Chapter 4

Sensitivity Analysis and

the Simplex Method

4.0 Introduction
In chapters 2 and 3, we studied how to formulate and solve LP models for a variety
of decision problems. However, formulating and solving an LP model does not
necessarily mean that the original decision problem has been solved. After solving an
LP model, a number of questions often arise about the optimal solution. In particular,
we might be interested in how sensitive the optimal solution is to changes in various
coefficients of the LP model.
Businesses rarely know with certainty what costs will be incurred or the exact
amount of resources that will be consumed or available in a given situation or time
period. Thus, optimal solutions obtained using models that assume all relevant factors
are known with certainty might be viewed with skepticism by management. Sensitivity
analysis can help overcome this skepticism and provide a better picture of how the
solution to a problem will change if different factors in the model change. Sensitivity
analysis also can help answer a number of practical managerial questions that might
arise about the solution to an LP problem.

4.1 The Purpose of Sensitivity Analysis

As noted in chapter 2, any problem that can be stated in the following form is an LP
problem:
MAX (or MIN): c1X1 1 c2X2 1 . . . 1 cnXn
Subject to: a11X1 1 a12X2 1 . . . 1 a1nXn # b1
…

ak1X1 1 ak2X2 1 . . . 1 aknXn $ bk

…

am1X1 1 am2X2 1 . . . 1 amnXn 5 bm

All the coefficients in this model (the cj, aij, and bi) represent numeric constants. So,
when we formulate and solve an LP problem, we implicitly assume that we can specify
the exact values for these coefficients. However, in the real world, these coefficients
might change from day to day or minute to minute. For example, the price a company
charges for its products can change on a daily, weekly, or monthly basis. Similarly, if
a skilled machinist calls in sick, a manufacturer might have less capacity to produce
items on a given machine than was originally planned.
141
142 Chapter 4 Sensitivity Analysis and the Simplex Method

Realizing that such uncertainties exist, a manager should consider how sensitive
an LP model’s solution is to changes or estimation errors that might occur in: (1) the
objective function coefficients (the cj), (2) the constraint coefficients (the aij), and (3) the
RHS values for the constraints (the bi). A manager also might ask a number of “What
if?” questions about these values. For example, what if the cost of a product increases
by 7%? What if a reduction in setup time allows for additional capacity on a given
machine? What if a worker’s suggestion results in a product requiring only 2 hours
of labor rather than three? Sensitivity analysis addresses these issues by assessing the
sensitivity of the solution to uncertainty or estimation errors in the model coefficients,
as well as the solution’s sensitivity to changes in model coefficients that might occur
because of human intervention.

4.2 Approaches to Sensitivity Analysis

You can perform sensitivity analysis on an LP model in a number of ways. If you want
to determine the effect of some change in the model, the most direct approach is simply
to change the model and re-solve it. This approach is suitable if the model does not take
an excessive amount of time to change or solve. In addition, if you are interested in
studying the consequences of simultaneously changing several coefficients in the model,
this might be the only practical approach to sensitivity analysis.
Solver also provides some sensitivity information after solving an LP problem. As
mentioned in chapter 3, one of the benefits of using the simplex method to solve LP
problems is its speed—it is considerably faster than the other optimization techniques.
However, the simplex method also provides more sensitivity analysis information than
the other techniques. In particular, the simplex method provides us with information
about the following:
The range of values the objective function coefficients can assume without changing
the optimal solution
The impact on the optimal objective function value of increases or decreases in the
availability of various constrained resources
The impact on the optimal objective function value of forcing changes in the values
of certain decision variables away from their optimal values
The impact that changes in constraint coefficients will have on the optimal solution
to the problem

4.3 An Example Problem

We will again use the Blue Ridge Hot Tubs problem to illustrate the types of sensitivity
analysis information available using Solver. The LP formulation of the problem is
repeated here, where X1 represents the number of Aqua-Spas and X2 represents the
number of Hydro-Luxes to be produced:

