- October 12, 2021 at 8:47 pm #637589Syed Ahsan AliMember
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I am afraid that I didn’t understand your lecture where you spoke about spare capacity in linear programming!
How do we know whether we are using all the available material of 90 kg / labour of 180 hours / Demand for Executive chairs?
1) If the material line is touching Optimum Point B; then we are using all the available material of 80 kgs;
2) If the labour line is touching Optimum Point B; then we are using all the available labour of 180 hours;
3) Since the demand line is not touching Optimum Point B; so we are not using all the demand for executive chairs BUT we are already producing 5 executive chairs from Optimum Plan so there is a slack of only (10 – 5) = 5 executive chairs;
4) Shadow Price is actually the extra unit contribution that we will earn by having one extra unit and it will be the maximum price that we are willing to pay for buying the material from the market because otherwise we would end up making a loss which you explained by mentioning about current price?
This is what I understood from your lecture; Please correct me if I am wrong.
Thanks for your continuous help. I appreciate your efforts 🙂October 13, 2021 at 7:47 am #637602John MoffatKeymaster
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All is correct except your point 4.
The shadow price is the extra contribution we will earn from one extra unit of the limited resource. It is therefore the most extra we will be prepared to pay (above what we are currently paying).
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