Consider an optimization model with a number of resource constraints. Each indicates that the amount of the resource used cannot exceed the amount available. Why is the shadow price of such a resource constraint always zero when the amount used in the optimal solution is less than the amount available?

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Mathematics

Winston Navarro

27 March, 12:50

Consider an optimization model with a number of resource constraints. Each indicates that the amount of the resource used cannot exceed the amount available. Why is the shadow price of such a resource constraint always zero when the amount used in the optimal solution is less than the amount available?

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Leslie Baker · Answer 1

Shadow pricing refers to the practice of accounting the prince of securities not on their assigned market value (as might be expected) but by their amortized costs. This can also be considered an "artificial" price assigned to a non-priced asset or accounting entry.

In this optimization model, we find a number of resource constraints which limit the changes to the resources. It is expected that these resources would not exceed the amount allocated for each particular constraint. The shadow price of a resource constraint would be zero in this example because the amount used would be less than the amount available. This means that it can fit within the established parameters, and therefore, would not need to be assigned a shadow price.