Yvonne Lang, VP of Finance at Digital Components, Inc.(DCI), wants a regression model which predicts the average collection period on credit sales.Her data set includes two qualitative variables: sales discount rates (0%, 2%, 4%, and 6%), and total assets of credit customers (small, medium, and large).The number of dummy variables needed for "total assets of credit customer" in Yvonne's regression model is ___.
A)1
B)2
C)3
D)4
E)7

Question

Quizplus · Accepted Answer

If there are three categories for "total assets of credit customers," then two dummy variables are needed. This is because the rule of thumb for the number of dummy variables needed for a qualitative variable with k categories is k-1. So, in this case, 3-1=2. Therefore, the best choice is B.