Explanation:
A "false good" refers to accepting a bad account (Type II error). The probability of a false good is the area under the bad account distribution curve to the right of the cutoff score. By increasing the cutoff score, the bank shifts the threshold to the right, which decreases the area of bad accounts above the threshold, thereby reducing the fraction of false goods. However, this trade-off inherently increases the number of "false bads" (Type I error: rejecting good accounts), making it impossible to simultaneously reduce both error types by simply shifting the cutoff. Regarding option A, the Z-score for good accounts is (680 - 730)/25 = -2.0, giving an error rate of 2.28% (which is > 1.0%).
Ultimate access to all questions.
Which of the following is a TRUE statement?
A
This cutoff of 680.0 ensures an error rate of less than 1.0%
B
The bank can reduce the fraction of false bads by increasing the cutoff score
C
The bank can reduce the fraction of false goods by increasing the cutoff score
D
The bank can simultaneously reduce the fraction of errors (ie, both false bads and false goods) by increasing the cutoff score
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