RSM270H1 Lecture Notes - Lecture 10: Shadow Price, Feasible Region
Document Summary
Process of transforming real world problem into mathematical model. Remember to add non-negativity constraints when setting up problem. How optimal solution affected by changes and estimation errors in the problem data. Feasible solution: a point that satisfies all constraints in the problem. Corner point property: an optimal solution to the linear program must lie at one or more corner points. Optimal point (region): the corner point or region with the best objective function value. Binding/active constraint: satisfied with equality at optimal solution. Inactive/nonbinding if satisfied with strict inequality at optimal solution. Adding redundant constraints do not affect optimal solution. Change in optimal objective value per unit increase in the right-hand side of the constraint, given that all other data remain the same. Must resolve linear program to find shadow price outside of range. Shadow price for any non-binding constraint is zero. If there are multiple optimal solutions, there must be at least one optimal corner point solution.
