Computational Methods for

Management and Economics

Carla Gomes

Module 7b
Duality and Sensitivity Analysis
Economic Interpretation of Duality
(slides adapted from: M. Hillier’s, J. Orlin’s, and H. Sarper’s)
 Post-optimality Analysis
• Post-optimality – very important phase of
modeling.
• Duality plays and important role in post-
optimality analysis
• Simplex provides several tools to perform
post-optimality analysis
 Post-optimality analysis for LP
Task Purpose Technique

Model Debugging Find errors and weaknesses in the model Re-optimization

Model Validation Demonstrate validity of final model Analysis results
Final Managerial on Allocation of organizational resources Dual (shadow)
resource allocations prices
Evaluate estimates of Determine if changes in parameters Sensitivity
model parameters change optimal solution Analysis
Evaluate parameter Determine best trade-offs between model Parametric
trade-offs parameters Linear
Programming
 Economic Interpretation of Duality

• LP problems – quite often can be interpreted as

allocating resources to activities.
• Let’s consider the standard form:

xi >= 0 , (i =1,2,…,n)
• Resources – m (plants)
• Activities – n (2 products)
• Wyndor Glass problem optimal product mix ---
allocation of resources to activities i.e., choose the levels
of the activities that achieve best overall measure of
performance
 

What if we change our resources – can we

improve our optimal solution?
 Sensitivity Analysis
How would changes in the problem’s objective function
coefficients or right-hand side values change the optimal
solution?
 Dual Variables (Shadow Prices)

• y1*= 0  dual variable (shadow price) for resource 1

• y2*= 1.5  dual variable (shadow price) for resource 2
• y3*= 1  dual variable (shadow price) for resource 3

How much does Z increase if we increase resource 2 by

1 unit (i.e., b2 = 12  b2=13)?
Graphical Analysis of Dual variables – Variation in RHS
Increasing level of resource 2 (b2)
Production rate for windows
W
10

3 D + 2 W = 18
8
(5/3,13/2)
D=4
2w=13  Z=3(5/3)+5(13/2)=37.5
6 2 W =12 Z=3(2)+5(6)=36
∆ Z=1.5
= y2 *
(2,6)
4

Feasible
Why is y1*=0?
region
2

0 2 4 6 8 D
Production rate for doors
Economic Interpretation of Dual Variables

The dual variable associated with resource i

(also called shadow price), denoted by yi*, measures
the marginal value of this resource, i.e., the rate at
which Z could be increased by (slightly) increasing
the amount of this resource (bi), assuming everything
else stays the same. The dual variable yi* is identified
by the simplex method as the coefficient of the ith slack
variable in row 0 of the final simplex tableau.
Dual Variables: binding and non-binding
constraints

• The shadow prices (dual variables) associated with

non-binding constraints are necessarily 0
(complementary optimal slackness)  there is a
surplus of non-binding resource and therefore
increasing it will not increase the optimal solution.
Economist refer to such resources as free
resources (shadow price =0)
• Binding constraints on the other hand correspond
to scarce resources – there is no surplus. In
general they have a positive shadow price.
Does Z always increase at the same rate if we
keep increasing the amount of resource 2?
Production rate for windows
W
10
(0,9) b2=18
3 D + 2 W = 18
8

(5/3,13/2) D=4
2w=13  Z=3(5/3)+5(13/2)=37.5
6 2 W =12 Z=3(2)+5(6)=36
∆ Z=1.5
= y2 *
(2,6)
4

Feasible What if b2 > 18 (i.e.,

region
2
2W>18)?

