An automobile company gets its brake pads from a supplier in Mexico. They are
shipped over each evening in large trucks. A shipment is considered good if 5% or fewer of
the pads are bad. But it is not possible to test every pad. So for each shipment, the quality
control manager randomly picks 100 brake pads and runs them through some tests. He
accepts the shipment only if 7 or fewer pads are found to be bad.
i. in words, explain what a Type-I error would be in this setting.
ii. in words, explain what a Type-II error would be in this setting.
iii. If you are the supplier, which type of error would be more important to you and why?
iv. if you are the automobile company, which type of error would be more important to
you and why?
v. if you are the supplier and you sent over a shipment that you know to be good, what
is the likelihood that the automobile company will still reject the shipment? Based on
this calculation what change to their acceptance policy of ‘7 or fewer bad out of 100’
would you ask them to make?