Question

Consider the Butler Trucking Company problem that we analyzed in class. Management has asked you to add driver experience to your regression model. You have decided to divide drivers into five groups: 1 year, 2 years, 3 years, 4 years, 5 years or more. How many dummy variables will you need to add to your regression model?

Answer 1

Answer:

4 dummy variables

Explanation:

There are five independent variables: 1 year, 2 years, 3 years, 4 years and (5 years and more).

In making your dummy variables in regression model, you need to take note of the dummy variable trap.

This trap will produce errors in the model if not taken care of. To take care of this trap, you need to make (n-1) dummy variables where n represents the number of independent variables.

Hence, in this case, we will have 5 - 1 = 4 dummy variables.