Lecture 6

Question 1

Dummy variables

Answer 1

How canwe includenominal(or ordinal) independent variables in a regression equation?
Create so called Dummy variables
Dummy variable is an indicator variable that indicates whether someone is or is not part of a specific category of the categorical independent variable
It is the conventionthatthe dummy variablehas the following values:
◦ ‘0’ ifonedoesnotbelongtoa categoryof the categoricalindependent variable
◦ ‘1’ ifonedoesbelongtoa categoryof the categoricalindependent variable

Question 2

Dummy variables in a regressionequation

Answer 2

If you compute the same number of dummy variables as there are categories
in the categorical independent variable, you have 1 dummy variable too
many; since…
If someone has not received:
1. ‘elementary education’
2.‘primary education‘
3.‘secondary education’
4.‘higher education’
…one must have received‘academical education’!

Question 3

Dummy variables in a regression equation
Rule

Question 4

Interpretation