When using dummy variables in a regression equation to model a qualitative or categorical variable, the number of dummy variables should equal to
a. one less than the number of categories.
b. one more than the number of categories.
c. the number of categories.
d. the number of other independent variables in the model.
The correct answer is: "a. one less than the number of categories".
This is best seen by example. Suppose there are only two categories. We can use a single dummy variable called cat2 (recall that dummy variables can assume a value of either 0 or 1). We can let cat2 =0 represent category 1 ...
This solution describes in detail why the number of dummy variables in a regression equation is always one less than the number of categories in a categorical variable.