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 = 250 - 5P and the market supply (including taxes) is QS = 3P - 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 QS = 3.4P - 130. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Explanation / Answer

Before legislation:

Qd=Qs

250-5P=3P-130

380=8P

P=47.5 $

After legislation:

250-5P=3.4P - 130

380=8.4P

P=45.24 $

Typical consumer save=47.5- 45.24 = 2.26 $ per unit

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