Download presentation

Presentation is loading. Please wait.

Published byGrace Liptrap Modified over 2 years ago

1
USING DUMMY VARIABLES IN REGRESSION MODELS

2
Qualitative Variables Qualitative variables can be introduced into regression models using dummy variables Dummy variables can take on only two values – 0 or 1 Suppose you feel a person’s income may be affected by his/her gender –X = 1 (male) X = 0 (female) or vice versa –Add a column of gender to the model Column of 1’s and 0’s

3
Multiple Values It is felt that the starting salary for a business school graduate is affected by whether the graduate majored in MIS, accounting, finance, or another business discipline (“Other”). –Use 3 dummy variables to represent business disciplines. x 1 = MIS x 2 = Accounting x 3 = Finance –Use k-1 dummy variables if there are k choices for the qualitative variable. If the entries for x 1, x 2, and x 3 were all 0, this indicates “Other” Never have more than one “1” for x 1, x 2, x 3

4
Example Suppose Bill is a business graduate who majored in accounting and received a staring salary of $27,000. Ellen is a second business graduate who majored in marketing (“Other”) and received a starting salary of $29,000. –The corresponding values for y and x 1, x 2, and x 3 for these graduate would be: Bill:y = 27000 x 1 = 0 x 2 = 1 x 3 = 0 Ellen:y = 29000 x 1 = 0 x 2 = 0 x 3 = 0

5
Models with both Quantitative and Qualitative Variables Many models include both quantitative and qualitative variables. Interpretation of coefficient of dummy variable (x) – how y is affected if x goes from 0 to 1. There is no “in-between” interpretation for the dummy variable x

6
Excel Example It is conjectured that starting salaries for business school graduates are a function of the major (MIS, Accounting, Finance, Other), gender (Male, Female), and college grade point average. A sample of 20 students is taken. –Use 3 dummy variables for the 4 choices of major. –Use 1 dummy variable for the 2 choices of gender. –GPA is a quantitative variable. Use Excel’s IF statement to translate the qualitative responses into 0’s and 1’s.

7
=IF(I2=“MIS”,1,0) =IF(I2=“Accounting”,1,0) =IF(I2=“Finance”,1,0)=IF(J2=“Male”,1,0) Drag cells B2:E2 to B21:E21 X Range is contiguous

8
Regression Equation Salary = 28124.18 + 2932.57MIS - 260.60Accounting + 2135.38Finance – 270.07Male + 142.38GPA

9
Review Dummy variables are regression variables that can only take on the values of 0 or 1. Multiple dummy variables can be used to represent different values of a qualitative variable. Use one less dummy variable than the number of possible values the qualitative variable – all 0’s represent the last value. Dummy variables can be used with other quantitative variables in regression models. Excel – Use of IF statement

Similar presentations

OK

1 1 Slide © 2016 Cengage Learning. All Rights Reserved. The equation that describes how the dependent variable y is related to the independent variables.

1 1 Slide © 2016 Cengage Learning. All Rights Reserved. The equation that describes how the dependent variable y is related to the independent variables.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on db2 introduction to computer Ppt on classical economics adam Ppt on rich heritage of india Ppt on index numbers page Ppt on advanced power system protection Ppt on review of literature sample Ppt on earth movements and major landforms in texas Ppt on power system transients Ppt on series and parallel circuits for kids Ppt on library management system in c++