I just did the question in the mcq after the chapter, however I don’t get why the most a company should be willing to pay is the shadow price plus the cost per material.

I am confused on the shadow prices part. Can we use the labour equation 5S + 6E = 181 to calculate the shadow price instead of material equation 2S + 4E = 81? Using labour equation, the shadow price will be $0.75. Is it appropriate to use labour equation to calculate shadow price?

Can you help me resolve one confusion. While calculating slack at the start of this video, it turned out to be zero in case of material and labour both. However, if i check the usage of material by using other method, it gives different result. What i did was that, we figured out that we are producing 30 standard chairs and 5 executive chairs. The quantity of material used in each chair is picked from the information given in question (i.e. 2 KG for standard and 4 kg for executive). When i multiply this by number of chairs produced it gives (i.e. 2*30 + 4*5) = 80 KG.

Same procedure i applied to calculate labour. Please let me where i am doing wrong.

Oops. I am sorry. i had 100KG of available material in my mind, i don’t know where it came from. Thank you for your patience to answer some silly questions.

mauryniruo says

Hi Mr John,

Why are we adding extra kilo to material but we are not adding extra hour to labor

John Moffat says

We add an extra kg to material if we want the shadow cost of material. We add an extra hour to labour if we want the shadow cost of labour.

chukwudi says

The most per kg the company should be ready to pay seems a bit off or am i missing something?

John Moffat says

Why a ‘bit off’? (The shadow price is the most extra they are prepared to pay).

raiyanr21 says

Hi Mr Moffat,

I just did the question in the mcq after the chapter, however I don’t get why the most a company should be willing to pay is the shadow price plus the cost per material.

Would you be able to explain this to me please?

Kind regards

raiyanr21 says

I found it, you’ve explained it in the video so just replayed it again. Apologies!

John Moffat says

No problem 馃檪

libbysteinhaus says

how do we know that if we change the limit of materials the optimum profit will still be at point B?

John Moffat says

Because the materials line will move but only by a very small amount, and the angle of the line will of course stay the same.

kayb123 says

Dear Mr John,

I am confused on the shadow prices part. Can we use the labour equation 5S + 6E = 181 to calculate the shadow price instead of material equation 2S + 4E = 81? Using labour equation, the shadow price will be $0.75. Is it appropriate to use labour equation to calculate shadow price?

Please guide me on this. Thank you very much.

John Moffat says

It depends on whether we want the shadow price of materials or the shadow price of labour.

kayb123 says

Thanks for your reply Mr John. 馃檪

John Moffat says

You are welcome 馃檪

kamran.khan says

Dear John,

Can you help me resolve one confusion. While calculating slack at the start of this video, it turned out to be zero in case of material and labour both. However, if i check the usage of material by using other method, it gives different result. What i did was that, we figured out that we are producing 30 standard chairs and 5 executive chairs. The quantity of material used in each chair is picked from the information given in question (i.e. 2 KG for standard and 4 kg for executive). When i multiply this by number of chairs produced it gives (i.e. 2*30 + 4*5) = 80 KG.

Same procedure i applied to calculate labour. Please let me where i am doing wrong.

John Moffat says

There are only 80kg of material available and they are using all of it. Therefore there is no slack!

kamran.khan says

Oops. I am sorry. i had 100KG of available material in my mind, i don’t know where it came from. Thank you for your patience to answer some silly questions.