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# The effect of tax cut on telecommunication price

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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 = 3.2P - 130. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

https://brainmass.com/economics/pricing-output-decisions/the-effect-of-tax-cut-on-telecommunication-price-578778

#### Solution Preview

What you need to do is to find the equilibrium prices for the current tax policy and for the new tax policy. To get how much money ...

#### Solution Summary

Tax cut on telecommunication services is translated to lower price to consumers. A typical consumer will save about \$1.16 per unit per month on his or her telecommunication bill.

\$2.19