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%.
-Refer to Scenario 15.5. What is the total amount Catherine will lose in earnings by being a smoker, if she works now and continues until age 65?

Question

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%.
-Refer to Scenario 15.5. What is the total amount Catherine will lose in earnings by being a smoker, if she works now and continues until age 65?

Quizplus · Accepted Answer

Catherine will lose $1,500 in earnings each year due to being a smoker. If she works from now until age 65, assuming she starts at age 20, that's 45 years of work. $1,500 lost per year over 45 years equals $67,500 lost in total.

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