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Shadow price is the price that we are prepared to pay to buy extra material for making an extra unit of a product and it is our extra contribution that we will be earning from that one extra unit when it is sold.
Shadow Price is calculated as follows:
1) Use two equations of limited resources from Optimum Point
2) Increase any Limited resource by 1
3) Calculate the Number of units we will be producing of each product using substitution method
4) Calculate new Contribution on those number of units
5) Calculate Shadow Price by (New Contribution – Old Contribution)What is your question?
(I assume that you have watched my lectures on this where I explain the steps involved.)
What you have written is correct except that in your step 2 we do not increase ‘any’ limited resource by 1. We increase the limited resource for which we are asked to calculate the shadow price.
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