Demand Elasticity and Cost Analysis of Building a Pipeline
Jessica Block
Rasmussen College
Author Note
This research is being submitted on July 25, 2018 for Audra Sherwood’s ECO 3250
Managerial Economics Course.
Introduction
Oil Company X has recently considered building a pipeline that stretches across the U.S,
from Canada to New Orleans. As an alternative investment, they are considering increasing
production at existing facilities. In order to compare these investment opportunities, the Cost
Department was tasked with determining 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. In
addition, the Cost Department needs to determine if the currently available alternative energy
source is a strong substitute good for oil, which may interfere with expected profits from this
project. I will be presenting the department’s findings and recommendations along with
supporting documentation such as cost curves and equations.
Determining Costs per 1,000 Miles
Fixed Costs
The fixed cost is the cost that does not change with an increase or decrease in the
production level of output. To find total fixed cost (FC) add up all fixed costs, excluding
marginal and variable costs of the business. The average fixed cost (AFC) is the fixed costs of
production (F) divided by the quantity (Q) of output produced. In this example, AFC = (11573) /
