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The senior partner in a local accountancy firm is concerned about the error rate amongst assessments issued by her office. A careful check over the past few years enables her to estimate that the error rate has the following probability distribution:

\(\begin{array}{ll}\text { Error rate } & \text { Probability } \\ 0.05 & 0.25 \\ 0.10 & 0.35 \\ 0.15 & 0.25 \\ 0.20 & 0.15\end{array}\)

Each error costs \(£ 40\) because of the labour time involved in reassessment. Her firm is just entering the assessment 'season', and is expected to perform 500 assessments over the next few months.
One way to reduce the error rate is to send all staff to a one-day training course at the local university - 'Precision in Assessment'. The university claims this would ensure an error rate of \(0.05\), but she considers that an error rate of \(0.10\) would be equally likely.

The course fee is \(£ 700\) for all her staff, whilst lost profit from one day's work missed would be \(f 500\). Advise her on whether to send staff on the course or not.

A careful check of that day's output shows that in ten assessments, two contained errors. Use this information to update the error rate probability distribution and hence determine whether your advice needs amendment.
in Economics & Finance by Platinum (95,794 points) | 17 views

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