Suppose that you wanted to predict the price of a house based on where the house was located (northeast, northwest, southeast, or southwest) as well as square footage. How many indicator variables would you need?

a. 0

b. 3

c. 1

d. 2

e. 4

Answer: b. 3

Step-by-step explanation:

We know that, the indicator variable is a dummy variable in regression analysis which is used to denote either presence (by 1) or absence (by 0) of a nominal variable that can be responsible for the change in output.

Number of indicator variables = (all levels in the original variable) - 1

Here, the given categories as per the location are northeast, northwest, southeast, or southwest.

i. e. all levels in the original variable = 4

Then, the umber of indicator variables we need = 4-1 = 3

Hence, we need 3 indicator variables.

Thus, the correct answer is b. 3.