Slides - Module-2 - Lesson-6

Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Categorical Variable
Is a variable that takes on values which are but labels.


 Gender is a categorical variable.

 Nationality is a categorical variable.

 Race of a person is a categorical variable.

 Height of a person ?

 Height of a person is not a categorical variable.

 Quarter of a year ?

 Quarter of a year (1, 2, 3, 4)

 Quarter of a year (1, 2, 3, 4) ?

 Quarter of a year (1, 2, 3, 4) is a categorical variable.
Examples
Examples
 Study on gender discrimination in salaries at workplace.
Examples
 Sales regression model.
Examples
A special technique needed,

Examples

‘Dummy Variable Regression’
‘Indicator Variable Regression’
Examples

Examples

It involves the use of,

‘Dummy Variables’ / ‘Indicator Variables’
Two Rules governing ‘Dummy Variables’
 A dummy variable can only take a value 0 or 1 .
 the number of dummy variables required in a regression is one

less than the number of categories in the categorical variable.



Male
Gender One ‘dummy variable’ needed
Female

Male
Gender One ‘dummy variable’ needed
Female
1st quarter
2nd quarter
Quarter Three ‘dummy variables’ needed
3rd quarter
4th quarter
Example (delivery1.xlsx)
A parcel delivery service operates in two different regions, region “A”
and region “B”. Delivery trucks leave the central warehouse and travel
to region A and deliver parcels in that region. Similarly delivery trucks
also leave the central warehouse and travel to region B and deliver
parcels in that region.
Y variable
Y variable X variables
A
One ‘dummy variable’ needed
B
A
One ‘dummy variable’ needed A B
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A B
0 1
A
B
1 0
A B
0 1
A
B
1 0
A B
0 1
A
B
1 0
A B
0 1
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0
A
B
1 0

Slides - Module-2 - Lesson-6

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Linear Regression for Business Statistics

Incorporating ‘Categorical Variables’ in a regression model.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

Is a variable that takes on values which are but labels.

A special technique needed,

A special technique needed,

A special technique needed,

A special technique needed,

It involves the use of,

Two Rules governing ‘Dummy Variables’

 A dummy variable can only take a value 0 or 1 .

 the number of dummy variables required in a regression is one

Two Rules governing ‘Dummy Variables’

 A dummy variable can only take a value 0 or 1 .

 the number of dummy variables required in a regression is one

Two Rules governing ‘Dummy Variables’

 A dummy variable can only take a value 0 or 1 .

 the number of dummy variables required in a regression is one

Two Rules governing ‘Dummy Variables’

 A dummy variable can only take a value 0 or 1 .

 the number of dummy variables required in a regression is one

Two Rules governing ‘Dummy Variables’

 A dummy variable can only take a value 0 or 1 .

 the number of dummy variables required in a regression is one

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