Due to an unexpected natural disaster, the Ministry of Human Resource Development is planning to provide financial aid to the states that have been affected in India. The ministry developed a regression model to predict the amount of aid payments for each state based on the number of residents and income per household. An indicator (dummy)

variable was applied to the states facing the natural disaster.

a) How would you code such a variable? (What values would it have for the states affected by the natural disaster?)

b) Does the indicator variable make sense?

c) Do you think a regression with the indicator variable for states affected by the natural disaster would model the amount of aid payment better than one without the predictor?