MAX: 350X1 1 300X2 } profit

Subject to: 1X1 1 1X2 # 200 } pump constraint
9X1 1 6X2 # 1,566 } labor constraint
12X1 1 16X2 # 2,880 } tubing constraint
X1, X2 $ 0 } nonnegativity conditions

This model is implemented in the spreadsheet shown in Figure 4.1 (and file Fig4-1.
xlsm that accompanies this book). (See chapter 3 for details on the procedure used
 The Answer Report 143

FIGURE 4.1 Spreadsheet model for the Blue Ridge Hot Tubs product mix problem

Variable Cells

Objective Cell

Constraint Cells

Key Cell Formulas

Cell Formula Copied to

D6 5SUMPRODUCT(B6:C6,$B$5:$C$5) D9:D11

to create and solve this spreadsheet model.) After solving the LP problem, a number
of reports are available about its solution via the Reports icon on the Analytic Solver
Platform tab on the ribbon.

Software Note
When solving an LP problem, be sure to use Solver’s Standard LP/Quadratic
Engine. This allows for the maximum amount of sensitivity analysis information
in the reports discussed throughout this chapter.

4.4 The Answer Report

Figure 4.2 shows the Answer Report for the Blue Ridge Hot Tubs problem. To create
this report, first solve the LP problem in the usual way and then click Reports, Optimi-
zation, Answer on the Analytic Solver Platform tab on the ribbon. This report summa-
rizes the solution to the problem, and is fairly self-explanatory. The first section of the
report summarizes the original and final (optimal) value of the objective cell. The next
section summarizes the original and final (optimal) values of the decision variable cells.
144 Chapter 4 Sensitivity Analysis and the Simplex Method

FIGURE 4.2
Answer Report
for the hot tub
problem

The final section of this report provides information about the constraints. In
particular, the Cell Value column shows the final (optimal) value assumed by each
constraint cell. Note that these values correspond to the final value assumed by the LHS
formula of each constraint. The Formula column indicates the upper or lower bounds
that apply to each constraint cell. The Status column indicates which constraints are
binding and which are nonbinding. A constraint is binding if it is satisfied as a strict
equality in the optimal solution; otherwise, it is nonbinding. Notice that the constraints
for the number of pumps and amount of labor used are both binding, meaning that
all the available pumps and labor hours will be used if this solution is implemented.
Therefore, these constraints are preventing Blue Ridge Hot Tubs from achieving a
higher level of profit.
Finally, the values in the Slack column indicate the difference between the LHS
and RHS of each constraint. By definition, binding constraints have zero slack and
nonbinding constraints have some positive level of slack. The values in the Slack
column indicate that if this solution is implemented, all the available pumps and labor
hours will be used, but 168 feet of tubing will be left over. The slack values for the
nonnegativity conditions indicate the amounts by which the decision variables exceed
their respective lower bounds of zero.
The Answer Report does not provide any information that could not be derived
from the solution shown in the spreadsheet model. However, the format of this report
gives a convenient summary of the solution that can be incorporated easily into a word-
processing document as part of a written report to management.
 The Sensitivity Report 145

Report Headings
When creating the reports described in this chapter, Solver will try to use various
text entries from the original spreadsheet to generate meaningful headings
and labels in the reports. Given the various ways in which a model can be
implemented, Solver might not always produce meaningful headings. However,
you can change any text entry to make the report more meaningful or descriptive.

4.5 The Sensitivity Report

Figure 4.3 shows the Sensitivity Report for the Blue Ridge Hot Tubs problem. To
create this report, first solve the LP problem in the usual way and then click Reports,
Optimization, Sensitivity on the Analytic Solver Platform tab on the ribbon. This report
summarizes information about the variable cells and constraints for our model. This
information is useful in evaluating how sensitive the optimal solution is to changes in
various coefficients in the model.

