Shadow Prices

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    gutsychyk
    Participant
    • Topics: 19
    • Replies: 41

    there r around 4 to 5 constraints in a question
    for instance
    labour – 4s + 2b = 26000


    (i)
    material 5s + 2b = 30000


    (ii)
    s= 6000—-(iii)
    etc etc
    calculate shadow price for labour

    so we ll take 2 equations, labour for sure
    which will be the second one?
    coz answer as to contribution is different on using both 2nd and 3rd equations
    so value of s and b by using i and ii will be different and by using i and iii will be different

    please advise


    avatar
    vedavyas
    Participant
    • Topics: 38
    • Replies: 58

    Why do you need a second equation. For Shadow pricing you will write the
    Labour equation as : 4s + 2b = 26001
    Now you have the value of s, just substitute it in the above equation. 4×6000 +2b =26001
    Now you will get the value of b, Substitute this value of b and s in the objective function/maximize contribution equation, and you will get a new contribution,
    Then all you have to do is compare this contribution with the contribution at the optimum level of prodution, the difference will be The Shadow Price for 1 extra unit of labour.


    avatar
    amrita
    Participant
    • Topics: 7
    • Replies: 2

    or u could calculate the shadow price by simultaneous equations..
    where 4s+2b=26001
    5s+2b= 30000…
    solve the equations to get s and b..
    then get the contribution of the above units.. and compare it with the contribution of the previous units, that will give u your shadow price.

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