Case Studies and Review Questions: Applying Microeconomics to Choices

How to Use Case Studies to Practice Microeconomic Thinking

This chapter is a practice lab. Instead of introducing new theory, you will apply ideas you already know to messy, realistic situations where information is incomplete, emotions are present, and constraints are real. Each case study follows a repeatable method so you can use the same approach for your own decisions at home, at work, or when running a small side business.

A simple decision worksheet (use for every case)

• 1) Define the decision and the objective. What exactly must be chosen, by when, and what does “better” mean (save money, save time, reduce stress, improve quality)?
• 2) List constraints. Money, time, rules, contracts, capacity, skills, health, and deadlines.
• 3) Identify the relevant alternatives. Include a “do nothing” option and at least one creative option.
• 4) Predict responses. How will you (and others) change behavior when prices, fees, or rules change?
• 5) Compare outcomes at the margin. Focus on the next unit: the next hour, next purchase, next customer, next month.
• 6) Stress-test with scenarios. Best case, typical case, worst case; also “what if price changes?”
• 7) Decide and set a checkpoint. Choose, then schedule a review date to adjust if reality differs from assumptions.

As you work through the cases, write down numbers even if they are rough. Microeconomic reasoning becomes practical when you translate feelings into estimates you can compare.

Case Study 1: The Gym Membership vs. Pay-Per-Visit

Situation: You currently pay $55/month for a gym membership. A nearby gym offers $12 per visit with no membership. You expect your schedule to become unpredictable for the next three months.

Step-by-step application

1) Define the decision and objective. Decide which payment plan minimizes cost while keeping you exercising enough to meet your health goal.

2) List constraints. You can realistically go 0–12 times per month depending on work. There may be cancellation fees or a required notice period.

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3) Identify alternatives.

• Keep $55/month membership.
• Switch to $12/visit.
• Hybrid: pause membership if allowed, use pay-per-visit temporarily.
• Home workouts (equipment cost, space, motivation).

4) Predict responses. A flat monthly fee can make each additional visit feel “free,” which may increase usage. Pay-per-visit makes each trip feel costly, which may reduce usage. Your future self may respond differently than your current self expects.

5) Compare outcomes at the margin (break-even visits). Compute the visit count where costs are equal.

Monthly membership: $55 (fixed for the month)Pay-per-visit: $12 * visitsBreak-even visits: 55 / 12 ≈ 4.6 visits

If you go 4 visits or fewer, pay-per-visit is cheaper. If you go 5 visits or more, membership is cheaper.

6) Stress-test with scenarios.

• Worst case: You go 2 times/month. Pay-per-visit costs $24 vs. $55 membership.
• Typical case: You go 6 times/month. Pay-per-visit costs $72 vs. $55 membership.
• Best case: You go 10 times/month. Pay-per-visit costs $120 vs. $55 membership.

7) Decide and set a checkpoint. If your schedule uncertainty is high, you might switch for one month and review after 30 days. Or keep membership if you know you will reliably exceed 5 visits and you value the “commitment device” effect.

Practical takeaway

When a choice mixes money and behavior, do not only compare prices. Also compare how the pricing structure changes your likelihood of using the service.

Case Study 2: Grocery Store Choice Under Time Pressure

Situation: Store A is cheaper but takes longer (drive + lines). Store B is more expensive but faster. You shop weekly for a household of two.

Step-by-step application

1) Define the decision and objective. Choose a shopping routine that balances money saved with time and stress.

2) List constraints. You have limited weeknight time. You also have a budget target.

3) Identify alternatives.

• Always shop at Store A.
• Always shop at Store B.
• Split: staples at A monthly, fresh items at B weekly.
• Delivery/pickup for some items.

4) Predict responses. If shopping takes too long, you may skip planning and buy more convenience food later, raising total spending. A faster store may reduce “decision fatigue” and impulse purchases, partially offsetting higher prices.

5) Compare outcomes with a simple weekly calculation. Estimate:

• Store A basket: $110, time 90 minutes total.
• Store B basket: $125, time 45 minutes total.

Difference: Store A saves $15 but costs 45 extra minutes. That is $15 / 0.75 hours = $20/hour “value” of time saved by Store B. If your personal value of an hour (after considering fatigue and schedule) is above $20, Store B may be worth it. If below $20, Store A may be better.

