Using machinery (K) and laborers (L), you produce whiteboard markers in the Cape Town area. Suppose each machine you use costs R500 per period, while each laborer costs R100 per period. You combine capital and labor to produce markers according to = 2KL.

a) Write an expression for the total cost you incur as a function of K and L. [2]

While this is useful, you should note that cost curves are usually a function of Q, the number of produced goods. For this question, assume capital is fixed at 5 machines for the period.

b) Use the production function given above (Q=2KL) to find an expression for the average total cost of production as a function of Q, the number of whiteboard markers you produce. [4]

c) What is the marginal cost of producing one more whiteboard marker? If you were to graph this marginal cost function, would it match the marginal cost curves found in the textbook? How does it differ? [4]

d) Given the shape of the marginal cost curve, what does this suggest about the shape of the marginal product curve? [2]

e) Does this firm experience diminishing marginal returns to labor in the short run? [4]

f) What is the average fixed cost of producing 10 units? What happens to the average fixed cost as we increase production in the short run? [4]

g) Graph the average total cost and average fixed cost curves. Be sure to label your diagram correctly. [6]