How is the shadow price determined in a linear programming solution?
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The shadow price is determined in a linear programming solution as the dual variable associated with the constraint, calculated during the simplex method or other LP solution techniques, representing the change in the objective function value per unit change in the constraint's right-hand side.
The shadow price is determined by:
- Solving the linear program to find the optimal solution.
- Identifying binding constraints at that solution.
- Calculating the dual prices associated with those constraints.
- Interpreting the values as the change in the objective function for a one-unit increase in the constraint.
This quantifies the value of additional resources.