0 2 4 6 8 D
Production rate for doors

 the optimal solution will stay at (0,9) for b2>=18

Does Z always decrease at the same rate
if we decrease resource 2?
Production rate for windows
W
10

3 D + 2 W = 18
8

D=4
(5/3,13/2) 2w=13  Z=3(5/3)+5(13/2)=37.5
6 2 W =12 Z=3(2)+5(6)=36
∆ Z=1.5
= y2 *
(2,6) If b2 < 6 the solution will no longer
4
vary proportionally. The optimal
Feasible b2=6 solution varies proportionally to the
region variation in b2 only if 6 <= b2 <=18.
2
In other words, the current basis remains
optimal for 6 ≤ b2 ≤ 18, but the decision
variable values and z-value will change.
0 2 4 6 8 D
Production rate for doors
• A dual variable yi* gives us the rate at which Z could be
increased by increasing the amount of resource i slightly.
• However this is only true for a small increase in the
amount of the resource. I.e., this definition applies only if
the change in the RHS of constraint i leaves the current
basis optimal. It also assumes everything else stays the
same.
• Another interpretation of yi* is: if a premium price must
be paid for the resource i in the market place, yi* is the
maximum premium (excess over the regular price) that
would be worth paying.
 Optimal Basis in the Wyndor Glass
Problem
• How can we characterize (verbally) the
optimal basis of the Wyndor Glass problem?

– Plant 1 – unutilized capacity (non-binding

constraint)
– Plant 2 – fully utilized capacity (binding
constraint)
– Plant 3 - fully utilized capacity (binding
constraint)
 How do we interpret the intervals?
• If we change one coefficient in the RHS, say
capacity of plant 2, by  the “basis” remains
optimal, that is, the same equations remain
binding.
• So long as the basis remains optimal, the shadow
prices are unchanged.
• The basic feasible solution varies linearly with.
If  is big enough or small enough the basis will
change.
The dual price or shadow price for the i th constraint
of an LP is the amount by which the optimal z-value
is improved (increased in a max problem or
decreased in a min problem) if the rhs of the i th
constraint is increased by one. This definition
applies only if the change in the rhs of constraint i
leaves the current basis optimal.
The dual variables or shadow prices are valid in a
given interval.
 Sensitivity analysis for c1

How much can we vary c1 without changing

the current basic optimal solution?
 Sensitivity analysis for c1
Production rate W Our objective function is:
for windows Z= c1 D+5W=k
8 c1

P = 3600 = 300D + 500W
slope of iso-profit line is: 5
D

Optimal solution

P = 3000 = 300D + 500W 6 (2, 6)

Feasible
4
region
P = 1500 = 300D + 500W

isoprofit line
0 2 4 6 8 10 D
Production rate for doors

How much can c1 vary until the slope of the iso-profit line
equals the slope of constraint 2 and constraint 3?
• How much can c1
vary until the slope of  c1 D  0  c1 0
the iso-profit line 5
equals the slope of
constraint 2 and
 c1 D   3  c115
5 2 2
constraint 3? 0  c1 7.5
• Slope of constraint
2 0
• Slope of constraint 3
 -3/2
 Importance of Sensitivity Analysis

Sensitivity analysis is important for several reasons:

• Values of LP parameters might change. If a parameter changes,
sensitivity analysis shows it is unnecessary to solve the problem again.
For example in the Wyndor problem, if the profit contribution of
product 1 changes to 5, sensitivity analysis shows the current solution
remains optimal.
• Uncertainty about LP parameters. In the Wyndor problem for
example, if the capacity of plant 1 decreases to 2, the optimal solution
remains a weekly rate of 2 doors and 6 windows. Thus, even if
availability of capacity of plant 1 uncertain, the company can be fairly
confident that it is still optimal to produce a weekly rate of 2 doors and
6 windows.
 Does the shadow price always have an
economic interpretation?
• Not necessarily

• For example,there is no economic interpretation

for dual variables associated with ratio constraints
 Glass Example
• x1 = # of cases of 6-oz juice glasses (in 100s)
• x2 = # of cases of 10-oz cocktail glasses (in 100s)
• x3 = # of cases of champagne glasses (in 100s)

max 5 x1 + 4.5 x2 + 6 x3 ($100s)

s.t 6 x1 + 5 x2 + 8 x3  60 (prod. cap. in hrs)
10 x1 + 20 x2 + 10 x3  150 (wareh. cap. in ft2)
x1  8 (6-0z. glass dem.)
x1  0, x2  0, x3  0

