If the qualitative characteristic you’d like to use as
an independent variable has more than two groups (as in the
earlier section “Juggling multiple characteristics with dummy
variables”), then the econometric model must include J – 1
variables to fully capture the possibilities. Suppose you’d like
to use a variable with a qualitative characteristic containing
four possible outcomes {A, B, C, and D}. The basic
econometric model to capture a qualitative characteristic is
expressed as