Question

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?

Answer 1

Given that:

-The monthly market demand for telecommunication services is given by

$Q_d=250-5p$ and the market supply $Q_s=4p+110$

Equilibrium price before tax cut 

$Q_d=Q_s$

$250-5p=4p+110$

$9p=250-110=140$

$9p=140$

$p=\frac {140} {9} =15.55$

p=15.55 per unit.

$Q_d=250-5(15.55)=250-77.75$

Qd=172.25units.

The Supply function under the new tax policy

$Q_s=4.171p+110$

Equilibrium price after tax cut

$Q_d=Q_s$

$250-5p=4.171p+110$

$250-110=4.171p+5p$

$140=9.171p$

$p=\frac {140} {9.171}$

p=$15.26per unit

$Qs=4.171(15.26)+110=63.649+110$

$Q_s$ =173.649units

Thus,the money per unit saved by the typical consumer$=15.55-15-26$

=$0.29 per unit