Application Exercise 1f: Smoking and opportunity costs
1) Define the term ‘net benefits’ and discuss how it might influence the decision making of consumers.
Net benefits refers to total benefits less the total costs. For exemple, assume that e person val-ues the benefit of working a five hour shift at McDonalds at $75 (i.e. the rate of pay of $15 per hour X the number of hours worked). If it costs $5 to travel to and from work (e.g. on public transport), then the net benefit of working at McDonalds (in financial terms) is $70 ($75 – $5).
2) Illustrate one way that tobacco manufacturers seek to persuade consumers to purchase their product.
This occurs in many ways, but primarily via advertising, promotion, product placement, etc.
3) Outline some possible alternatives to spending $3000 on cigarettes in a agiven year.
Again, many alternatives should become apparent, such as spend-Ing on entertainment or the purchase of physical assets.
4) Determine the opportunity cost of spending $3000 on cigarettes over a one year period.
This will vary from person to person as it ultimately depends on each person’s preferences and tastes in determining which of the ‘choices’ that have been foregone (or sacrificed) is the ‘next best elternative’, which becomes the opportunity cost. For example, a person who values travel might determine that the opportunity cost of continulng ta smoke Is a $3000 hollday In Ball.
5) Discuss why the consumption of cigarettes may not be the most rational decision, using the concept of opportunity cost in your answer.
It is not rational because the major costs of smoking (which are delayed into the future) is the relatively high probability of smoking related illness or even death.