module 3

Please do not accept to answer question, if you are not skilled on this subject matter.

Competency

Elasticity, consumer choice, utility, productivity, and nature of costs.

Course Scenario

Oil Company X is a large oil refinery which has been expanding and
taking on new investment projects. Recently, they have considered
building a pipeline that stretches across the United States, from Canada
to New Orleans.

You are a member of the Cost Department. At a recent meeting of the
board of directors, it was estimated that the cost of building the
pipeline would be two million dollars in total for the production of a
30,000-mile stretch, $5,000 of which is a fixed cost in taxes. They also
want you to determine if the currently available alternative energy
source is a strong substitute good for oil, which may interfere with
expected profits from this venture.

Instructions

As a cost analyst at your firm, you are asked to evaluate the
marginal cost of producing the pipeline per 1,000-mile stretch as well
as the average total cost of producing the pipeline per 1,000 miles.
Submit a 2-page report detailing the cost. Include calculations in your
Word document.

You will also include a table showing the final figures for the following costs:

1. Total Fixed Cost
2. Total Variable Cost
3. Average Variable Cost
4. Average Fixed Cost
5. Marginal Cost

Be sure to also include a calculation of the cross-price elasticity
of the alternative energy source and oil. Assume the current price of
oil is $50/gallon. If the price increases to $55/gallon of crude oil,
the quantity demanded of the alternative energy source increases by 20%.

Is this a complementary good, a substitute good, or a non-related
good? If there is a relationship, indicate whether the relationship is
weak or strong. Justify your answer with an explanation.

Format your proposal to include a title page, introduction,
conclusion, and references. Include all relevant graphs, equations, and
calculations. Show your work on calculations to ensure you receive
partial credit for incorrect answers. No credit will be given if your
work is not shown. Remember to cite your sources using correct APA
format, and also use correct grammar, spelling, and formatting.