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Dear Sir,
I am stuck with one of the problems from exam kit,would be grateful if u could pls help me in understanding the solution.
Question
Products. X. Y
Materials(2$/kg) 3kg. 2.5kg
Direct Labor. 4$ 3$
V.Oh. 2$ 1.50
Sp. 20$ 18$
Contribution/unit. 8$ 8.50$
Demand. 500u/wk. Unlimited
To find: Shadow price if materials were limited to 2000 kg/wkSolution..3.40$/kg
Sir,
Why the shadow price in tgis case is contribution per unit of scarce resources.Why this contribution is termed as shadow price.Usually the difference or increase in contribution is used to calculate shadow price.Failed to understood this answer pls help
Many thanks
RidhimaProduct X gives a contribution per kg of 8/3 = $2.67
Product Y gives a contribution per kg of 8.50/2.5 = $3.40Therefore Y is better and given there is unlimited demand for Y they would use all 2,000 kg making Y and would be earning $3.40 per kg.
The shadow price is the extra contribution that would be earning from having 1 extra kg, and since again there is unlimited demand for Y then extra kgs would all be used to make Y and would earn $3.40 per kg.
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