12.4 Dummy variables 1

Dummy variable model

With 2 levels:

The multiple regression equation below, includes a dummy variable (X2) with two levels. This variable then applied to an example concerning pies sales over a holiday period:

holiday

price

Y is pies sales

Intercept/Slope

Dummy variable model

With 2 levels:

Shown below, the category for 'holiday' (X2) is the dummy variable (it has been coded '1' or '0'): X2 = 1, if a holiday occurred during the week X2 = 0, if there was no holiday that week

same slope

different intercept

Shown graphically

Dummy variable model

With 2 levels:

Both X2 = 1 and X2 = 0 have the same slope - just a different intercept. If H0: β = 0 is rejected (the null hypothesis) then it can be said that 'holiday' has a significant effect on pie sales.

Y (sales)

Holiday (X2 = 1)

b0 + b2

Holiday (X2 = 0)

b0

X1 (Price)