In a survey, an individual's health insurance status is reported as being in one of the following categories: Medicare, Medicaid, Employer provided insurance, Individual private insurance, Other insurance or UninsureD .If health insurance status is to be used as an independent variable in a regression, the following are acceptable combinations of dummy variables:
A)Medicare, Medicaid, Employer, Individual, Other, Uninsured
B)Medicare, Medicaid, Employer, Individual, Other
C)Medicare, Medicaid, Employer, Individual, Uninsured
D)B and C
E)All of the above

Question

In a survey, an individual's health insurance status is reported as being in one of the following categories: Medicare, Medicaid, Employer provided insurance, Individual private insurance, Other insurance or UninsureD .If health insurance status is to be used as an independent variable in a regression, the following are acceptable combinations of dummy variables:
A)Medicare, Medicaid, Employer, Individual, Other, Uninsured
B)Medicare, Medicaid, Employer, Individual, Other
C)Medicare, Medicaid, Employer, Individual, Uninsured
D)B and C 
E)All of the above

Quizplus · Accepted Answer

In regression analysis, when using categorical variables with $n$ categories, one must create $n-1$ dummy variables to avoid the dummy variable trap (perfect multicollinearity). Both options B and C correctly create $n-1$ dummy variables for the 6 categories, using one category as the base (reference) category implicitly. Option A incorrectly includes all categories, leading to multicollinearity.

In a Survey, an Individual's Health Insurance Status Is Reported