Week 7

DISCUSSION 1

What does the shadow price reflect in a maximization problem? Please explain
How do the graphical and computer-based methods of solving LP problems differ? In
what ways are they the same? Under what circumstances would you prefer to use the
graphical approach?

What does the shadow price reflect in a maximization problem? Please explain.

The marginal value in combination with an additional unit of resource reflects the shadow
price in a maximization problem. The delta between the original profit and the profit after on
unit is analyzed reflects the shadow price in a product related scenario. The best example that
I can relate to my personal experience is in BUS 499, which utilized Capstone software for
business management. We saw the pros and cons of an additional unit throughout the process
of running a business and managing inventory ad resources. The most interesting part to me
was how the employee hours reflected when additional shifts were added for more production
resources.

How do the graphical and computer-based methods of solving LP problems differ? In

what ways are they the same?

The graphical method utilizes two variables and computer-based method utilizes several
variables, which makes it more complex in nature. They both achieve the same result of data
analysis for decision making purposes but I prefer the appearance of the graphical method
due to its ease of presentation for upper management discussions.

Under what circumstances would you prefer to use the graphical approach?

I would use the graphical approach when trying to debate the desire of additional production
and how that affects the bottom line for the company. The data will provide the answer to the
question and the presentation will help the listeners understand the direction we should take. 

DISCUSSION 2

How does sensitivity analysis affect the decision making process? How could it be used
by managers?

How does sensitivity analysis affect the decision making process?

Sensitivity analysis affects the decision making process by implementing parameter changes
on the optimal solution. The changes can be related to certain or uncertain data possibilities,
which can allow the management team to run different scenarios based on what they
anticipate. The sensitivity analysis allows for focus on the primary factors in the model,
which provided a weighted type of data management.
How could it be used by managers?

I believe that management can use the sensitivity analysis to weigh different possibilities
throughout a long process of decision making possibilities. The can focus on certain areas
and then shift the focus as the values permit. This depends on the desired outcome of the
analysis and the being utilized but I see this as something that can evolve based on the
answers derived throughout the process. I think I would use this tool more efficiently by
drilling down on issues as the weight of each is reviewed.

DISCUSSION 3

In many ways, shadow prices are far more important results of an LP model then the
optimal solution. Explain. Make sure that your answer provides context to the nature
and utility of shadow prices.

According to Taylor (2011), the shadow price is defined as “the marginal economic value of
one additional unit of a resource.” (p. 135).  In a LP model, a shadow price is, in effect, the
highest price you would be willing to pay for a single additional unit.  The shadow price
provides a look at the fiscal feasibility of increasing products with variations in demand for
the given product.

References

Taylor, B. W. (2011). Introduction to management science, (2011 custom Ed.). Boston, MA:
Pearson Learning Solutions.