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Slides Module 3 Lesson 1

The document discusses using dummy variables in a regression model to account for categorical variables. A parcel delivery service delivers to three regions: A, B, and C. To include the region variable in a regression model, two dummy variables would be needed to represent the three regions. The dummy variables would be coded as 1s and 0s to indicate the region for each observation.

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33 views

Slides Module 3 Lesson 1

The document discusses using dummy variables in a regression model to account for categorical variables. A parcel delivery service delivers to three regions: A, B, and C. To include the region variable in a regression model, two dummy variables would be needed to represent the three regions. The dummy variables would be coded as 1s and 0s to indicate the region for each observation.

Uploaded by

padma
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Linear Regression for Business Statistics

Incorporating ‘Categorical Variables’ in a regression model.


...the Dummy Variable regression technique
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

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.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
B
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed
B
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed (REGA)
B
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed (REGA)
B
A B
1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed (REGA)
B
A B
1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed (REGA)
B
A B
1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed (REGA)
B
A B
1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.
...the Dummy Variable regression technique

A
One ‘dummy variable’ needed (REGA)
B
A B
1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Example (deliveries2.xlsx)
The parcel delivery service obtains some additional data, this time for a
third region it delivers to, region C. So now, the data consists of
deliveries across three regions, region A, region B and region C.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Example (deliveries2.xlsx)
The parcel delivery service obtains some additional data, this time for a
third region it delivers to, region C. So now, the data consists of
deliveries across three regions, region A, region B and region C.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Example (deliveries2.xlsx)
The parcel delivery service obtains some additional data, this time for a
third region it delivers to, region C. So now, the data consists of
deliveries across three regions, region A, region B and region C.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Example (deliveries2.xlsx)
The parcel delivery service obtains some additional data, this time for a
third region it delivers to, region C. So now, the data consists of
deliveries across three regions, region A, region B and region C.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

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

Y variable X variables
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

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

Y variable X variables

A
B Two ‘dummy variables’ needed
C
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed
C
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables
Reference Category
A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0

Difference in overall delivery time it takes to make deliveries to Region A


as compared to Region C, all other variables kept at the same level.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0

Difference in overall delivery time it takes to make deliveries to Region A


as compared to Region C, all other variables kept at the same level.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0

Difference in overall delivery time it takes to make deliveries to Region A


as compared to Region C, all other variables kept at the same level.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0

Is the difference in the fixed time to make deliveries across the two regions.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0

p-value > 

Is the difference in the fixed time to make deliveries across the two regions.
Linear Regression for Business Statistics
Incorporating ‘Categorical Variables’ in a regression model.

Y variable X variables

A
B Two ‘dummy variables’ needed A B C
C 1 0 0
0 1 0

Difference in overall delivery time it takes to make deliveries to Region B


as compared to Region C, all other variables kept at the same level.

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