Consider the short run situation in which K is fixed at 5000. Assume r = .05 and w = 40. Open a new Excel worksheet for cost information. Note the difference between your production worksheet, in which the first column stored possible values of L, and this new cost worksheet in which the first column will store possible values of q. The variable represented in the first column will be graphed on the horizontal axis of the scatter-plot. For the isoquant diagram, L is shown on the horizontal axis. The new cost worksheet will be used to graph cost functions, with quantity of output on the horizontal axis ? Use column A to store possible values of q from 0 through 20. ? Use column B to store Total Fixed Cost (TFC). Fixed cost in this example is equal to r*K, with K = 5000. ? Use column C to store Total Variable Cost (TVC). Variable cost in this example is equal to w*L. To compute the quantity of L that must be combined with K=5000 to produce each possible value of q, remember that the production function is: 0.5 0.5 q = 0.02K L . ? Use algebra to solve for L as a function of q and K. Because K is fixed at 5000 for this short run analysis, the resulting equation will have L on the left-hand-side and the variable q will be combined with several constants on the right-hand-side. Substitute this equation for L to generate the TVC values for column C. Be careful to enclose the entire denominator in parentheses. ? Use column D to store Total Cost (TC) = TFC + TVC. ? Generate AFC in column E by dividing TFC/q ? Generate AVC in column F by dividing TVC/q ? Generate ATC in column G by dividing TC/q ? Generate one estimate of MC in column H by computing the change in TC as output increases. Leave the first row blank. Enter a formula into the third row: =d3-d2. Copy this formula into the remaining columns. This will provide arc elasticity. ? Generate a second estimate of MC in column I. Point elasticity is equal to 0.02 (5000) 2(40 ) 2 q ? Use scatter-plot to graph TC, TFC and TVC. ? Use scatter-plot to generate a second graph to show ATC, AFC, AVC and the second estimate of MC.