Question

Show full calculations step by step. 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 = 350 - 4P and the market supply (including taxes) is Qs = 4P - 130 (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 Qs = 4.3P - 130.

(a) What is the equilibrium price before the tax is imposed?

(b) What is the equilibrium price after the tax is imposed?

Answer 1

The equilibrium price before the tax is $60 and after the tax is $57.83.

Step-by-step explanation:

To determine the equilibrium price before the tax is imposed, we need to find the price at which the quantity demanded equals the quantity supplied. Using the given demand function, Qd = 350 - 4P, and the original supply function, Qs = 4P - 130, we can set Qd equal to Qs and solve for P:

350 - 4P = 4P - 130

8P = 480

P = 60

So, the equilibrium price before the tax is $60.

To determine the equilibrium price after the tax is imposed, we need to use the new supply function, Qs = 4.3P - 130. We set Qd equal to Qs and solve for P:

350 - 4P = 4.3P - 130

8.3P = 480

P = 57.83

So, the equilibrium price after the tax is $57.83.