(from AMP and slides from James Orlin)

• Z* = 51.4286
Decision Variables
• x1 = 6.4286 (# of cases of 6-oz juice glasses (in 100s))
• x2 = 4.2857 (# of cases of 10-oz cocktail glasses (in 100s))
• x3 = 0 (# of cases of champagne glasses (in 100s))
Slack Variables
• s1* = 0
• s2* = 0
• s3* = 1.5714 Complementary
Dual Variables optimal slackness
• y1* = 0.7857 conditions
• y2* = 0.0286
• y3* = 0
• Consider constraint 1. 6 x1 + 5 x2 + 8 x3  60 (prod.
cap. in hrs)
• Let’s look at the objective function if we change the
production time from 60 and keep all other values the same.

Production Optimal difference

hours obj. value
60 51 3/7 The
dual
61 52 3/14 11/14
/shadow
62 53 11/14 Price is
63 53 11/14 11/14 11/14.
 More changes in the RHS

Production Optimal difference The

hours obj. value shadow
64 54 4/7 11/14 Price is
65 55 5/14 11/14 11/14 until
production
66 56 1/11 * = 65.5
67 56 17/22 15/22
 What is the intuition for the shadow price staying
constant, and then changing?

• Recall from the simplex method that the

simplex method produces a “basic feasible
solution.” The basis can often be described
easily in terms of a brief verbal description.
The verbal description for the optimum basis for the
glass problem:

1. Produce Juice Glasses and

cocktail glasses only
2. Fully utilize production
and warehouse capacity

z = 5 x1 + 4.5 x2 x1 = 6 3/7 (6.4286)

6 x1 + 5 x2 = 60 x2 = 4 2/7 (4.2857)
10 x1 + 20 x2 = 150 z = 51 3/7 (51.4286)
The verbal description for the optimum basis
for the glass problem:
1. Produce Juice Glasses and
cocktail glasses only
2. Fully utilize production and
warehouse capacity
z = 5 x1 + 4.5x2
6 x1 + 5 x2 = 60 + 
10 x1 + 20 x2 = 150
For  = 5.5,
x1 = 8, and the
constraint x1  8
becomes binding.
x1 = 6 3/7 + 2/7
x2 = 4 2/7 – /7
z = 51 3/7 + 11/14 
 How do we interpret the intervals?
• If we change one coefficient in the RHS, say
production capacity, by  the “basis” remains
optimal, that is, the same equations remain
binding.
• So long as the basis remains optimal, the shadow
prices are unchanged.
• The basic feasible solution varies linearly with.
If  is big enough or small enough the basis will
change.
 Illustration with the glass example:
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 (prod. cap. in hrs)
10 x1 + 20 x2 + 10 x3  150 (wareh. cap. in ft2)
x1  8 (6-0z. glass dem.)
x1  0, x2  0, x3  0

The shadow price is the “increase” in the optimal value per

unit increase in the RHS.
If an increase in RHS coefficient leads to an increase in
optimal objective value, then the shadow price is positive.
If an increase in RHS coefficient leads to a decrease in
optimal objective value, then the shadow price is negative.
 Illustration with the glass example:
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 (prod. cap. in hrs)
10 x1 + 20 x2 + 10 x3  150 (wareh. cap. in ft2)
x1  8 (6-0z. glass dem.)
x1  0, x2  0, x3  0

Claim: the shadow price of the production capacity

constraint cannot be negative.
Reason: any feasible solution for this problem remains
feasible after the production capacity increases. So, the
increase in production capacity cannot cause the optimum
objective value to go down.
 Illustration with the glass example:
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 (prod. cap. in hrs)
10 x1 + 20 x2 + 10 x3  150 (wareh. cap. in ft2)
x1  8 (6-0z. glass dem.)
x1  0, x2  0, x3  0

Claim: the shadow price of the “x1  0” constraint

cannot be positive.
Reason: Let x* be the solution if we replace the constraint
“x1  0” with the constraint “x1  1”. Then x* is feasible
for the original problem, and thus the original problem has
at least as high an objective value.
 Signs of Shadow Prices for
maximization problems
• “  constraint” . The shadow price is non-negative.

