Question

you are conducting a regression analysis to explain the sales of a particular model of automobile. You want to include the color of the automobile. The model is available in red, white, blue and black. how many dummy variables should you use for color?

Answer 1

Solution: There are four color's (red, white, blue and black) of the automobile. Dummy variable  is a numerical variable used in regression analysis to represent subgroups of the sample in your study. Here we will use three dummy variables for these four poosible color's of automobile.

Let's suppose we have 5 cars, with four possible color's

Here s1 denotes the dummy variable for color White, s2 denotes the dummy variable for blue and s3 denotes the dummy variable for black. Please note the color red has been treated as control group. so when all the values of dummy variables are 0 indicates the car is red.

As we can see, the car #1 is white color

car #2 is red color

car #3 is blue color

car #4 is red color

car #5 is black color