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What is meant by shadow price?

Shadow price is the value assigned to changes in the quantity of scarce resources available normally measured in terns of contribution. If more critical scarce resource becomes available then the feasible regional would tend to expand and this means that optimal point would tend to move outward away from the origin thus earning more contribution. This increase in the contribution is the shadow price which is measured on the per unit of scarce resource basis.

Management can use shadow price as measure of how much they would be willing to pay to gain more of scarce resource. It represent the maximum they should be willing to pay for more scarce resource over and above the normal price subject to any non financial issues that may be present.

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