Ramon manages a branch office of a large financial services firm. He uses computers (capital, K) and people (labour, L) to produce consulting advice Q, according to the production function: Q=K * L.

Employing people costs the wage rate w = 1 while renting computers costs the rental rate r. Suppose computers cost twice what people do, i.e. r=2w=2. For now, the number of computers in the branch is fixed atK=k0

1. How much labour does Ramon employ if he needs to produce output Q? Show that short-run total cost is SRTC(Q) =2k0+Q/k0

1. Derive short-run average and marginal costs. How do short-run average and marginal cost vary with the output? Draw a diagram.
2. Assume that Ramon decides to optimally choose capital. Derive the long-run total cost function, average cost function, and marginal cost function.