3. You are a member of Board who chairs an ad committee of reforming taxes on telecommunication services. The local telecom tax es can amount to as much as 25 percent of a consumer’s phone bill. The high 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 Q=250-5P and the market supply (including taxes) is Q=4P+110 (both in million). The Board of management is considering tax reform that would dramatically cut tax rates, leading to the supply function under the new tax policy of Q=4.171P+110. How much money would typical consumer save each month as a result of proposed legislation?
"Qd=250-5p\\\\Qs=4P+110"
equilibrium price before tax
"Qd=Qs\\\\250-5P=4P+110\\\\4P+5P=250-110\\\\9P=140\\\\P=15.55"
Substituting p in demand function we get
"Qd=250-5(15.55)\\\\Q=172.25units"
supply function under new tax policy
"Qs=4.171+110"
equilibrium price after tax
"Qd=Qs\\\\250-5P=4.171+110\\\\250-110=4.171P+5P\\\\140=9.161P\\\\P=15.26"
Substituting p in supply function we get
"Qs=4..171(15.26)+110=63.649+110\\\\Q=173.649 units"
the money per unit saved by typical consumer
"15.55-15.26\\\\=\\$0.29"
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