Purchase Solution

The effect of tax cut on telecommunication price

Not what you're looking for?

Ask Custom 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 - 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?

Purchase this Solution
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.

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 ...

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • Delta Telecom's management is in the process of exploring which transfer price is best for the firm as a whole...

    levied on circuit board (to paid by German division): 10% of transfer price German tax rate: 60% Assume that the U.S. and German tax authorities allow transfer price for circuit board set at either U.S. variable manufacturing cost or the U.S. market

  • government acts as an automatic stabilizer

    Discuss with the aid of diagrams the short run effect on output, unemployment, general price level and interest rate with an increase in both consumption and investment expenditure (assuming the economy is initially at full employment). (8 ) b.

  • Supply and Demand Curve Analysis

    The consumers shoulder the tax in terms of increase in the selling price. This is a kind of indirect tax passed on to the consumers.

  • IS-LM model

    What will happen in the long run? d. If the Federal Reserve is following a policy of price stability, how should they react to the tax increase? If the Fed action is implemented, will the tax cut succeed in boosting output?

  • Aggregate demand and transfer payments

    On the other hand, individuals are likely to spend less than the tax cut if the income effect is greater than the substitution effect.

  • Government purchases

    * What is the initial effect of the tax reduction on aggregate demand? * What additional effects follow this initial effect? What is the total effect of the tax cut on aggregate demand?

  • Effect of tax rate changes

    Effect of tax rate changes on disposable income and consumption.

  • effects on the equilibrium levels of aggregate output

    The Congress passed a substantial cut in the individual income tax at the same time. B) During the summer of 2003, the Congress passed and President Bush signed the third tax cut in 3 years. Many of the tax cuts took effect in 2005.

  • Dividends in General

    Dividend Tax Cut and Security Prices: Examining the Effect of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Financial Management, 36 (4), 89-106.

View More Related Solutions