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A company currently 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 4 kg of Z per unit; product Y uses 5 kg of Z per unit. Material Z is costing currently $2 per kg, and the shadow price for material Z has been calculated as $2.70 per kg. The supplier of material Z is prepared to increase the weekly supply by 10 kg.
What is the most per kg that the company should be prepared to pay for the extra material?
A. $0.70
B. $2.70
C. $4.70
D. $2.40
I choose B but it was wrong. Correct answer was C. Please explain this for me as I thought shadow price is the most extra we would be prepared to pay for one extra unit of limited resource. As it is given in question that shadow price for Z is $2.70, shouldn’t answer be B. ($2.70)?Your reply would be greatly appreciated.
The Tutor will give the correct answer but here is how I understand it….
Think of the shadow price as the extra (premium) the company is prepared to pay in addition to normal price.
So in this case the normal price is for Z is $2 and the additional Premium (shadow price) is $2.70. Therefore together this comes to $4.70.
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