A department store is considering a new credit policy to try to reduce the number of customers de-faulting on payments. A suggestion is made to discontinue credit to any customer who has been one week or more late with his/ her payment at least twice. Past records show 95 percent of defaults were late at least twice. Also,3 percent of all customers default, and 30 percent of those who have not defaulted have had at least two late payments.
a. Find the probability that a customer with at least two late payments will default.
b. Based on part a, should the policy be adopted? Explain.