Reference no: EM132337066

Question

Not sure if I'm missing a step in this problem. My answer seems a little low. Any help would be greatly appreciated.

You are an assistant to a senator who chairs a committee on reforming taxes ion 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 is given by QS = 3P -120, where P is the monthly price of telecommunication services. The senator is considering a tax reform that would cut tax rates, leading to a supply curve under the new policy of QS = 3.2P - 120. How much money per unit would a typical consumer save each month as a result of the proposed legislation?

Here are my calculations.

Solving for P...

300 -4P = 3P -120.

420 = 7P

P= 60

Initial equilibrium price is $60/month.

Solving for P under senator's tax reform...

300 -4P = 3.2P - 120.

420= 7.2P

P= $58.3 per month.

Thus, when we examine the amount the typical subscriber would save, we take the initial equilibrium ($60) and subtract is from the new equilibrium ($58.33). This results in a savings of $1.67