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Week 7 Discussion 1

The shadow price reflects the amount an organization would be willing to pay for an additional unit of a constrained resource in a maximization problem. For example, in a linear programming model optimizing profits from scissors production using labor and steel, a shadow price of $10 for labor means the organization could expect $10 more in profits for each additional labor hour, and $15 for steel means $15 more for each additional pound of steel. Shadow prices provide the maximum values the organization should pay per unit of each constrained resource to maintain optimal profits.

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3K views

Week 7 Discussion 1

The shadow price reflects the amount an organization would be willing to pay for an additional unit of a constrained resource in a maximization problem. For example, in a linear programming model optimizing profits from scissors production using labor and steel, a shadow price of $10 for labor means the organization could expect $10 more in profits for each additional labor hour, and $15 for steel means $15 more for each additional pound of steel. Shadow prices provide the maximum values the organization should pay per unit of each constrained resource to maintain optimal profits.

Uploaded by

JMcDon1007
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What does the shadow price reflect in a maximization problem? Please explain.

The shadow price can also be referred to as “dual values” or “marginal values”. The shadow price is
defined in the text as “the amount the organization would be willing to pay for one additional unit of a
resource.

For example, let’s say an organization was doing a linear programming model on scissors and they had
resources of labor (per hour) and steel (per pound). If the shadow price was calculated to reflect $10 for
labor and $15 for steel, it would mean that the organization could expect a profit of $10 additional
dollars for each unit (hour) of labor added and could expect a profit of $15 additional dollars for each
unit of steel (pounds) that was added.

The information above tells the organization that they should pay a MAXIMUM of $10 for each hour of
labor added and a MAXIMUM of $15 for each pound of steel added. Paying any more than these values
would result in an upside down situation where the costs outweighed the benefit.

How do the graphical and computer-based methods of solving LP problems differ? In what ways are
they the same? Under what circumstances would you prefer to use the graphical approach?

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