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Dummy Variables

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Whats the concept of dummy variables. What is their relevance in regression analysis?

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Solution Summary

This solution describes the concept of a dummy variable, discusses its meaning, and gives examples how to use dummy variables in a regression analysis. The solution is illustrative in nature and does not include calculations.

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Dear Student:

In simple regression analysis, the relationship between two variables, the independent variable (x) and the dependent variable (y), can be expressed as y = a + bx, where a = constant value, b = coefficient, and x = variable which gets different values or is a dummy variable.

Most often dummy variables are used in multiple regression analysis, which means that there are several independent variables (x1, x2, x3+ xn) and one dependent variable (y). Thus the value of y is dependent on several independent variables. For example, the equation with four independent ...

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