Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 17

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 Q d = 300 - 4 P and the market supply (including taxes) is Q s = 3 P - 120 (both in millions), where P is the monthly price of 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 Q s = 3.2 P - 120. How much money per unit would a typical consumer save each month as a result of the proposed legislation?