Evren wants to go into the donut business. For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts (K = 1; r = 500). He must pay unionized donut bakers a monthly salary of $400 each. He projects his monthly production function to beQ = 5KL; where Q is tons of donuts.

a. In the short-run, Evren's level of capital is xed at K = 1: With the current level of capital, what is the marginal product of labor? Is the marginal product diminishing? Explain.

b. If Evren wishes to make 25 tons of donuts, how many bakers are required given the current level of capital? How much will it cost to produce this (total cost)?

c. Derive Evren's short-run cost function with K=1.

d. Derive the marginal cost curve from your answer to c and show the relationship between the marginal cost and marginal product of labor.

e. In the long-run, Evren can adjust level of capital. Derive the long-run cost function.