Question

Annual expenditures for prescription drugs was $838 per person in the Northeast of the country. A sample of 60 individuals in the Midwest showed a per person annual expenditure for prescription drugs of $745. Suppose the population standard deviation is $300. Follow the steps below to develop a hypothesis test to determine whether the sample data support the conclusion that the population annual expenditure for prescription drugs per person is lower in the Midwest than in the Northeast.

1. Formulate the null and alternative hypotheses. State whether this is a one-tailed test (and if so, upper or lower tail) or a two-tailed test.

2. Suppose the significance level is α=0.05. Explain what this means.

3. Calculate the test statistic. (Hint: Is known or unknown?)

4. Calculate the p-value and make a decision to either reject H0 or to fail to reject H0.

5. Calculate the critical value(s). Use the test statistic then to make a decision to either reject H0 or to fail to reject H0.

6. State what your decision means in the context of the problem (prescription expenditure in the Midwest vs. the Northeast).

Answer 1

Given : Sample size=n=60

Sample mean=

Population standard deviation=

Significance level=

Hypothesized value=

Hypothesis : Vs  

The test is one tailed test

The test statistic is ,

The p-value is ,

; From standard normal distribution table

The critical value is ,

; From standard normal distribution table

Decision: Here , p-value=0.0082<

Therefore , reject Ho

Conclusion : Hence , there is sufficient evidence to support the claim that the population annual expenditure for prescription drugs per person is lower in the Midwest than in the Northeast.