COMMERCE 3QA3 Lecture Notes - Lecture 13: Sensitivity Analysis, Profit Margin, Opportunity Cost
8 Feb 2018
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Lecture 13: use of non-negativity shadow prices (2b) A sensitivity analysis is done by: formulate lp model, solve lp model to find optimal solution, sensitivity analysis for constraints, binding or non binding, slack or surplus for constraint. Shadow price for a non-negativity constraint (=reduced cost for a decision variable: range of feasibility for the right hand side for the coefficient of a decision variable in the objective function. Constraints for the non-negativity is under the variables. Suppose a new product, cabinets (a), requires 3 hours per unit in the carpentry department and 2 hours in the painting department, and has a profit margin of per cabinet. Then the cost of producing new product a is: Since this is less than the profit margin is , new product a should be produced. Shaodw prices are useful for evaluation the opportunity cost of producing a new product that uses some of the same resources as existing products.
