Answer-first summary for fast verification
Answer: II and III
**Explanation:** **Statement I: There are four dummy variables required** - This is **incorrect**. When dealing with categorical variables with k categories (in this case, 4 quarters), we need k-1 dummy variables to avoid the **dummy variable trap** (perfect multicollinearity). If we include all 4 dummy variables plus a constant term, the model would be perfectly collinear. **Statement II: There are three dummy variables required** - This is **correct**. For 4 quarters, we need 3 dummy variables. For example: - D1 = 1 for Q1, 0 otherwise - D2 = 1 for Q2, 0 otherwise - D3 = 1 for Q3, 0 otherwise - Q4 would be the reference category (all dummies = 0) **Statement III: A dummy variable takes on a value of 1 if a particular condition is true and 0 if that condition is false** - This is **correct**. This is the fundamental definition of a dummy (indicator) variable in regression analysis. Therefore, statements II and III are correct, making option C the correct answer.
Author: Nikitesh Somanthe
Ultimate access to all questions.
No comments yet.
After finding that sales of a company vary seasonally over each quarter, an analyst is trying to incorporate such seasonality effect and build the regression model using dummy variables. Which of the following statements is (are) correct?
I. There are four dummy variables required
II. There are three dummy variables required
III. A dummy variable, takes on a value of 1 if a particular condition is true and 0 if that condition is false.
A
Only II
B
I and III
C
II and III
D
Only I