A survey was conducted two years ago asking college students their top motivations for using a credit card. To determine whether this distribution has changed, you randomly select 425 college students and ask each one what the top motivation is for using a credit card. Can you conclude that there has been a change in the claimed or expected distribution? Use alpha = 0.10.

Response Old Survey % New Survey Frequency
Reward 27 112
Low rate 23 96
Cash back 21 109
Discount 9 48
Others 20 60

See explanation

Step-by-step explanation:

Solution:-

- A survey was conducted among the College students for their motivations of using credit cards two years ago. A randomly selected group of sample size n = 425 college students were selected.

- The results of the survey test taken 2 years ago and recent study are as follows:

                                           Old Survey ( % )            New survey ( Frequency )

                  Reward                 27                                              112

                  Low rate               23                                              96

                  Cash back           21                                              109

                  Discount              9                                               48

                  Others                  20                                             60

- We are to test the claim for any changes in the expected distribution.

We will state the hypothesis accordingly:

Null hypothesis: The expected distribution obtained 2 years ago for the motivation behind the use of credit cards are as follows: Rewards = 27% , Low rate = 23%, Cash back = 21%, Discount = 9%, Others = 20%

Alternate Hypothesis: Any changes observed in the expected distribution of proportion of reasons for the use of credit cards by college students.

( We are to test this claim - Ha )

We apply the chi-square test for independence.

- A chi-square test for independence compares two variables in a contingency table to see if they are related. In a more general sense, it tests to see whether distributions of categorical variables differ from each other.

- We will compute the chi-square test statistics ( X^2 ) according to the following formula:

Where,

 O_i : The observed value for ith data point

 E_i : The expected value for ith data point.

- We have 5 data points.

So, Oi :Rewards = 27% , Low rate = 23%, Cash back = 21%, Discount = 9%, Others = 20% from a group of n = 425.

     Ei : Rewards = 112 , Low rate = 96, Cash back = 109, Discount = 48, Others = 60.

Therefore,

- Then we determine the chi-square critical value ( X^2- critical ). The two parameters for evaluating the X^2- critical are:

                     Significance Level ( α ) = 0.10

                     Degree of freedom ( v ) = Data points - 1 = 5 - 1 = 4  

Therefore,

                     X^2-critical = X^2_α,v = X^2_0.1,4

                    X^2-critical = 7.779

- We see that X^2 test value = 14.30589 is greater than the X^2-critical value = 7.779. The test statistics value lies in the rejection region. Hence, the Null hypothesis is rejected.

Conclusion:-

This provides us enough evidence to conclude that there as been a change in the claimed/expected distribution of the motivations of college students to use credit cards.

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