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Thread: Dummy variable question in regression

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    Dummy variable question in regression




    Hello,

    I'm trying to understand dummy variables in regression. I'm regressing the price of diamonds against (1) weight (2) Clarity and (3) Colour. Clarity and colour and dummy variables and I created these in Minitab. This is the equation.

    Price = 1.65 Weight + 3.99 Clarity_A + 3.86 Clarity_B + 0.210 Colour_A
    + 0.157 Colour_B

    Is the Price for a weight = 2, Clarity A and Colour B the following?

    Price = 1.65(2) + 3.99(1) + 3.86(0) + .210(0) + .157(1)
    Price = 5.797

    Thank you

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    Re: Dummy variable question in regression

    Yes it is correct, but only if:

    - clarity and colour both have only 2 options (A and B)

    What I mean is, if for instance clarity and colour be A, B and C, then you need to include a constant in your model. But given your information, it is correct.

    (Ofcourse, only if all assumptions of OLS are satisfied)

  3. #3
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    Re: Dummy variable question in regression


    Either color or clarity (or both) has to have more than two levels, else the design matrix would have linear dependence (even w/o an intercept).

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