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.

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:

Total Fixed Cost
Total Variable Cost
Average Variable Cost
Average Fixed Cost
Marginal Cost
Please use this included Excel Cost Spreadsheet to calculate your costs.

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.