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I have no idea which example you are referring to!!
Say which example and then I will help you.
A company makes two products, X and Y.
Both products use material Z which is in limited supply, and current production levels are using the entire weekly supply .
Product X uses 5kg of Z per unit; Product Y uses 5kg of Z per unit.
Material Z is costing currently $3 per kg, and the shadow price for Material Z has been calculated as $3.7 per kg.
The supplier of material Z is prepared to increase the weekly supply by 10kg.
what is the most per kg that the company should be prepared to pay for the extra material ?
The answer is $6.7.
But I don’t know understand this question at all and how did they get this answer ? please can you let know the working and why ? I have watched the lecture but in the lecture , it didn’t mention about this one .
Thanks
SherryBy definition, I believe that the “shadow price” is the amount EXTRA that a company should be willing to pay for, in this case, a material.
Therefore in addition to $3 Material Z currently costs, and seeing as Material Z is in limited supply, the company will pay up to but not over the extra $3.70.
$3 + $3.70 = $6.70
A penny for your thoughts, Mr. Moffat?
sherry1983: what shuv23 has written is correct. It is certainly mentioned in the lecture – I write down and stress that the shadow price is the most extra that they would be prepared to pay for one extra unit of the limited resource!!! That is the most important thing of all about shadow prices!!!
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