HIST 221 Lecture Notes - Lecture 10: Credit Manager, Machine Press, Contingency Table
STAT 251
Handout #4b – Chapter 5
SOLUTIONS
1. Recall the credit default problem from worksheet 4: The credit manager for a major department store found that 4%
of all credit customers default on their payments. (“Default” means to never pay.) 85% of those who defaulted were late
with at least two monthly payments, while 38% of those who did not default had at least two late monthly payments.
Display the information in the tree diagram below.
2. Given that a customer has made at least two late monthly payments, what is the probability that s/he will default? Use
your tree diagram.
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Document Summary
Solutions: recall the credit default problem from worksheet 4: the credit manager for a major department store found that 4% of all credit customers default on their payments. ( default means to never pay. ) 85% of those who defaulted were late with at least two monthly payments, while 38% of those who did not default had at least two late monthly payments. =(cid:882). (cid:882)(cid:890)(cid:887: the credit manager is considering denying further credit to anyone who has at least two late payments, fearful that such people will default on their debts. Considering that the chance of defaulting if someone is at least two payments late is only around 9%, it may be somewhat harsh to implement the plan to deny credit to those who are late. If it were 20% or more, perhaps we would have more cause for concern: suppose two baseball teams meet in a 2-game series.