4.5.1 CHANGES IN THE OBJECTIVE

FUNCTION COEFFICIENTS
Chapter 2 introduced the level-curve approach to solving a graphical LP problem and
showed how to use this approach to solve the Blue Ridge Hot Tubs problem. This graphical
solution is repeated in Figure 4.4 (and file Fig4-4.xlsm that accompanies this book).
The slope of the original level curve in Figure 4.4 is determined by the coefficients
in the objective function of the model (the values 350 and 300). In Figure 4.5, we can

FIGURE 4.3
Sensitivity Report
for the hot tub
problem
146 Chapter 4 Sensitivity Analysis and the Simplex Method

FIGURE 4.4 Graph of original feasible region and optimal solution

Original Level
Curve

Original
Optimal
Solutions

FIGURE 4.5 How a change in an objective function coefficient can change the slope of the level curve and
the optimal solution

New Level
Curve

New Optimal
Solutions
 The Sensitivity Report 147

see that if the slope of the level curve were different, the extreme point represented by
X1 5 80, X2 5 120 would be the optimal solution. Of course, the only way to change
the level curve for the objective function is to change the coefficients in the objective
function. So, if the objective function coefficients are at all uncertain, we might be
interested in determining how much these values could change before the optimal
solution would change.
For example, if the owner of Blue Ridge Hot Tubs does not have complete control
over the costs of producing hot tubs (which is likely because he purchases the fiberglass
hot tub shells from another company), the profit figures in the objective function
of our LP model might not be the exact profits earned on hot tubs produced in the
future. So before the manager decides to produce 122 Aqua-Spas and 78 Hydro-Luxes,
he might want to determine how sensitive this solution is to the profit figures in the
objective. That is, the manager might want to determine how much the profit figures
could change before the optimal solution of X1 5 122, X2 5 78 would change. This
information is provided in the Sensitivity Report shown in Figure 4.3.
The original objective function coefficients associated with the variable cells are
listed in the Objective Coefficient column in Figure 4.3. The next two columns show the
allowable increases and decreases in these values. For example, the objective function
value associated with Aqua-Spas (or variable X1) can increase by as much as $100 or
decrease by as much as $50 without changing the optimal solution, assuming all other
coefficients remain constant. (You can verify this by changing the profit coefficient
for Aqua-Spas to any value in the range from $300 to $450 and re-solving the model.)
Similarly, the objective function value asso ciated with Hydro-Luxes (or variable X2)
can increase by $50 or decrease by approximately $66.67 without changing the optimal
values of the decision variables, assuming all other coefficients remain constant. (Again,
you can verify this by re-solving the model with different profit values for Hydro-Luxes.)

Software Note
When setting up a spreadsheet model for an LP problem for which you
intend to generate a Sensitivity Report, it is a good idea to make sure the cells
corresponding to RHS values of constraints contain constants or formulas that
do not involve the decision variables. Thus, any RHS formula related directly
or indirectly to the decision variables should be moved algebraically to the LHS
of the constraint before implementing your model. This will help to reduce
problems in interpreting the Solver Sensitivity Report.

4.5.2 A COMMENT ABOUT CONSTANCY

The phrase “assuming all other coefficients remain constant” in the previous
paragraph underscores the fact that the allowable increases and decreases shown in
the Sensitivity Report apply only if all the other coefficients in the LP model do not
change. The objective coefficient for Aqua-Spas can assume any value from $300 to
$450 without changing the optimal solution—but this is guaranteed to be true only if all the
other coefficients in the model remain constant (including the objective function coefficient for
X2). Similarly, the objective function coefficient for X2 can assume any value between
$233.33 and $350 without changing the optimal solution—but this is guaranteed to be
true only if all the other coefficients in the model remain constant (including the objective
function coefficient for X1). Later in this chapter, you will see how to determine whether
148 Chapter 4 Sensitivity Analysis and the Simplex Method

the current solution remains optimal if changes are made in two or more objective
coefficients at the same time.