6) Stress-test. If Store A occasionally has 30-minute lines, the time cost becomes unpredictable. If you are time-constrained only on some weeks, a mixed strategy can dominate both extremes.

7) Decide and checkpoint. Try the split strategy for four weeks, track total spending and total time. Adjust based on actual results rather than assumptions.

Practical takeaway

“Cheaper” can be more expensive once you include time, stress, and downstream behavior (like eating out because you ran out of time to cook).

Case Study 3: Pricing a Side Hustle Service (Tutoring, Design, Handyman)

Situation: You provide a service and currently charge $30/hour. You are fully booked two evenings per week and want to increase income without burning out.

Step-by-step application

1) Define the decision and objective. Choose a pricing and scheduling policy that increases earnings while keeping workload manageable.

2) List constraints. You have a fixed number of hours you can work. Some clients are price-sensitive; others value reliability and quality.

3) Identify alternatives.

• Raise hourly price for all clients.
• Keep price but add a premium time slot price (peak pricing).
• Offer packages (e.g., 5 sessions prepaid) with a small discount.
• Reduce low-value tasks (admin) by using templates or automation.

4) Predict responses. A price increase may reduce the number of clients but can increase total revenue if demand is not too sensitive. It can also change the mix of clients toward those who value the service more.

5) Compare outcomes with a small experiment. Suppose you currently do 8 hours/week at $30 = $240/week.

• Option A: Raise to $36/hour (20% increase). If hours drop from 8 to 7, revenue becomes $252/week.
• Option B: Raise to $40/hour. If hours drop from 8 to 6, revenue becomes $240/week (same as before) but with less work.

Even when revenue does not rise, reducing hours can be a win if your objective includes avoiding burnout.

6) Stress-test. Consider client churn risk and reputation. A gradual approach can reduce risk: raise prices for new clients first, then for existing clients with notice.

7) Decide and checkpoint. Implement a two-week test: new-client rate $36/hour, peak slots $40/hour, off-peak $34/hour. Track inquiries, conversions, and your stress level.

Practical takeaway

When capacity is limited, pricing is not only about “being fair.” It is a tool to allocate scarce time and shape the client mix.

Case Study 4: Choosing Between Two Job Offers with Different Pay Structures

Situation: Offer A: $62,000 salary, stable hours, short commute. Offer B: $52,000 salary plus commission that could add $0–$25,000, longer commute, more variable schedule.

Step-by-step application

1) Define the decision and objective. Choose the job that best matches your income needs, risk tolerance, and lifestyle.

2) List constraints. You have fixed monthly bills. You also have limited tolerance for income volatility.

3) Identify alternatives.

• Take Offer A.
• Take Offer B.
• Negotiate: higher base in B, signing bonus in A, remote days, guaranteed draw.

4) Predict responses. Commission pay changes incentives: you may work harder, but also experience stress and potentially make short-term decisions to hit targets. The firm may also set quotas that affect your effective earnings.

5) Compare outcomes using scenarios.

• Low commission: $52,000 total.
• Mid commission: $65,000 total.
• High commission: $77,000 total.

Now include commute cost in time and money. If Offer B adds 6 hours/week commuting and you value that time at $20/hour, that is $120/week, roughly $6,240/year in time value. Subtracting that from expected earnings can change which offer dominates.

6) Stress-test. Ask: what happens in a bad quarter? Can you still pay bills? Also consider skill growth: does one job build more valuable experience that expands future options?

7) Decide and checkpoint. If you choose B, set a personal rule: reassess after 6 months with actual commission data and stress level. If you choose A, set a rule to revisit growth opportunities after 12 months.

Practical takeaway

Variable pay is not just “higher upside.” It is a different product: it bundles income with risk, effort, and time costs.

Case Study 5: A Landlord Decides Whether to Renovate a Rental Unit

Situation: You own a small rental. Renovation costs $9,000. You believe it could raise rent by $120/month and reduce vacancy time.

Step-by-step application

1) Define the decision and objective. Decide whether renovation improves your net returns given cost, risk, and tenant quality.

