Question

You are an assistant to a senator who chairs an ad hoe committee on reforming taxes o 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 regulation 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=200 -5P and the market supplying (including taxes) is Qs=2P-150(both in millions) where P is the monthly price of telecommunication services.

The senator is considering tax reform that would dramatically cut tax rates, leading to a supply function reform that would dramatically cut tax rates, leading, to a supply function under the new tax policy of Q^s= 2.4P -150.

How much money would a typical consumer save each month as a result of the proposed legislation?

Answer 1

Answer:
As given in the question,
Qd = 200 - 5P
Qs = 2P - 150

Equating demand & supply to equality,
=> 200 - 5P = 2P - 150
=> 7P = 350
=> P = 350/7
         = $50

Post tax reform, revised QS = 2.4P - 150
Equating this with (unchanged values) of demand curve,
=> 200 - 5P = 2.4P - 150
=> 7.4P = 350
=> P = 350/7.4
        = $47.3 (approximating to nearest decimal place)

Hence, savings due to tax reform
= $(50 - 47.3)
= $2.7 per consumer

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