Yvonne Yang, VP of Finance at Discrete Components, Inc.(DCI), wants a regression model which predicts the average collection period on credit sales.Her data set includes two qualitative variables: sales discount rates (0%, 2%, 4%, and 6%), and total assets of credit customers (small, medium, and large).The number of dummy variables needed for "total assets of credit customer" in Yvonne's regression model is ________.
A)1
B)2
C)3
D)4
E)7

Question

Quizplus · Accepted Answer

For a qualitative variable with n categories, the number of dummy variables needed is n-1 to avoid the dummy variable trap. Since "total assets of credit customer" has 3 categories, 3-1=2 dummy variables are needed.