2) List constraints. Cash on hand, financing rate, time to manage contractors, local regulations, and the unit being unavailable during work.

3) Identify alternatives.

• Renovate now.
• Do minimal repairs only.
• Renovate partially (kitchen only, flooring only).
• Wait 12 months and reassess market conditions.

4) Predict responses. Higher rent may reduce the pool of applicants but could attract higher-income tenants and reduce late payments. Better quality may reduce maintenance calls.

5) Compare outcomes with a payback calculation.

Renovation cost: $9,000Rent increase: $120/month = $1,440/yearSimple payback period: 9,000 / 1,440 ≈ 6.25 years

Now add vacancy reduction. If renovation reduces expected vacancy by 1 month every 2 years and rent is $1,600/month, that is an expected benefit of $800/year (because $1,600 spread over two years). Total annual benefit becomes $1,440 + $800 = $2,240, and payback becomes about 4.0 years.

6) Stress-test. What if rent increase is only $80/month? What if renovation runs 20% over budget? What if interest rates rise and financing costs increase? Create a table of outcomes.

7) Decide and checkpoint. If you renovate, set a maximum budget and timeline, and pre-plan the rent listing strategy. If you do not renovate, set a maintenance threshold that triggers reconsideration.

Practical takeaway

Large spending decisions become clearer when you translate them into annual benefits and compare against realistic downside scenarios.

Review Questions (Answer in Writing, Not in Your Head)

Method and framing

• Pick a recent purchase you regret. Using the decision worksheet, which step did you skip or do poorly?
• For a decision you are currently delaying, what is the “do nothing” option costing you each week?
• Write two different objectives for the same decision (for example, “minimize cost” vs. “minimize stress”). How does the best option change?

Case-based calculations

• A streaming service costs $18/month. Renting a movie costs $5. At what number of movies per month is the subscription cheaper? What non-price factors could still make renting better for you?
• You can buy a 10-ride transit pass for $28 or pay $3.25 per ride. What is the break-even number of rides? How would uncertainty about travel plans affect your choice?
• A coffee shop offers a loyalty card: buy 9 drinks, get the 10th free. Each drink is $4.50. What is the effective discount rate if you complete the card? What might prevent you from capturing the discount?

Behavioral responses to pricing rules

• Describe a pricing plan that makes you consume more than you otherwise would. What feature of the plan causes that behavior?
• Think of a time you avoided a per-use fee but ended up paying more elsewhere (for example, driving farther to save on gas). What was the hidden cost?
• If a gym switched from monthly membership to per-visit pricing, which types of customers would increase visits and which would decrease? Explain why.

Small business and workplace applications

• You have limited appointment slots. Would you rather raise prices or add hours? List three costs of adding hours that are easy to ignore.
• A client asks for a discount. Write two counteroffers that change the product instead of the price (for example, fewer revisions, off-peak scheduling, longer delivery time).
• Your workplace offers a bonus for hitting a metric. Name one way the bonus could unintentionally reduce overall performance by shifting effort away from other tasks.

Planning and checkpoints

• Choose one upcoming decision (purchase, subscription, job change, pricing change). Write a one-paragraph plan that includes a checkpoint date and what data you will review.
• Write a “stop rule” for a project you tend to over-invest in. What signal will tell you to pause or change course?
• List three numbers you can track weekly that would improve your decisions (time spent, spending by category, inquiries, cancellations, etc.). Why those three?

Mini-Templates You Can Reuse

Template: Break-even and scenario table

Use this when comparing a fixed fee vs. per-use pricing, or when deciding whether to upgrade.

Option A (fixed): $____ per monthOption B (per use): $____ per useBreak-even uses = fixed / per-useAssumptions: expected uses = ____ (low ____ / typical ____ / high ____)

Template: Time-inclusive comparison

Use this when the cheaper option costs more time.

Money difference per week: $____Time difference per week: ____ hoursImplied value of time = money difference / time differenceCompare to your personal value of time (and stress): $____/hour

Template: Small pricing experiment for a service

Use this when you are unsure how customers will respond to a price change.

Current price: $____New test price: $____Test duration: ____ weeksTrack: inquiries, conversions, hours worked, revenue, cancellationsDecision rule: keep new price if revenue/hour rises and stress stays acceptable