A retailer owes the government for a certain period

Reference no: EM131076259

Let t = the amount of sales tax a retailer owes the government for a certain period. The article "Statistical Sampling in Tax Audits" (Statistics and the Law, 2008: 320-343) proposes modeling the uncertainty in t by regarding it as a normally distributed random variable with mean value µ and standard deviation s (in the article, these two parameters are estimated from the results of a tax audit involving n sampled transactions). If a represents the amount the retailer is assessed, then an under-assessment results if t > a and an over-assessment results if a > t. The proposed penalty (i.e., loss) function for over- or under-assessment is 1 is suggested to incorporate the idea that over-assessment is more serious than under-assessment)

s the value of a that minimizes the expected loss, where F21 is the inverse function of the standard normal cdf.

c. If k = 2 (suggested in the article), µ = $100,000, and s= $10,000, what is the optimal value of α, and what is the resulting probability of over-assessment?

Reference no: EM131076259

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