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 Q^d = 350 - 4P and the market supply (including taxes) is Q^s = 4P -130 (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 Q^s = 4.3P -130. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Explanation / Answer

In equilibrium, Qd = Qs.

Before tax reform,

350 - 4P = 4P - 130

8P = 480

P = 480/8 = 60

After tax reform, Qs = 4.3P - 130.

Equating with (unchanged) Qd,

350 - 4P = 4.3P - 130

8.3P = 480

P = 480/8.3 = 57.83

Money saved per unit = 60 - 57.83 = 2.17

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.