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 - 110 (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 = 3.5P - 110. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Answer 1

Answer:

A typical consumer will save $2.65 per unit each month as a result of the proposed legislation

The equilibrium price of the current tax regime is computed as below:

Monthly demand is denoted by the equation - Qd = 250 - 5P

Monthly supply is denoted by the equation - Qs = 3P - 110

The equilibrium price is computed as follows:
Qd= Qs
250 - 5P = 3P - 110
3P + 5P = 110 + 250
8P = 360
P = 45
The equilibrium price is $45 which is to be paid by the customers

The Monthly supply is denoted by a change in tax rates - QS = 3.5P - 110

The equilibrium price is calculated below
Qd= Qs
250 - 5P =3.5P - 110
3.5P + 5P = 110 + 250
8.5P = 360
P = 42.35
The equilibrium price is $42.35 to be paid by customers

Savings per unit = price before the new tax rate - price after-tax rate
=$45.00 - $42.35
=$2.65