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 = 200 - 5P and the market supply (including taxes) is QS = 2P - 150 (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 = 2.4P - 150. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Explanation / Answer

Qd = 200 - 5P

QS = 2P - 150

Equating demand & supply,

200 - 5P = 2P - 150

7P = 350

P = 350/7 = $50

After tax reform, revised QS = 2.4P - 150

Equating this with (unchanged) demand curve,

200 - 5P = 2.4P - 150

7.4P = 350

P = 350/7.4 = $47.3 (Rounded off to 2 decimals)

Therefore, savings as result of tax reform = $(50 - 47.3) = $2.7 per consumer

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