Question

A local bank reviewed its credit card policy with the intention of recalling some of its credit

cards. In the past approximately 5% of cardholders defaulted, leaving the bank unable to

collect the outstanding balance. Hence, management established a prior probability of .05

that any particular cardholder will default. The bank also found that the probability of

missing a monthly payment is .20 for customers who do not default. Of course, the

probability of missing a monthly payment for those who default is 1.

Let

M = missed payment

D1 = customer defaults

D2 = customer does not default

a. Given that a customer missed one or more monthly payments, compute the posterior

probability that the customer will default.

b. The bank would like to recall its card if the probability that a customer will default is

greater than .20. Should the bank recall its card if the customer misses a monthly payment?

Why or why not?​

Answer 1

Answer:

sorry I didn't get the answer