La Quinta Motor Inns developed a computer model to help predict the profitability of sites that are being considered as locations for new hotels. If the computer model predicts large profits, La Quinta buys the proposed site and builds a new hotel. If the computer model predicts small or moderate profits, La Quinta chooses not to proceed with that site. (Data extracted from S. E. Kimes and J. A. Fitzsimmons, "Selecting Profitable Hotel Sites at La Quinta Motor Inns," Interfaces, Vol. 20, March-April 1990, pp. 12-20.) This decision-making procedure can be expressed in the hypothesis-testing framework. The null hypothesis is that the site is not a profitable location. The alternative hypothesis is that the site is a profitable location.
a. Explain the risks associated with committing a Type I error in this case.
b. Explain the risks associated with committing a Type II error in this case.
c. Which type of error do you think the executives at La Quinta Motor Inns want to avoid? Explain.
d. How do changes in the rejection criterion affect the probabilities of committing Type I and Type II errors?