I'm having trouble figuring out how to start with some parts of these probability questions, like part A
I tried to used P(pass test&non survivor)/ P(non survivor) to get P(passtest|nonsurvivor)
But when I checked the solution I saw that they used the unconditional probability of P(pass test) = P(pass test|survivor)* P(survivor) + P(pass test| non survivor)*P(non survivor).
I understand why they used that but I don't understand why the method I chose was wrong, can someone please clarify? How do you know which formula to use in these situations. Thanks, (Question is below)
You have developed a set of criteria for evaluating distressed credits. Companies that do not receive a passing
I tried to used P(pass test&non survivor)/ P(non survivor) to get P(passtest|nonsurvivor)
But when I checked the solution I saw that they used the unconditional probability of P(pass test) = P(pass test|survivor)* P(survivor) + P(pass test| non survivor)*P(non survivor).
I understand why they used that but I don't understand why the method I chose was wrong, can someone please clarify? How do you know which formula to use in these situations. Thanks, (Question is below)
You have developed a set of criteria for evaluating distressed credits. Companies that do not receive a passing
score are classed as likely to go bankrupt within 12 months. You gathered the following information when
validating the criteria:
•
Forty percent of the companies to which the test is administered will go bankrupt within 12 months: P
(nonsunivor) = 0.40.
Fifty-five percent of the companies to which the test is administered pass it: P(pass test)= 0.55.
• The probability that a company will pass the test given that it will subsequently survive 12 months, is 0.85:
P(pass test|survivor) =0.85.
A. What is P (pass test|nonsurvivor)?
B. Using Bayes' formula, calculate the probability that a company is a survivor, given that it passes the test;
that is, calculate P(survivor|pass test).
C. What is the probability that a company is a nonsurvivor given that it fails the test?
D. Is this test effective?