You are an assistant to a senator who chairs an ad hoe committee on reforming ta
ID: 1248360 • Letter: Y
Question
You are an assistant to a senator who chairs an ad hoe committee on reforming taxes o 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 regulation 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=250 -5P and the market supplying (including taxes) is Qs=4P-110(both in millions) where P is the monthly price of telecommunication services. The senator is considering tax reform that would dramatically cut tax rates, leading to a supply function reform that would dramatically cut tax rates, leading, to a supply function under the new tax policy of Q^s= 4.171P -110. How much money would a typical consumer save each month as a result of the proposed legislation?Explanation / Answer
Number of units consumed in old tax regime: is nothing but the equilibrium quantity
Equilibrium is achieved when Qd= Qs
Qd=250 -5P
Qs=4P-110
250 -5P= 4P-110
9P= 360
P= $40
Number of units consumed is given by the equilibrium quantity.
Equilibrium quantity is calculated by substituting Eq price in either Qd or Qs.
Equilibrium quantity=4P-110
= 4 x$40 – 110
Equilibrium quantity=160-110
Equilibrium quantity=50 units.
Total expenditure by a consumers= Number of units consumed x price paid
= 50 units x $40
= $2000 millions
Number of units consumed in new tax regime: is nothing but the equilibrium quantity
Equilibrium is achieved when Qd= Qs
Qd=250 -5P
Qs=4.171P -110
250 -5P= 4.171P -110
9.171P= 360
P= $39.254
Number of units consumed is given by the equilibrium quantity.
Equilibrium quantity is calculated by substituting Eq price in either Qd or Qs.
Equilibrium quantity=4.171P-110
= 4 x$39.254 – 110
Equilibrium quantity=163.72-110
Equilibrium quantity= 53.7 units.
Total expenditure by a consumers= Number of units consumed x price paid
= 53.7 units x $39.254
= $2107.9 millions
Due to tax reduction, supply curve shifts towards its right, forming a new equilibrium point, where there is higher supply at every previous price level.
The new equilibrium point is lower than the previous point, at this point the price is low but the quantity consumed is more. This results in a higher consumption.
But on call rates, a typical customer will save = $40 - $ 39.254
= $ 0.746 per unit of consumption.
So, their total consumption has increased from $2000 to $2107.9 millions.
But due a tax cut, consumer could save= $0.746 on each unit of consumption.
Total consumer savings= $0.746 x 53.7 units
= $40.06 millions.
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