Scenario 15.5: Consider the Following Information Based on a Story by Hubert

question 61

Multiple Choice

Scenario 15.5:
Consider the following information based on a story by Hubert B. Herring that appeared in The New York Times on Catherine has a two-pack-a-day cigarette habit. Cigarettes cost about $2 per pack. Catherine is 20. On a $250,000 life insurance policy, her annual premiums are $1200; a non-smoker's would be $500. Smokers earn from 4 to 8 percent less in income than non-smokers (lower productivity and more absence, among other things) . In this case Catherine's income is expected to be $20,500 per year over her lifetime whereas $22,000 is an average non-smoker's salary. Let interest rates are expected to be 3%.
-According to the information in Scenario 15.5, if Catherine's life expectancy is 80 as a non-smoker and no inflation is expected to occur throughout her life (so that cigarettes stay at $2 per pack) , then what amount would she save by not buying cigarettes?

• A) $4
• B) $1460
• C) $29,200
• D) $87,600
• E) $116,800

---

Definitions:

Economic Variables

Quantitative measures that represent a characteristic of the economy or a part of the economy, influencing or describing economic activity.

Positive Economic Analysis

An objective approach to economics that focuses on describing and explaining economic phenomena without making normative judgments.

Fallacy of Composition

Erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole).

Association

An organization or group of individuals who voluntarily come together to achieve common goals, often representing a profession, industry, or interest.