• “  constraint” . The shadow price is non-positive.

• “ = constraint”. The shadow price could be zero

or positive or negative.
 Signs of Shadow Prices for
minimization problems
• The shadow price for a minimization problem is the “increase” in the
objective function per unit increase in the RHS.

• “  constraint” . The shadow price is non-positive.

• “  constraint” . The shadow price is non-negative

• “ = constraint”. The shadow price could be zero

or positive or negative.

• Please answer with your partner.

 The shadow price of a non-binding constraint is 0.
“Complementary Slackness.”
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 (prod. cap. in hrs)
10 x1 + 20 x2 + 10 x3  150 (wareh. cap. in ft2)
x1  8 (6-0z. glass dem.)
x1  0, x2  0, x3  0

In the optimal solution, x1 = 6 3/7.

Claim: The shadow price for the constraint “x1  8” is zero.

Intuitive Reason: If your optimum solution has x1 < 8, one

does not get a better solution by permitting x1 > 8.
 Is the shadow price the change in the
optimal objective value if the RHS
increases by 1 unit.

• That is an excellent rule of thumb! It is true

so long as the shadow price is valid in an
interval that includes an increase of 1 unit.
 The shadow price is valid if only one right hand
side changes. What if multiple right hand side
coefficients change?

• The shadow prices are valid if multiple

RHS coefficients change, but the ranges are
no longer valid.
Reduced Costs
 Do the non-negativity constraints
also have shadow prices?
• Yes. They are very special and are called
reduced costs?

• Look at the reduced costs for

– Juice glasses reduced cost = 0
– Cocktail glasses reduced cost = 0
– Champagne glasses red. cost = -4/7
 What is the managerial interpretation of
a reduced cost?
• There are two interpretations. Here is one of them.

• We are currently not producing champagne glasses. How

much would the profit of champagne glasses need to go up
for us to produce champagne glasses in an optimal solution?

• The reduced cost for champagne classes is –4/7. If we

increase the revenue for these glasses by 4/7 (from 6 to 6
4/7), then there will be an alternative optimum in which
champagne glasses are produced.
 Why are they called the reduced costs?
Nothing appears to be “reduced”
• The reduced costs can be obtained by
treating the shadow prices are real costs.
This operation is called “pricing out.”
 Pricing Out
max 5 x1 + 4.5 x2 + 6 x3 ($100s) shadow price
s.t 6 x1 + 5 x2 + 8 x3  60 ……11/14
10 x1 + 20 x2 + 10 x3  150 ……1/35
1 x1  8 …….0
x1  0, x2  0, x3  0

Pricing out treats shadow prices as

though they are real prices. The
result is the “reduced costs.”
 Pricing Out of x1
shadow price
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 ……11/14
10 x1 + 20 x2 + 10 x3  150 ……1/35
1 x1  8
…….0
x1  0, x2  0, x3  0
5
Reduced cost of x1 = - 6 x 11/14
- 10 x 1/35
- 1 x0
= 5 – 33/7 – 2/7 = 0
 Pricing Out of x2
shadow price
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 ……11/14
10 x1 + 20 x2 + 10 x3  150 ……1/35
1 x1  8
…….0
x1  0, x2  0, x3  0

4.5
Reduced cost of x2 = - 5 x 11/14
- 20 x 1/35
- 0 x0
= 4.5 – 55/14 – 4/7 = 0
 Pricing Out of x3
shadow price
max 5 x1 + 4.5 x2 + 6 x3 ($100s)
s.t 6 x1 + 5 x2 + 8 x3  60 ……11/14
10 x1 + 20 x2 + 10 x3  150
……1/35
1 x1  8
x1  0, x2  0, x3  0 …….0

