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The Magic Pumpkin Limousine Company Wants to Purchase a Car

question 39

Essay

The Magic Pumpkin Limousine Company wants to purchase a car entertainment system for one of its automobiles. The entertainment system vendor has offered to finance the $2,000 purchase over one year in 12 installments, with a total of $200 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finance the purchase with an installment loan, where $155 in interest will be repaid and payments on the loan must be made quarterly. What are the effective interest rates on these loans? Which loan should they select?


Definitions:

Type I Error

The statistical mistake of rejecting a null hypothesis when it is actually true, also known as a "false positive".

Type II Error

The error that occurs when the null hypothesis is falsely not rejected, missing the detection of an actual effect.

Probability

A measure expressing the likelihood of a particular event or outcome occurring.

Two-tailed Test

A statistical test that considers the possibility of both directions of effect (greater than or less than), assessing the significance of a deviation in either direction from a null hypothesis.

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