Cross Price Elasticity Example

The cross-price elasticity concept can be illustrated by considering the demand function for monitored in-home health-care services provided by Home Medical Support (HMS), Inc.

Here, QY is the number of patient days of service per year; PY is the average price of HMS service; PD is an industry price index for prescription drugs; PH is an index of the average price of hospital service, a primary competitor; PT is a price index for the travel industry; i is the interest rate; and I is disposable income per capita. Assume that the parameters of the HMS demand function have been estimated as follows:

Qy = 25,000 - 5PY - 3PD + 10PH + 0.0001PT - 0.02i + 2.5I

The effects on QY caused by a one-unit change in the prices of other goods are

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