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 = 350 - 5P and the market supply (including taxes) is QS = 3P - 140 (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 = 3.4P - 140. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Explanation / Answer

We need to calculate P and Q at the equilibrium point of Qd and at the old Qs:

Qd = Qs

350 -5P = 3.4P -140

490 = 8P

P =61.25

Now we need to compute P after change in Qs

Qd = Qs

350 -5P = 3.4P -140

490 = 8.4P

P = 490/8.4

P=58.33

Saving by consumer would be equal to reduction in P.

Savings by consumer = 61.25 – 58.33

                                         = 2.92 dollars per unit.

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