An insurance company wishes to keep the error rates in medical claims at or below 5%. If

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An insurance company wishes to keep the error rates in medical claims at or below 5%. If there is evidence of an error rate greater than this, they will need to introduce new quality procedures. The company has two possible decision plans:
Plan A. Randomly select 30 independent claims and audit them for errors. Use the rule: Decide error rate is acceptable if there are three or fewer errors in the sample of 30.
Plan B. Randomly select 60 independent claims and audit them for errors. Use the rule: Decide error rate is acceptable if there are five or fewer errors in the sample of 60.

(a) For each plan, if the probability of error is truly 5%, what is the chance they will decide their error rate is acceptable?

(b) For each plan, if the probability of error is truly 15%, what is the chance they will erroneously decide their error rate is acceptable?

(c) What are the advantages and disadvantages of Plan B? LO.1

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