What is a dummy variable, and how is it useful to multiple regression? Give an example of three dummy variables that could be used in describing your home town
A dummy variable is a variable that takes on a value of one or zero to indicate the presence or absence of an attribute. Dummy variables can help explain some of the variation in y due to the presence or absence of a characteristic. Three dummy variables that can be used to describe one town versus another are URBAN (1 if urban, 0 otherwise), MANUF (1 if durable goods manufacturing is the major industry, 0 otherwise), and POPMIL (1 if the population is 1 million or more, 0 otherwise). Other dummy variables could include the presence of a major university, a major medical center, a major research institution, and many more.
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