The shadow price in a linear programming model is:
A) Interesting from a mathematical or economic theory standpoint, but not generally useful from an accounting standpoint.
B) Equal to the current market price for an additional unit of the related resource.
C) The maximum price a rational decision-maker would be willing to pay for an additional unit of the scarce resource.
D) Greater than the market price for the related resource.
E) Zero for a binding constraint.

Question

Quizplus · Accepted Answer

The shadow price represents the maximum value that a decision-maker would be willing to pay for an additional unit of a scarce resource in order to increase the objective function value. Therefore, option C is the correct answer. Option A is incorrect because the shadow price can be useful in determining the value of a resource in a market. Option B is incorrect because the shadow price is not necessarily equal to the current market price, as it reflects the impact of the scarce resource on the objective function. Option D is incorrect because the shadow price can be equal to or less than the market price. Option E is incorrect because a binding constraint has a positive shadow price.

The Shadow Price in a Linear Programming Model Is