If one was to include in a regression a binary dummy variable for all four regions of the country (East, West, South, North) - what identification challenge would be presented?
A) Endogeneity problem
B) Heteroscedasticity
C) Perfect multicollinearity
D) Variance inflation factor

Question

Quizplus · Accepted Answer

Including a dummy variable for all four regions of the country would create perfect multicollinearity, meaning that the dummies would be linearly dependent on each other and would add no additional information to the regression. This creates an identification problem because the coefficients on the individual dummies would not have unique solutions and would be difficult to interpret.

If One Was to Include in a Regression a Binary