Two complements , shoes and socks will have a negative value of income elasticity of demand.

Question

BlackTom AI · Accepted Answer

To evaluate the statement, we first consider what income elasticity of demand (YED) means for complements. 
Option A: 'True' would claim that two complements, such as shoes and socks, have a negative income elasticity of demand. While many complementary goods exhibit negative cross-price effects, the sign of income elasticity for complements is not universally negative by default. Income elasticity measures how quantity demanded responds to changes in income, holding other factors constant, and its sign depends on whether the good is a normal or inferior good. For many typical everyday goods, demand rises with income (normal goods), yielding a positive income elasticity. Thus, assuming all complements automatically have negative income elasticity is an oversimplification and often incorrect.
Option B: 'False' argues against the blanket assertion that all complements have negative income elasticity. This is more accurate because the relationship between income and demand for complements depends on the goods in question. Some complementary pairs may see increased consumption as income rises if both goods are normal goods or if higher income leads to more discretionary spending on bundled items. Therefore, the blanket claim that two complements must have negative income elasticity is not generally true.
Consideration of the underlying theory: income effects depend on whether each good is a normal or inferior good. If both shoes and socks are treated as normal goods for a given consumer, their quantities demanded could increase with income, leading to a positive income elasticity for the pair or at least for each component individually. Conversely, if one or both goods are inferior in particular contexts, the elasticity could be negative. The key is that the sign is not fixed by their complementarity alone; it hinges on consumer preferences and income levels in the relevant market.
In summary, the statement asserting a universal negative income elasticity for the pair (shoes and socks) is not generally valid, because income effects can produce positive or negative elasticities depending on whether the goods are normal or inferior in the specific context. The more accurate position is that it is not necessarily negative for complements in all cases, making the claim as stated incorrect.

Two complements , shoes and socks will have a negative value of income elasticity of demand.

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