6
Reduced cost of x3 = - 8 x 11/14
- 10 x 1/35
- 0 x0
= 6 – 44/7 – 2/7 = -4/7
 Can we use pricing out to figure out
whether a new type of glass should be
produced? shadow price
max 5 x1 + 4.5 x2 + 7 x4 ($100s)
s.t 6 x1 + 5 x2 + 8 x4  60 ……11/14
10 x1 + 20 x2 + 20 x4  150 ……1/35
1 x1  8
…….0
x1  0, x2  0, x4  0
7
Reduced cost of x4 = - 8 x 11/14
- 20 x 1/35
- 0 x0
= 7 – 44/7 – 4/7 = 1/7
 Pricing Out of xj
shadow price
max 5 x1 + 4.5 x2 + cj xj ($100s)
s.t 6 x1 + 5 x2 + a1j xj  60
……y1
10 x1 + 20 x2 + a2j xj  150
……….. ……y2
………. + amjxj = bm
………
x1  0, x2  0, x3  0
……ym

Reduced cost of xj = ?
 Brief summary on reduced costs
• The reduced cost of a non-basic variable xj is the
“increase” in the objective value of requiring that
xj >= 1.
• The reduced cost of a basic variable is 0.
• The reduced cost can be computed by treating
shadow prices as real prices. This operation is
known as “pricing out.”
• Pricing out can determine if a new variable would
be of value (and would enter the basis).
 Summary
• The shadow price is the unit change in the optimal
objective value per unit change in the RHS.
• The shadow price for a “ 0” constraint is called the
reduced cost.
• Shadow prices usually but not always have economic
interpretations that are managerially useful.
• Non-binding constraints have a shadow price of 0.
• The sign of a shadow price can often be determined by
using the economic interpretation
• Shadow prices are valid in an interval.
• Reduced costs can be determined by pricing out
 Reduced Costs
• The reduced cost of a variable x is the shadow
price of the “x  0” constraint. It is also the
negative of cost coefficient for x in the final
tableau.

• Suppose in the previous example that we required

that x3  1? What is the impact on the optimal
objective value? What is the resulting solution?

By the previous slide, the impact is -4/7.

 More on reduced costs
• In a pivot, multiples of constraints are
added to the cost row.

• We will use this fact to determine explicitly

how the cost row in the final tableau is
obtained.
 Implications of Reduced Costs
• Implication 1: increasing the cost coefficient
of a non-basic variable by  leads to an
increase of its reduced cost by .
 Implications of Reduced Costs
• Implication 2: We can compute the
reduced cost of any variable if we know the
original column and if we know the
“prices” for each constraint.
FACT: We can
compute the
reduced cost of a
new variable. If
the reduced cost is
positive, it should
be entered into
the basis.
• Every tableau has “prices.” These are
usually called simplex multipliers.

• The prices for the optimal tableau are the

shadow prices.
 Quick Summary
• Connection between shadow prices and reduced
cost. If xj is the slack variable for a constraint,
then its reduced cost is the negative of the shadow
price for the constraint.

• The reduced cost for a variable is the negative of

its cost coefficient in the final tableau
Sensitivity Analysis
Computer Analysis
 The Computer and Sensitivity Analysis

• If an LP has more than two decision variables, the

range of values for a rhs (or objective function
coefficient) for which the basis remains optimal cannot
be determined graphically.

• These ranges can be computed by hand but this is often

tedious, so they are usually determined by a packaged
computer program. MPL and LINDO will be used and
the interpretation of its sensitivity analysis discussed.
• Note: sometimes Excel provides erroneous results
 MPL – Sensitivity analysis info

c1 cost
Reduced
Dual or Shadow is the amount the
prices are the objective function
amount the coefficient for
optimal z-value variable i would
improves if the have to be
rhs of a Dual variables increased for
constraint is there to be an
increased by one b2
alternative
unit (assuming optimal solution.
no change in
basis). More later…
 MPL – Sensitivity analysis info

