Question: A major oil company is considering the optimal timing for the construction of new refineries. From past experience, each doubling of the size of a refinery at a single location results in an increase in the construction costs of about 68 percent. Furthermore, a plant size of 10,000 barrels per day costs $6 million. Assume that the demand for the oil is increasing at a constant rate of two million barrels yearly and the discount rate for future costs is 15 percent.
a. Find the values of k and a assuming a relationship of the form f(y) kya. Assume that y is in units of barrels per day.
b. Determine the optimal timing of plant additions and the optimal size of each plant.
c. Suppose that the largest single refinery that can be built with current technology is 15,000 barrels per day. Determine the optimal timing of plant additions and the optimal size of each plant in this case. (Assume 365 days per year for your calculations.)