AE Quiz 7

A _____ variable is used to incorporate qualitative information in a regression

model.

• dependent

• continuous

• binomial

• dummy

Answer explanation

A dummy variable or binary variable is used to incorporate qualitative information in a regression model

In a regression model, which of the following will be described using a binary

variable?

• Whether it rained on a particular day or it did not

• The volume of rainfall during a year

• The percentage of humidity in air on a particular day

• The concentration of dust particles in air

Answer explanation

A binary variable is used to describe qualitative information in regression model. Therefore, such a variable will be used to describe whether it rained on a particular day or it did not

Which of the following is true of dummy variables?

• A dummy variable always takes a value less than 1.

• A dummy variable always takes a value higher than 1.

• A dummy variable takes a value of 0 or 1.

• A dummy variable takes a value of 1 or 10.

Refer to the model above. The inclusion of another binary variable in this model

that takes a value of 1 if a person is uneducated, will give rise to the problem of

_____.

• omitted variable bias

• self-selection

• dummy variable trap

• heteroskedastcity

Answer explanation

The inclusion of another dummy variable in this model would introduce perfect collinearity and lead to a dummy variable trap.

The following simple model is used to determine the annual savings of an individual

on the basis of his annual income and education.

Savings = β0+∂0 Edu + β1Inc+u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’

measures the income of the individual.

Refer to the model above. The benchmark group in this model is _____

• the group of educated people

• the group of uneducated people

• the group of individuals with a high income

• the group of individuals with a low income

Answer explanation

The benchmark group is the group against which comparisons are made. In this case, the savings of a literate person is being compared to the savings of an illiterate person; therefore, the group of illiterate people is the base group or benchmark group

The following simple model is used to determine the annual savings of an individual

on the basis of his annual income and education.

Savings = β0+∂0 Edu + β1Inc+u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’

measures the income of the individual.

Refer to the above model. If ∂0 > 0, _____.

• uneducated people have higher savings than those who are educated

• educated people have higher savings than those who are not educated

• individuals with lower income have higher savings

• individual with lower income have higher savings

Answer explanation

The coefficient ∂0 measures the impact of education on an individual’s annual savings. If it has a positive impact, as in this case, educated people should have higher savings.

The income of an individual in Budopia depends on his ethnicity and several other

factors which can be measured quantitatively. If there are 5 ethnic groups in

Budopia, how many dummy variables should be included in the regression equation

for income determination in Budopia?

• 1

• 5

• 6

• 4

Answer explanation

If a regression model is to have different intercepts for, say, g groups or categories, we need to include g -1 dummy variables in the model along with an intercept. In this case, the regression equation should include 5-1=4 dummy variables since there are 5 ethnic groups.

The quarterly increase in an employee’s salary depends on the rating of his work

by his employer and several other factors as shown in the model below:

Increase in salary= β0+∂0Rating + other factors. The variable ‘Rating’ is a(n) _____

variable

• dependent variable

• ordinal variable

• continuous variable

• poisson variable

Answer explanation

The value of the variable ‘Rating’ depends on the employer’s rating of the worker. Therefore, it incorporates ordinal information and is called an ordinal variable.

Which of the following is true of Chow test?

• It is a type of t test.

• It is a type of sign test.

• It is only valid under homoskedasticty.

• It is only valid under heteroskedasticity.

Answer explanation

Since the Chow test is just an F test, it is only valid under homoskedasticity.

Which of the following is true of dependent variables?

• A dependent variable can only have a numerical value.

• A dependent variable cannot have more than 2 values.

• A dependent variable can be binary.

• A dependent variable cannot have a qualitative meaning.

Answer explanation

A dependent variable is binary if it has a qualitative meaning.