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The proposed tax reform would lead to a change in the supply function

Posted on | by Kelvin

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 = 300 − 4P and the market supply (including taxes) is QS = 2P − 120 (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 = 2.5P − 120. How much money per unit would a typical consumer save each month as a result of the proposed legislation?
Instruction: Enter your response rounded to the nearest penny (two decimal places).

Sample Answer

The proposed tax reform would lead to a change in the supply function for telecommunication services. Under the current tax rates, the supply function is given by QS = 2P – 120. However, under the proposed tax policy, the supply function would be QS = 2.5P – 120.

To determine the amount of money per unit a typical consumer would save each month as a result of the proposed legislation, we need to calculate the difference in price (P) between the two supply functions.

First, let’s set the quantity demanded (Qd) equal to the quantity supplied (QS) under the current tax rates:

Qd = QS
300 – 4P = 2P – 120

Simplifying the equation, we get:
6P = 420
P = 70

So, under the current tax rates, the monthly price of telecommunication services is $70.

Now, let’s calculate the quantity supplied (QS) under the proposed tax policy at this price:

QS = 2.5P – 120
QS = 2.5(70) – 120
QS = 175 – 120
QS = 55

Under the proposed tax policy, the quantity supplied at a price of $70 is 55 million.

To determine the amount of money per unit a typical consumer would save each month, we need to calculate the difference in price between the two supply functions:

Price difference = Proposed price – Current price
Price difference = $70 – $70
Price difference = $0

Therefore, a typical consumer would not save any money per unit each month as a result of the proposed tax reform.

 

 

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