4.5.3 ALTERNATE OPTIMAL SOLUTIONS

Sometimes, the allowable increase or allowable decrease for the objective function
coefficient for one or more variables will equal zero. In the absence of degeneracy (to
be described later), this indicates that alternate optimal solutions exist. You can usually
get Solver to produce an alternate optimal solution (when they exist) by: (1) adding
a constraint to your model that holds the objective function at the current optimal
value, and then (2) attempting to maximize or minimize the value of one of the decision
variables that had an objective function coefficient with an allowable increase or
decrease of zero. This approach sometimes involves some “trial and error” in step 2,
but should cause Solver to produce an alternate optimal solution to your problem.

4.5.4 CHANGES IN THE RHS VALUES

As noted earlier, constraints that have zero slack in the optimal solution to an LP
problem are called binding constraints. Binding constraints prevent us from further
improving (i.e., maximizing or minimizing) the objective function. For example, the
Answer Report in Figure 4.2 indicates that the constraints for the number of pumps and
hours of labor available are binding, whereas the constraint on the amount of tubing
available is nonbinding. This is also evident in Figure 4.3 by comparing the Final Value
column with the Constraint R.H. Side column. The values in the Final Value column
represent the LHS values of each constraint at the optimal solution. A constraint is
binding if its Final Value is equal to its Constraint R.H. Side value.
After solving an LP problem, you might want to determine how much better or
worse the solution would be if we had more or less of a given resource. For example,
Howie Jones might wonder how much more profit could be earned if additional pumps
or labor hours were available. The Shadow Price column in Figure 4.3 provides the
answers to such questions.
The shadow price for a constraint indicates the amount by which the objective
function value changes given a unit increase in the RHS value of the constraint, assuming
all other coefficients remain constant. If a shadow price is positive, a unit increase in the
RHS value of the associated constraint results in an increase in the optimal objective
function value. If a shadow price is negative, a unit increase in the RHS value of the
associated constraint results in a decrease in the optimal objective function value. To
analyze the effects of decreases in the RHS values, you reverse the sign on the shadow
price. That is, the negated shadow price for a constraint indicates the amount by which
the optimal objective function value changes given a unit decrease in the RHS value of
the constraint, assuming all other coefficients remain constant. The shadow price values
apply provided that the increase or decrease in the RHS value falls within the allowable
increase or allowable decrease limits in the Sensitivity Report for each constraint.
For example, Figure 4.3 indicates that the shadow price for the labor constraint is 16.67.
Therefore, if the number of available labor hours increased by any amount in the range
from 0 to 234 hours, the optimal objective function value changes (increases) by $16.67 for
each additional labor hour. If the number of available labor hours decreased by any amount
in the range from 0 to 126 hours, the optimal objective function value changes (decreases)
by 2$16.67 for each lost labor hour. A similar interpretation holds for the shadow price
for the constraint on the number of pumps. (It is coincidental that the shadow price for the
pump constraint (200) is the same as that constraint’s RHS and Final Values.)
 The Sensitivity Report 149

4.5.5 SHADOW PRICES FOR NONBINDING CONSTRAINTS

Now, let’s consider the shadow price for the nonbinding tubing constraint. The tubing
constraint has a shadow price of zero with an allowable increase of infinity and an
allowable decrease of 168. Therefore, if the RHS value for the tubing constraint increases
by any amount, the objective function value does not change (or changes by zero). This
result is not surprising. Because the optimal solution to this problem leaves 168 feet
of tubing unused, additional tubing will not produce a better solution. Furthermore,
because the optimal solution includes 168 feet of unused tubing, we can reduce the
RHS value of this constraint by 168 without affecting the optimal solution.
As this example illustrates, the shadow price of a nonbinding constraint is always
zero. There is always some amount by which the RHS value of a nonbinding constraint
can be changed without affecting the optimal solution.

