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. I f th

Question No 9.68
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. I f the computer model predicts small or
moderate profits, La Quinta chooses not to proceed with
that site (data extracted from S. E. Kimes and 1. 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 J
error in this case.
b. Explain the risks associated with committing a Type Il
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 J and Type II errors?

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