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 spends $15 million on related paper work and compliance costs. Depending on the locale, telecom taxes can amount to as such as 25 percent of a consumers phone bill. These high tax rates on telecom services have become quite controversial, due to the fact that deregulation of the telecom industry led to a highly competitive market. Your best estimates indicate that, based on the current tax rates, the monthly market demand for telecom services is given by Qd = 250 5P and the market supply, including taxes is Qs = 4P 110 (both in millions), where P is monthly price of telecom services. The senator is considering tax reform that would dramatically cut tax rates, leading to a supply function under the new tax policy Qs = 4.171P 110. How much money would a typical consumer save each month as a result of the proposed legislation

Explanation / Answer

Old plan Qd=250 -5P Qs=4P-110 Set these equal and solve 250 -5P= 4P-110 9P= 360 P= 40 Qd=250-5(p)=50 Therefore, our equilibrium p=40 and q=50 Profit = 50*40= $2000 millions This is the new plan Qd=250 -5P Qs=4.171P -110 Set our equations equal and solve 250 -5P= 4.171P -110 9.171P= 360 P= 39.25 Qd=250-5(39.25)=53.75 Therefore equilibrium p is 39.25 and q is 53.75 profit is 53.75*39.25=$2109.69 In this case, we can tell the tax reduction will increase tax revenue by 2109.69-2000=109.69 million dollars. This is a 5.48% increase Hope this helps

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