4.5.6 A NOTE ABOUT SHADOW PRICES

One important point needs to be made concerning shadow prices. To illustrate
this point, let’s suppose that the RHS value of the labor constraint for our example
problem increases by 162 hours (from 1,566 to 1,728) due to the addition of new
workers. Because this increase is within the allowable increase listed for the labor
constraint, you might expect that the optimal objective function value would increase
by $16.67 3 162 5 $2,700. That is, the new optimal objective function value would
be approximately $68,800 1 $66,100 1 $16.67 3 162 5 $68,800 2 . Figure 4.6 shows the
re-solved model after increasing the RHS value for the labor constraint by 162 labor
hours to 1,728.
In Figure 4.6, the new optimal objective function value is $68,800, as expected. But
this solution involves producing 176 Aqua-Spas and 24 Hydro-Luxes. That is, the

FIGURE 4.6 Solution to the revised hot tub problem with 162 additional labor hours
150 Chapter 4 Sensitivity Analysis and the Simplex Method

FIGURE 4.7
How a change
in the RHS
value of the labor
constraint changes
the feasible region
and optimal
solution

optimal solution to the revised problem is different from the solution to the original
problem shown in Figure 4.1. This is not surprising because changing the RHS of a
constraint also changes the feasible region for the problem. The effect of increasing the
RHS of the labor constraint is shown graphically in Figure 4.7.
So, although shadow prices indicate how the objective function value changes if
a given RHS value changes, they do not tell you which values the decision variables
need to assume in order to achieve this new objective function value. Determining the
new optimal values for the decision variables requires that you make the appropriate
changes in the RHS value and re-solve the model.

Another Interpretation
of Shadow Prices
Unfortunately, there is no one universally accepted way of reporting shadow
prices for constraints. In some software packages, the signs of the shadow prices
do not conform to the convention used by Solver. Regardless of which software
package you use, there is another way to look at shadow prices that should
always lead to a proper interpretation. The absolute value of the shadow price
always indicates the amount by which the objective function will be improved
if the corresponding constraint is loosened. A less than or equal to constraint is
loosened by increasing its RHS value, whereas a greater than or equal to constraint
is loosened by decreasing its RHS value. (The absolute value of the shadow price
can also be interpreted as the amount by which the objective will be made worse if
the corresponding constraint is tightened.)
 The Sensitivity Report 151

4.5.7 SHADOW PRICES AND THE VALUE

OF ADDITIONAL RESOURCES
In the previous example, an additional 162 hours of labor allowed us to increase
profits by $2,700. A question might then arise as to how much we should be willing to
pay to acquire these additional 162 hours of labor. The answer to this question is, “It
depends. . . .”
If labor is a variable cost that was subtracted (along with other variable costs) from
the selling price of the hot tubs to determine the marginal profits associated with each
type of tub, we should be willing to pay up to $2,700 above and beyond what we would
ordinarily pay to acquire 162 hours of labor. In this case, notice that both the original
and revised profit figures of $66,100 and $68,800, respectively, represent the profit
earned after the normal labor charge has been paid. Therefore, we could pay a premium
of up to $2,700 to acquire the additional 162 hours of labor (or an extra $16.67 per
additional labor hour) and still earn at least as much profit as we would have without
the additional 162 hours of labor. Thus, if the normal labor rate is $12 per hour, we
could pay up to $28.67 per hour to acquire each of the additional 162 hours of labor.
On the other hand, if labor is a sunk cost, which must be paid regardless of how
many hot tubs are produced, it would not (or should not) have been subtracted from
the selling price of the hot tubs in determining the marginal profit coefficients for each
tub produced. In this case, we should be willing to pay a maximum of $16.67 per hour
to acquire each of the additional 162 hours of labor.

