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

Demand: Q = 250-5P

and Pre legislation Supply: Q = 3P-130

equating the above two equations we get

250-5P = 3P-130

P = $47.5 and Q = 12.5 units.

After legislation , new supply: Q = 3.4P-130

equating new suply function with old demand, we get

250-5P = 3.4P-130

P = $45.2381 and Q = 5.7142

Consumer will save = old price - new price = 47.5 - 45.2381 = $2.261905 per unit

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