Step 3 - Specify significance level

Significance level
Denoted by α, or alpha, the significance level is the probability of making a type I error, or the probability that we will reject the null hypothesis when it is true. The common values used are 0.1, 0.05,and 0.01.

Type I error
Reject the null hypothesis when it is true.

Type II error
Fail to reject the null hypothesis when it is false.

Note:

• Decrease in Type 1 error leads to increase in Type 2 error.

p-value :
Lowest significance level at which Ho can be rejected. Lower the p-value, stronger the evidence to reject H0. If p is smaller than α, reject H0; If p is greater than α, do not reject H0

Power of a test
It is the probability of correctly rejecting Ho when it is false. The formula is as:

Power of a test = 1 - probability of Type II error