Explanation:
To avoid the "dummy variable trap" (which is a scenario where the independent variables are highly correlated - perfect multicollinearity), a model that includes an intercept term should employ dummy variables to represent an independent variable with distinct categories. Since quarters represent 4 distinct seasonal categories, the analyst will need $4 - 1 = 3$ dummy variables.
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Q.78 Julian Nagelsmann works as a market analyst in Air Fresher Inc., a company specializing in the manufacture of room heaters. While modeling the company's sales, he's noticed a quarterly seasonal pattern. Given that his model includes an intercept term, how many dummy variables will he require in order to model the seasonality component?
A
4
B
3
C
2
D
1