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Sir!!
The answer to the test given on linear programming states that the most that the company should be prepared to pay for extra material is the total of the two which adds up to 6.70. I saw your reply to the same query in the comments as well. But I still don’t understand the logic behind it. I watched your lecture very well but it doesn’t mention anything about adding up the cost of the supplier and the shadow price. Shouldn’t the most we prepare to pay be equal to only the shadow price? In this case however since the cost is even lower shouldn’t the answer be only $3.00???
I’m sorry if I’m causing you any trouble.
The lecture does mention it!!
The definition of the shadow price is that it is the most extra that we would be prepared to pay for one extra unit of the limited resource.
Calculating the extra contribution that is made from having one extra unit assumes that we could buy the extra unit at the current price – the contribution per unit will have been calculated using the current price in the first place.
However much extra contribution would be generated at the current price is the most extra above the current price that we would be prepared to pay.
Thank you, sir!! Now I get it. I read it all over again and it makes sense. Thank you very much!!
sir i did not understand how to know the optimum contribution point in graph. after drawing contribution line u have mentioned about parallel lines which i did not get in lecture.
After you have drawn the line, you move it away from the origin while keeping it parallel.
The optimum solution is the furthest away without leaving the feasible region, so it will be one of the corners of the feasible region.
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