thus, in this context, we can say that power of the test is the probability of correctly rejecting a false null hypothesis. And power of the test is the probability that the bank denies a loan that would not have been repaid.

(b)

To determine

To explain what could the bank do to increase the power.

Answer to Problem 17E

Bank should raise the cut-off power.

Explanation of Solution

It is given in the question that before lending someone money, banks must decide whether they believe the applicant will repay the loan. The strategy used is a point system. And the loan score method a bank uses to decide which applicants it will lend money. Thus, to increase the power, bank will raise the cut-off score because the probability of correctly denied loans would be increased.

(c)

To determine

To explain what is the disadvantage of doing that.

Explanation of Solution

It is given in the question that before lending someone money, banks must decide whether they believe the applicant will repay the loan. The strategy used is a point system. And the loan score method a bank uses to decide which applicants it will lend money. Thus, the disadvantage of doing that is that a greater number of trustworthy people would be denied credit and the bank would miss the opportunity to collect interest on those loans.