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The effect of tax cut on telecommunication price

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?

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.