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 consumers 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 = 250 - 5P and the market supply (including taxes) is QS = 3P - 110 (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 = 3.5P - 110. How much money per unit 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=3P-110

250 -5P= 3P-110

8P= 360

P= $45

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=3P-110

= 3x$45

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