Question

Suppose that you wanted to predict the price of a house based on where the house was located (northeast, northwest, southeast, or southwest) as well as square footage. How many indicator variables would you need?

a. 0
b. 3
c. 1
d. 2
e. 4

Answer 1

Answer: b. 3

Explanation:

We know that , the indicator variable is a dummy variable in regression analysis which is used to denote either presence ( by 1 ) or absence ( by 0 ) of a nominal variable that can be responsible for the change in output.

Number of indicator variables = (all levels in the original variable)-1

Here , the given categories as per the location are northeast, northwest, southeast, or southwest.

i.e. all levels in the original variable = 4

Then, the umber of indicator variables we need = 4-1 =3

Hence, we need 3 indicator variables.

Thus , the correct answer is b. 3.