A6 ShadowPrices and Sensitivity.pdfVIP

OR Modelling Today’s Goals ? Understand and apply the concept of shadow prices. ? Perform Sensitivity Analysis – Apply Sensitivity Analysis to a problem ? Interpret an Excel Sensitivity Report Shadow Prices ? The Shadow price is the value of having one more unit of a resource. ? Don’t get confused by the word “price”. A shadow price is a value, not a price. ? What is the difference between the value of a good and the price of a good? Shadow Prices ? The Shadow price is the value of having one more unit of a resource. ? In an LP the resources are related to the constraints. ? The RHS tells us how much of each resource is available. ? Often, the amount of the resource available is in fact a decision. Thus, it is useful to determine the value of changing the amount of resource available. What are the resources in this problem? The Apex TV company has to decide how many 27- and 20- inch sets to produce. They can sell at most 40 of the 27-inch sets and 10 of the 20-inch sets per month. A 27-inch set requires 20 work-hours, and a 20-inch set requires 10 work-hours. They have 720 work hours available each week. Each 27-inch set produces a profit of $120, and each 20-inch set a profit of $80. Resources: work hours; demand. What are the resources here? Giapettos Wood Carving manufactures 2 types of toys: soldiers and trains. Soldiers sell for $27 and use $10 of materials, $14 labor, trains for 21, 9 of material, 10 of labor. Each toy requires 2 types of labor – carpentry and painting. Soldiers require 1 hour carpentry, 2 painting; trains require 1 and 1. Giapetto only has 80 hours of carpentry and 100 hours of finishing available. Only 40 soldiers are sold each week. Wants to maximize profit. Formulate problem. Resources: carpentry labor and painting labor, and demand. Shadow prices The Shadow price is the value of having one more unit of a resource The shadow price of a resource tells you how much you would be willing to spend to buy another