When dealing with categorical variables in the context of a multivariate regression, we:
A) Include the categorical variable directly into the model and interpret the results
B) Change the categorical variable into a dummy variable (per category) and include all of the dummy variables in the regression.
C) Change the categorical variable into a dummy variable (per category) and include all but one of the dummy variables in the regression.
D) Interact the categorical variable with a continuous variable.

Question

Quizplus · Accepted Answer

Categorical variables are converted into dummy variables for inclusion in a regression model, but one category is always omitted to serve as a reference group. This approach avoids the dummy variable trap, which can cause multicollinearity issues in the model.

When Dealing with Categorical Variables in the Context of a Multivariate