Allowable ranges
c1 (w/o changing basis)
for the x1 coefficient
(c1) is:
0  c1  7.5

Allowable range (w/o

b2 changing basis) for
the rhs (b2) of the
second constraint is:
What about c2? And b1 and b3? 6  b2  18
Lindo Sensitivity Analysis

Allowable ranges – in
terms of increase and
decrease
(w/o changing basis)
for the x1 coefficient
(c1) is:
0  c1  7.5
 The Computer and Sensitivity Analysis
• Consider the following maximization problem. Winco sells
four types of products. The resources needed to produce one
unit of each are:
Product Product Product Produc Availabl
1 2 3 t4 e
Raw 2 3 4 7 4600
material
Hours of 3 4 5 6 5000
labor
Sales price $4 $6 $7 $8
To meet customer demand, exactly 950 total units must be
produced. Customers demand that at least 400 units of product 4
be produced. Formulate an LP to maximize profit.
Let xi = number of units of product i produced by Winco.
• The Winco LP formulation:

max z = 4x1 + 6x2 +7x3 + 8x4

s.t. x1 + x2 + x3 + x4 = 950
x4 ≥ 400
2x1 + 3x2 + 4x3 + 7x4 ≤ 4600
3x1 + 4x2 + 5x3 + 6x4 ≤ 5000
x1,x2,x3,x4 ≥ 0
LINDO output and MAX 4 X1 + 6 X2 + 7 X3 + 8 X4
SUBJECT TO
sensitivity 2) X1 + X2 + X3 + X4 = 950
analysis 3) X4 >= 400
4) 2 X1 + 3 X2 + 4 X3 + 7 X4 <= 4600
example(s). 5) 3 X1 + 4 X2 + 5 X3 + 6 X4 <= 5000
END
Reduced cost LP OPTIMUM FOUND AT STEP 4
is the amount the OBJECTIVE FUNCTION VALUE
objective function 1) 6650.000

coefficient for VARIABLE VALUE REDUCED COST

variable i would X1
X2
0.000000
400.000000
1.000000
0.000000
have to be X3 150.000000 0.000000
X4 400.000000 0.000000
increased for
there to be an ROW
2)
SLACK OR SURPLUS
0.000000
DUAL PRICES
3.000000
alternative 3) 0.000000 -2.000000
4) 0.000000 1.000000
optimal solution. 5) 250.000000 0.000000

NO. ITERATIONS= 4
 RANGES IN WHICH THE BASIS IS UNCHANGED:

LINDO sensitivity
OBJ COEFFICIENT RANGES
analysis example(s).
VARIABLE CURRENT ALLOWABLE ALLOWABLE
COEF INCREASE DECREASE
Allowable range (w/o
X1 4.000000 1.000000 INFINITY
changing basis) for
X2 6.000000 0.666667 0.500000
the x2 coefficient
X3 7.000000 1.000000 0.500000
(c2) is:
X4 8.000000 2.000000 INFINITY
5.50  c2  6.667
RIGHTHAND SIDE RANGES
Allowable range (w/o ROW CURRENT ALLOWABLE ALLOWABLE
changing basis) for RHS INCREASE DECREASE
the rhs (b1) of the first 2 950.000000 50.000000 100.000000
constraint is: 3 400.000000 37.500000 125.000000
4 4600.000000 250.000000 150.000000
850  b1  1000
5 5000.000000 INFINITY 250.000000
 MAX 4 X1 + 6 X2 + 7 X3 + 8 X4
Shadow prices SUBJECT TO
2) X1 + X2 + X3 + X4 = 950
are shown in the 3) X4 >= 400
Dual Prices 4) 2 X1 + 3 X2 + 4 X3 + 7 X4 <= 4600
5) 3 X1 + 4 X2 + 5 X3 + 6 X4 <= 5000
section of END
LINDO output. LP OPTIMUM FOUND AT STEP 4

