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 = 300 - 4P and the
market supply (including taxes) is QS = 3P - 120 (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 = 3.2P - 120. How
much money per unit would a typical consumer save each month as a result
of the proposed legislation?
Instruction: Enter your response rounded to the nearest penny (two decimal
places).
$ 1.67 1.67 Correct
Explanation
Equating the initial quantity demanded and quantity supplied gives the equation: 300 - 4P = 3P -
120. Solving for price, we see that the initial equilibrium price is $60.00 per month. When the tax rate
is reduced, equilibrium is determined by the following equation: 300 - 4P = 3.2P - 120. Solving, we
see that the new equilibrium price is about $58.33 per month.
In other words, a typical subscriber would save about $1.67 (the difference between $60.00 and
$58.33).
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