Identifying Costs and Returns to Scale

Overview

After viewing a brief (5 minute YouTube video) that describes the production function for a baseball manufacturer, students will work in teams to identify the fixed and variable costs for a baseball manufacturer. After identifying costs, students will also discuss whether or not the production function exhibits increasing, decreasing or constant returns to scale.

After working in teams of 4-5 students, the team will choose a reporter who will report out the findings and rationale of the team.

Expected Student Learning Outcomes

In this exercise students will be able to identify and describe fixed and variable costs as well as returns to scale after viewing a video that describes the production function of a baseball manufacturer.

Information Given to Students

Students are placed into teams of 4-5 students (typically at the start of the semester). They are provided with the attached handout. Show the brief video in class and ask students to take notes individually on the back of the handout. After the video is shown, ask students to work in teams to answer the questions on the handout. Students must also choose a recorder who will report the findings and rationale for their team during the entire class discussion. Give students 15 minutes to complete the handout. They may use the textbook and online sources, if allowed. After the 15 minutes, ask each of the reporters to provide at least one of the costs from the video and explain. Create a class list on the board. Continue until all of the teams have exhausted their lists of fixed and variable costs. Ask teams to report their answer for the returns to scale as well as the rationale. Discuss the specialization of labor illustrated in the video.

Producer Theory AE

For this assignment, go to the following address to view an episode of "How It's Made-Baseballs":

https://www.youtube.com/watch?v=sXS9dfzUbxw (cut and paste the url into your browser)

What you will need to do before you begin:

Define fixed and variables costs as well as Returns to Scale using your textbook.

What you must answer while viewing the video:

Provide at least 5 examples of fixed costs and variable costs from the video.

Discuss as a Team:

Which Returns to Scale is exhibited by the production function shown in the video?

1. Increasing Returns to Scale.
2. Decreasing Returns to Scale.
3. Constant Returns to Scale.

Costs and Returns to Scale Student Handout (Microsoft Word 2007 (.docx) 13kB Jan24 18)

This activity is most successful after covering costs and production material. Students are placed into teams of 4-5 students (typically at the start of the semester). They are provided with the attached handout. Show the brief video in class and ask students to take notes individually on the back of the handout. After the video is shown, ask students to work in teams to answer the questions collectively on the handout. Each student completes their own handout.

Students must also choose a recorder who will report the findings and rationale for their team during the entire class discussion. Give students 15 minutes to complete the handout. They may use the textbook and online sources, if allowed. After the 15 minutes, ask each of the reporters to provide at least one of the costs from the video and explain. Create a class list on the board. Continue until all of the teams have exhausted their lists of fixed and variable costs. Ask teams to report their answer for the returns to scale as well as the rationale. Discuss the specialization of labor illustrated in the video.

During the discussion, I circulate the classroom to answer questions and redirect or increase engagement in the discussion. I often find one group confuses fixed and variable costs and need clarification of the concepts. I also explain to teams that they need to collectively create a list of at least 8-10 fixed and 8-10 variable costs from their individual answers so that they do not run out of costs to report. They become creative when they have to come up with a more substantial list and the conversation becomes more interesting about the differences (For example, a salaries are a fixed cost whereas hourly wages are a variable cost.)

The handout can be collected for participation points or credit at the end of the class session. I find that when the exercise is collected at the end of the class meeting, students generally take more detailed notes and expect a correct answer to record. However, when the exercise is not collected at the end of the class meeting, students take fewer notes but engage in the discussion in class. In this case, I ask students to take 5-minutes at the end and summarize their discussion on the handout for their own records.

If there is a consensus around one of the 'Returns To Scale' choices then play devil's advocate and ask the teams to rank the choices from best to worst. This will allow you to discuss each of the options and have teams provide their rationale for their rankings. I typically need to encourage the conversation at this point. I ask students to explain which employees the company may ask to perform on the video. I also asked students to reflect on effectiveness of tasks when they are new at it versus when they have some experience (i.e. learning curve). I also ask students to explain the difference between capital-intensive and labor-intensive production processes. After we do this collectively, students often are able to defend the decreasing returns to scale position due to the labor-intensive method of baseball production and the learning curve associated with sewing the baseball leather (see the employee at the end of the video).

Teams will report out their answer collectively, on a submission paper or on the board, depending upon how visual you want the answers to be. I also collect the student handout from each student so that I can provide them with "credit" or "half-credit" or "no credit" for their participation in the activity. I explain to students that I expect to "see" their notes and graphs that detail how they reached the answer. I also circulate the room during the entire team activity to redirect student discussions and clarify the activity or the course material.