A real estate agent wishes to predict the selling price of a home based on several variables.One categorical variable of interest is the quality of the home - low,medium,or high.If the real estate agent wished to include "quality" in a regression model,how many indicator variables would he/she need to use in the model?
A)4
B)3
C)0
D)1
E)2

Question

Quizplus · Accepted Answer

To include "quality" in a regression model, the real estate agent needs to use indicator variables. Since there are three levels in the quality variable - low, medium, high - the best approach is to use two indicator variables. One indicator variable will represent the effect of being medium quality and the other indicator variable will represent the effect of being high quality. The reference group will be low quality. Therefore, two indicator variables are needed to represent the three levels of the quality variable.

A Real Estate Agent Wishes to Predict the Selling Price