OBJECTIVE FUNCTION VALUE

Shadow prices 1) 6650.000
are the amount
VARIABLE VALUE REDUCED COST
the optimal z- X1 0.000000 1.000000
X2 400.000000 0.000000
value improves if X3 150.000000 0.000000
the rhs of a X4 400.000000 0.000000

constraint is ROW SLACK OR SURPLUS DUAL PRICES

2) 0.000000 3.000000
increased by one 3) 0.000000 -2.000000
unit (assuming 4) 0.000000 1.000000
5) 250.000000 0.000000
no change in
NO. ITERATIONS= 4
basis).
Interpretation of shadow prices for the Winco LP

ROW SLACK OR SURPLUS DUAL PRICES

2) 0.000000 3.000000 (overall demand)
3) 0.000000 -2.000000 (product 4 demand)
4) 0.000000 1.000000 (raw material availability)
5) 250.000000 0.000000 (labor availability)

Assuming the allowable range of the rhs is not violated, shadow (Dual) prices
show: $3 for constraint 1 implies that each one-unit increase in total demand
will increase net sales by $3. The -$2 for constraint 2 implies that each unit
increase in the requirement for product 4 will decrease revenue by $2. The $1
shadow price for constraint 3 implies an additional unit of raw material (at no
cost) increases total revenue by $1. Finally, constraint 4 implies any additional
labor (at no cost) will not improve total revenue.
Shadow price signs
1. Constraints with symbols will always have
nonpositive shadow prices.
2. Constraints with  will always have nonnegative
shadow prices.
3. Equality constraints may have a positive, a
negative, or a zero shadow price.
 Managerial Use of Shadow Prices
The managerial MAX 4 X1 + 6 X2 + 7 X3 + 8 X4
SUBJECT TO
significance of shadow 2) X1 + X2 + X3 + X4 = 950 raw
prices is that they can 3) X4 >= 400
material
4) 2 X1 + 3 X2 + 4 X3 + 7 X4 <= 4600
often be used to 5) 3 X1 + 4 X2 + 5 X3 + 6 X4 <= 5000
determine the END
labor
maximum amount a LP OPTIMUM FOUND AT STEP 4
manager should be OBJECTIVE FUNCTION VALUE
willing to pay for an 1) 6650.000
additional unit of a VARIABLE VALUE REDUCED COST
resource. Reconsider X1 0.000000 1.000000
X2 400.000000 0.000000
the Winco to the right. X3 150.000000 0.000000
X4 400.000000 0.000000
What is the most ROW SLACK OR SURPLUS DUAL PRICES
Winco should be 2) 0.000000 3.000000
3) 0.000000 -2.000000
willing to pay for 4) 0.000000 1.000000
additional units of raw 5) 250.000000 0.000000

material or labor? NO. ITERATIONS= 4

 Managerial Use of Shadow Prices
MAX 4 X1 + 6 X2 + 7 X3 + 8 X4
The shadow price for raw SUBJECT TO
material constraint (row 4) 2) X1 + X2 + X3 + X4 = 950
3) X4 >= 400
shows an extra unit of raw 4) 2 X1 + 3 X2 + 4 X3 + 7 X4 <= 4600
5) 3 X1 + 4 X2 + 5 X3 + 6 X4 <= 5000
material would increase END
revenue $1. Winco could
LP OPTIMUM FOUND AT STEP 4
pay up to $1 for an extra
OBJECTIVE FUNCTION VALUE
unit of raw material and be 1) 6650.000
as well off as it is now.
VARIABLE VALUE REDUCED COST
X1 0.000000 1.000000
Labor constraint’s (row 5) X2 400.000000 0.000000
shadow price is 0 meaning X3
X4
150.000000
400.000000
0.000000
0.000000
that an extra hour of labor
ROW SLACK OR SURPLUS DUAL PRICES
will not increase revenue. 2) 0.000000 3.000000
So, Winco should not be 3)
4)
0.000000
0.000000
-2.000000
1.000000
willing to pay anything for 5) 250.000000 0.000000

an extra hour of labor. NO. ITERATIONS= 4