4.5.8 OTHER USES OF SHADOW PRICES

Because shadow prices represent the marginal values of the resources in an LP problem,
they can help us answer a number of other managerial questions that might arise. For
example, suppose Blue Ridge Hot Tubs is considering introducing a new model of hot
tub called the Typhoon-Lagoon. Suppose that each unit of this new model requires 1
pump, 8 hours of labor, and 13 feet of tubing, and can be sold to generate a marginal
profit of $320. Would production of this new model be profitable?
Because Blue Ridge Hot Tubs has limited resources, the production of any Typhoon-
Lagoons would consume some of the resources currently devoted to the production
of Aqua-Spas and Hydro-Luxes. So, producing Typhoon-Lagoons will reduce the
number of pumps, labor hours, and tubing available for producing the other types of
hot tubs. The shadow prices in Figure 4.3 indicate that each pump taken away from
production of the current products will reduce profits by $200. Similarly, each labor
hour taken away from the production of the current products will reduce profits by
$16.67. The shadow price for the tubing constraint indicates that the supply of tubing
can be reduced without adversely affecting profits.
Because each Typhoon-Lagoon requires 1 pump, 8 hours of labor, and 13 feet of
tubing, the diversion of resources required to produce one unit of this new model
would cause a reduction in profit of $200 3 1 1 $16.67 3 8 1 $0 3 13 5 $333.33. This
reduction would be partially offset by the $320 increase in profit generated by each
Typhoon-Lagoon. The net effect of producing each Typhoon-Lagoon would be a $13.33
reduction in profit 1 $320 2 $333.33 5 2$13.33 2 . Therefore, the production of Typhoon-
Lagoons would not be profitable (although the company might choose to produce a
small number of Typhoon-Lagoons to enhance its product line for marketing purposes).
Another way to determine whether or not Typhoon-Lagoons should be produced is to
add this alternative to our model and solve the resulting LP problem. The LP model for
152 Chapter 4 Sensitivity Analysis and the Simplex Method

FIGURE 4.8 Spreadsheet model for the revised product mix problem with three hot tub models

Key Cell Formulas

Cell Formula Copied to

E6 5SUMPRODUCT(B6:D6,$B$5:$D$5) E9:E11

this revised problem is represented as follows, where X1, X2, and X3 represent the number
of Aqua-Spas, Hydro-Luxes, and Typhoon-Lagoons to be produced, respectively:
MAX: 350X1 1 300X2 1 320X3 } profit
Subject to: 1X1 1 1X2 1 1X3 # 200 } pump constraint
9X1 1 6X2 1 8X3 # 1,566 } labor constraint
12X1 1 16X2 1 13X3 # 2,880 } tubing constraint
X1, X2, X3 $ 0 } nonnegativity conditions

This model is implemented and solved in the spreadsheet, as shown in Figure 4.8
(and file Fig4-8.xlsm that accompanies this book). Notice that the optimal solution
to this problem involves producing 122 Aqua-Spas 1 X1 5 122 2 , 78 Hydro-Luxes
1 X2 5 78 2 , and no Typhoon-Lagoons 1 X3 5 0 2 . So, as expected, the optimal solution
does not involve producing Typhoon-Lagoons. Figure 4.9 shows the Sensitivity Report
for our revised model.

4.5.9 THE MEANING OF THE REDUCED COSTS

The Sensitivity Report in Figure 4.9 for our revised model is identical to the Sensitivity
Report for our original model except that it includes an additional row in the decision
variable cells section. This row reports sensitivity information on the number of
Typhoon-Lagoons to produce. Notice that the Reduced Cost column indicates that
 The Sensitivity Report 153

