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

Case 1

At the equilibrium the Qs =Qd so, 2P - 150 = 200 - 5P

or, 7P = 350

or P = $ 50 per unit.

Case 2

Now with the new supply curve at the equilibrium the Qs =Qd so, 2.4P - 150 = 200 - 5P

or, 7.4P = 350

or, P = $ 47.29

Therefore total saving per unit = 50- 47.29 = $2.71

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