Hi,
I’m struggling to understand the difference between constraints and binding constraints in relation to linear programming.
From past exam papers I am seeing that only binding constraints have a shadow prices but cannot get the logic behind it.
Any insights would be wonderful!
Thank you!
ACCA Forums
PMConstraint vs binding constraint
Basically binding constraints impact the solution of the problem. Non binding constraints do not and that is why non binding constraints have a shadow price of zero. Hope this helps.
Binding constraints are ones the resources of which are fully utilised for a particular optimal solution, meaning that LHS = RHS when optimal values of X and Y are plugged into the constraint.
When you add resources on them, after some production, there may arise new binding constraints and so even them are not fixed.
Shadow price is an increase in value obtained by having an additional unit of a fully utilised resource (binding constraint at the time) at its original cost.
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