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Shadow Price

The document discusses the relationship between a linear programming problem and its dual. It explains that the dual problem can be constructed from the primal by making the constraints and variables symmetric. The dual variables represent the shadow prices or worth of each constrained resource, while the dual objective is to minimize the total worth of the resources used. Optimal solutions to the primal and dual problems will have equal objective function values, representing profit equalling the worth of the resources used.

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Manish Rawat
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147 views12 pages

Shadow Price

The document discusses the relationship between a linear programming problem and its dual. It explains that the dual problem can be constructed from the primal by making the constraints and variables symmetric. The dual variables represent the shadow prices or worth of each constrained resource, while the dual objective is to minimize the total worth of the resources used. Optimal solutions to the primal and dual problems will have equal objective function values, representing profit equalling the worth of the resources used.

Uploaded by

Manish Rawat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Shadow Price

Duality
Economic Value
Linear Programming
Shadow Price or Duality

• In LP problem, dual is defined for various forms of primal


depending on the sense of optimization (maximization or
minimization), the types of constraints (≤, ≥, and = ) and the
sign of variables (nonnegative or unrestricted).

• Primal problem is expressed in standard form which is


defined as
n
• Maximize or minimize c x
j1
j j

n
• subject to  a ij x j  b i , i  1,2,..........m
j1

• where variables x j  0, j  1,2,.....n , include surplus and slack,


if any
Duality

• The standard form has three properties.

• All constraints are equations and nonnegative right-hand


side.

• All the variables are nonnegative.

• Sense of optimization may be maximization of minimization.

• Solution of dual problem can be obtained directly from the


optimal primal simplex tableau.

• Variables and constraints of the dual problem can be


constructed symmetrically from the primal problem as:
1. A dual variable is defined for each of the m primal constraint
equations.

2. A dual constraint is defined for each primal of the n primal


variables.

3. Left hand side coefficients of the dual constraint equal the


constraint (column) coefficients of the associated primal
variable. Its right hand side equals the objective coefficient of
the same primal variable.

4. The objective coefficients of the dual equal the right hand side
of the primal constraint equations.
Rules for formulation
Primal Variables
x1 x2   xj   xn
Dual
Variables c1 c2   cj   cn  
y1 a11 a12 a1j a1n b1
y2 a21 a22 a2j a2n b2
   
ym am1 am2   amj   amn bm
jth Dual Dual
constraint objective
Standard primal   Dual Problem
problem objective objective constraint variable sign
Maximization Minimization ≥ unrestricted
Minimization Maximization ≤ unrestricted
Economic Interpretation

• LP is treated as resource allocation model in which objective is to


maximize revenue or profit subject to limited resources.
• Primal Dual
n m
• Maximize z   Minimize
cjxj w   bi y i
j 1 i 1
n m
• subject to  a subject
x  b , ito 1,2,.......m
ij j i a yi  c j , j  1,2,.....n
ij
j 1 i 1
x j  0, j  1,2,...........n y i  0, i  1,2,...........m

• Here primal problem has n economic activities and m resources.

• Coefficient cj in primal, represents profit per unit of activity j.

• Resource i, whose maximum availability is bi, is consumed at the


rate of aij units per unit of activity j.
Economic Interpretation

• For any primal and dual solutions, values of objective


functions, must satisfy the following inequality:
n m
z   c jx j   bi yi  w
j1 i 1

• Equality holds when both primal and dual solution are


optimal.

• Here bi represents number of units available of resource i and


yi represent the worth per unit of resource i, it is also named
as dual prices, shadow prices or simplex multipliers.
Economic Interpretation

• Inequality z < w associated with any two feasible primal and


dual solutions is interpreted as (Profit) < (Worth of resources)

• This relationship says, so long as total return from all the


activities is less than worth of the resources, the corresponding
primal and dual solutions cannot be optimal.

• Optimality (maximum return) is reached only when the


resources have been exploited completely, which can happen
only when input (worth of resources) equals output (profit).
Primal: Reddy Mikks Dual: Reddy Mikks
Maximize z = 5x1+4x2 Minimize w = 24y1+6y2+y3+2y4
Subject to Subject to
6x1+4x2≤10x  0, j  1, 2, . . . n
. .
6y1+y2-y3≥5
x1+2x2≤6 4y1+2y2+y3+y4≥4
-x1+x2≤1 y1,y2,y3,y4≥0
x2≤2  
x1, x2>0  
Optimal solution Optimal solution
x1=3, x2=1.5, z=21 y1=0.75, y2=0.5, y3=y4=0,w=21
• Worth per unit of raw material, M1 is y1 = 0.75 (or $750 per ton),
whereas the raw material M2 is y2 = 0.5 (or $500 per ton).
• 3rd and 4th constraint, represent the market requirements, their dual
prices (optimal dual values) or worth per unit is zero, which
indicates that their associated resources are abundant.
Economic Interpretation

• Dual constraints can be interpreted by using result of Property I

• namely, at any primal iteration,


m

• (Objective coefficient of xj) =  a ij y i  c j


i 1

• Here cj represents profit per unit of activity j


m

• So the quantity  a ij y i in the equation with an opposite sign,


i 1
must stand for cost.
Economic Interpretation

• At the same time, given aij is the amount of resource i used by


activity j, the dual variables yi must represent the imputed cost
per unit of resource i
m

• Hence the quantity  a ij y i as imputed cost of all the resources


i 1
needed to produce 1 unit of activity j.

• In maximization optimality condition of the simplex method,


an increase in the level of an unused (nonbasic) mactivity j can
improve profit only if its objective coefficient  a ij y i  c j is
i 1
negative.
• (Imputed cost of used resources per unit of activity j) < (Profit
per unit of activity j )

• The maximization optimality condition also says that it is


economically advantageous to increase an activity to a positive
level if its unit profit exceeds its unit imputed cost.

• To represent imputed cost of used resources per unit of


activity j. The notation (zj –cj) is the objective coefficient of xj
in the simplex tableau and is often referred to as the reduced
cost of activity j.

• The use of (zj-cj) in the simplex computations is actually part


of the revised simplex method.

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