Scenario 12.1: Jennifer has decided to give up her pack-a-day smoking habit and invest the money she would have spent on cigarettes in a retirement account. At $6.00 a pack, Jennifer is currently spending $2,190 per year on cigarettes. Jennifer is 25 years old and plans to retire in 35 years, at age 60. She has chosen a retirement account that will earn a long-term average return of 5 percent per year. Jennifer is currently earning $40,000 annually. Assume that the average annual inflation rate will be 5 percent per year, that the cost of cigarettes will increase with inflation, and that Jennifer's income will also rise with the inflation rate.
-This Scenario addresses the economic concept of

Question

Quizplus · Accepted Answer

This scenario addresses the economic concept of present value, as Jennifer is comparing the present value of her annual cigarette spending to the future value that it can earn in a retirement account with a long-term average return of 5 percent per year. She is also taking inflation into account, which affects both the cost of cigarettes and her income.