You are an assistant to a senator who chairs an ad hoc committee on reforming ta

Question

You are an assistant to a senator who chairs an ad hoc committee on reforming taxes on telecommunication services. Based on your research, AT&T has spent over $15 million on related paperwork and compliance costs. Moreover, depending on the locale, telecom taxes can amount to as much as 25 percent of a consumer’s phone bill. These high tax rates on telecom services have become quite controversial, due to the fact that the deregulation of the telecom industry has led to a highly competitive market. Your best estimates indicate that, based on current tax rates, the monthly market demand for telecommunication services is given by Qd = 300 - 4P and the market supply (including taxes) is QS = 2P - 120 (both in millions), where P is the monthly price of the telecommunication services.

The senator is considering tax reform that would dramatically cut tax rates, leading to a supply function under the new tax policy of QS = 2.3P - 120. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Instruction: Round your answer to the nearest penny (2 decimal places).

$

Explanation / Answer

Initial equilibrium:

Qd = Qs

300 - 4P = 2P - 120

6P = 420

P = 70

Q = 300 - 4P = 300 - (4 x 70) = 20

Revised equilibrium:

Qd = Qs

300 - 4P = 2.3P - 120

6.3P = 420

P = 66.67

So, consumer savings per unit = (70 - 66.67) = 3.33

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