How does shadow price relate to marginal utility in Operations Research?
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In Operations Research, the shadow price of a resource represents its marginal utility, measuring the change in the objective function value resulting from a one-unit increase in the resource, indicating its incremental value or contribution.
Shadow price relates to marginal utility in Operations Research by both representing the additional benefit gained from an increase in resource availability.
- Shadow Price: Reflects the increase in the objective function (e.g., profit) from a one-unit increase in a binding constraint.
- Marginal Utility: Indicates the additional satisfaction or benefit derived from consuming one more unit of a good or resource.
Both concepts highlight the value of scarce resources. A higher shadow price indicates a higher marginal utility, suggesting that the resource is highly valued and essential for improving outcomes.