the reduced cost value for Typhoon-Lagoons is 213.33. This is the same number that
we calculated in the previous section when determining whether or not it would be
profitable to produce Typhoon-Lagoons.
The reduced cost for each variable is equal to the per-unit amount the product
contributes to profits minus the per-unit value of the resources it consumes (where the
consumed resources are priced at their shadow prices). For example, the reduced cost
of each variable in this problem is calculated as:
Reduced cost of Aqua-Spas 5 350 2 200 3 1 2 16.67 3 9 2 0 3 12 5 0
Reduced cost of Hydro-Luxes 5 300 2 200 3 1 2 16.67 3 6 2 0 3 16 5 0
Reduced cost of Typhoon-Lagoons 5 320 2 200 3 1 2 16.67 3 8 2 0 3 13 5 213.33
The allowable increase in the objective function coefficient for Typhoon-
Lagoons equals 13.33. This means that the current solution will remain optimal
provided that the marginal profit on Typhoon-Lagoons is less than or equal to
$320 1 $13.33 5 $333.33 (because this would keep its reduced cost less than or equal
to zero). However, if the marginal profit for Typhoon-Lagoons is more than $333.33,
producing this product would be profitable and the optimal solution to the problem
would change.
It is interesting to note that the shadow prices (marginal values) of the resources
consumed equate exactly with the marginal profits of the products that, at optimality,
assume values between their simple lower and upper bounds. This will always be the
case. In the optimal solution to an LP problem, the variables that assume values between
their simple lower and upper bounds always have reduced cost values of zero. (In
our example problem, all the variables have implicit simple upper bounds of positive
infinity.) The variables with optimal values equal to their simple lower bounds have
reduced cost values that are less than or equal to zero for maximization problems, or
greater than or equal to zero for minimization problems. Variables with optimal values
equal to their simple upper bounds have reduced cost values that are greater than or

FIGURE 4.9
Sensitivity Report
for the revised
product mix
problem with three
hot tub models
154 Chapter 4 Sensitivity Analysis and the Simplex Method

FIGURE 4.10
Summary of Optimal Value of Optimal Value of
optimal reduced Type of Problem Decision Variable Reduced Cost
cost values at simple lower bound #0
Maximization between lower and upper bounds 50
at simple upper bound $0
at simple lower bound $0
Minimization between lower and upper bounds 50
at simple upper bound #0

equal to zero for maximization problems, or less than or equal to zero for minimization
problems. Figure 4.10 summarizes these relationships.
Generally, at optimality, a variable assumes its largest possible value (or is set
equal to its simple upper bound) if this variable helps improve the objective function
value. In a maximization problem, the variable’s reduced cost must be nonnegative
to indicate that if the variable’s value increased, the objective value would increase
(improve). In a minimization problem, the variable’s reduced cost must be non-
positive to indicate that if the variable’s value increased, the objective value would
decrease (improve).
Similar arguments can be made for the optimal reduced costs of variables at their
lower bounds. At optimality, a variable assumes its smallest (lower bound) value if it
cannot be used to improve the objective value. In a maximization problem, the vari-
able’s reduced cost must be nonpositive to indicate that if the variable’s value increased,
the objective value would decrease (worsen). In a minimization problem, the variable’s
reduced cost must be nonnegative to indicate that if the variable’s value increased, the
objective value would increase (worsen).

Key Points
Our discussion of Solver’s Sensitivity Report highlights some key points concern-
ing shadow prices and their relationship to reduced costs. These key points are
summarized as:
The shadow prices of resources equate the marginal value of the resources
consumed with the marginal benefit of the goods being produced.
Resources in excess supply have a shadow price (or marginal value) of zero.
The reduced cost of a product is the difference between its marginal profit
and the marginal value of the resources it consumes.
Products whose marginal profits are less than the marginal value of the goods
required for their production will not be produced in an optimal solution.

4.5.10 ANALYZING CHANGES IN CONSTRAINT COEFFICIENTS

Given what we know about reduced costs and shadow prices, we can now analyze how
changes in some constraint coefficients affect the optimal solution to an LP problem. For
example, it is unprofitable for Blue Ridge Hot Tubs to manufacture Typhoon-Lagoons
assuming that each unit requires 8 hours of labor. However, what would happen if the