Opportunity cost-OR techniques

Slideshow Transcript

1. Slide 1: Opportunity cost-an application of mathematical programming • It is also known as shadow prices. Shadow price or scarce resource is the increase in the value of objective function which would be achieved if one or more unit of the resource was available. • Shadow prices can provide guidance to decision makers. • If some one offers the decision maker the additional resources at a price less than the shadow price it is always beneficial. LEARNING OBJECTIVES • Discover how to identify the shadow prices and penalty costs from the solution of a linear programming problem. • Understand the role these prices and costs play in post-optimality analysis. • Assess the effectiveness of your team in maximizing learning. Shadow Prices • The shadow prices for a Linear Programming problem are the solutions to its dual. The ith shadow price is the change in the objective function resulting from a one unit increase in the ith coordinate of b. A shadow price is a