Question

An analyst wants to include the level of education to a regression model. The level of education has 4 possible values: HS, BS, MS, and PhD. How many dummy variables must the analyst add to the regression model to account for this variable

Answer 1

Three.

Explanation:

An analyst wants to include Level of Education in a regression model.

Level of Education has 4 possible values - HS, BS, MS, PHD

How many dummy variables must the analyst add to the regression model, in order to account for the variable LEVEL OF EDUCATION?

Since LOE has 4 possible values, (4 - 1 = 3) dummy variables will be added to the regression model.

If the dummy letter is M for instance, and 1 represents the presence of a particular LOE and 0 represents the absence of that LOE;

M1 = 1 when LOE is HS but =0 when LOE is otherwise

M2 = 1 when LOE is BS but =0 when LOE is otherwise

M3 = 1 when LOE is MS but =0 when LOE is otherwise

So, when M1, M2, M3 are equal to 0, the PHD value is represented.