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Managing the Producer's or the Consumer's Risk-ECO6416

# Managing the Producer's or the Consumer's Risk-ECO6416 -...

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Managing the Producer's or the Consumer's Risk The logic behind a statistical test of hypothesis is similar to the following logic. Draw two lines on a paper and determine whether they are of different lengths. You compare them and say, “Well, certainly they are not equal. Therefore they must be of different lengths. By rejecting equality, that is, the null hypothesis, you assert that there is a difference. The power of a statistical test is best explained by the overview of the Type I and Type II errors. The following matrix shows the basic representation of these errors. The Type-I and Type-II Errors As indicated in the above matrix a Type-I error occurs when, based on your data, you reject the null hypothesis when in fact it is true. The probability of a type-I error is the level of significance of the test of hypothesis and is denoted by α . Type-I error is often called the producer's risk that consumers reject a good product or service indicated by the null hypothesis. That is, a producer introduces a good product, in doing so, he or she take a risk that consumer will reject it.

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