Economic Interpretation of Dual, Shadow Price & Complementary Slackness Theorem

ANKIT CHOUDHARY 221024 APOORVA GUPTA 221033 AYESHA AHUJA 221036

Primal
We are starting a business selling two FORE insignia products: Sweaters and Scarves. Profits on each are Rs. 35 and Rs. 10 respectively. Each has a pre-bought embroidered crest sewn on it; We have 2000 crests in hand. Sweaters take four skeins of yarn, while scarves only take one, and there are 2300 skeins of yarn available. Finally, we have available storage space for 1250 scarves; we could use any of that space for sweaters, too, but sweaters take up half again as much space as scarves. What product mix maximizes revenue?

Crest Scarf Sweater 1 1

Yarn 1 4

Storage 2 3

Formulating the Problem

Let x be the number of sweaters and y the number of scarves made. We want to Max z = 35x + 10y

subject to
x + y 2000 4x + y 2300 (Crest Constraint) (Yarn Constraint)

3x + 2y 2500
x; y 0

(Storage Constraint)
(Non Negative Constraint)

Graphical Solution

Objective Function Value at Corner Points

z(0; 0) = 0

z(575; 0) = 20125
z(0; 1250) = 12500 z*(420; 620) = 20900

Notice one constraint is Non Binding

We should make 420 sweaters and 620 scarves.

Initial Table
Cj B.V S1 S2 S3 Cj-Zj CB 0 0 0 35 X 1 4 3 35 10 Y 1 1 2 10 0 S1 1 0 0 0 0 S2 0 1 0 0 0 S3 0 0 1 0 SOLUTION 2000 2300 2500 RATIO 2000 575 833.33

st 1

Iteration
Cj 35 X 0 1 0 0 10 Y 3/4 1/4 5/4 5/4 0 S1 1 0 0 0 0 S2 -1/4 - -35/4 0 S3 0 0 1 0 SOLUTION 1425 575 775 RATIO 1900 2300 1380

B.V S1 x S3 Cj-Zj

CB 0 35 0

Optimal Solution
Cj B.V S1 X Y Cj-Zj CB 0 35 10 35 X 0 1 0 0 10 Y 0 0 1 0 0 S1 1 0 0 0 0 S2 1/5 2/5 -3/5 -8 0 S3 -3/5 -1/5 4/5 -1 SOLUTION 960 420 620

What if...?

Suppose our business were suddenly given

one additional crest patch one additional skein of yarn one additional unit of storage space

How much would profits change?

One Additional Resource

Non Binding Constraint So no change in solution We'll make more sweaters and lesser scarves We'll make lesser sweaters and more scarves

Z=35*(0)+10*(0)=0
Additional Crest

Z=35*(0.4)+10*(-0.6)=8
Additional Yarn

Z=35*(-0.2)+10*(0.8)=1
Additional Storage

Shadow Price
In a linear programming problem in standard form, Shadow Price is the amount by which the optimal value of the objective function is improved (so that it increases the z value for a maximization problem and decreases the z value for a minimization problem) if the right hand side of constraint is increased by one unit and all other constraints remaining constant.

Z=35*(0)+10*(0)=0

Z=35*(0.4)+10*(-0.6)=8

Z=35*(-0.2)+10*(0.8)=1

Dual
Suppose an entrepreneur wants to buy our business's resources. What prices should be quoted for each crest? skein of yarn? Unit of storage? Suppose the entrepreneur quotes p for each crest patch, q for each skein of yarn, and r for each storage unit. Each sweater takes one patch, 4 skeins, and 3 storage units, so effectively p + 4q + 3r is bid per sweater. Likewise, p + q + 2r is bid per scarf.
Scarf Sweater

Crest
1 1

Yarn
1 4

Storage
2 3

Formulating the Problem

Dual Problem Primal Problem

Min z1 = 2000p + 2300q + 2500r subject to p + 4q + 3r 35 p + q + 2r 10 p, q, r 0 Where p= price of each crest q= price of each yarn r= price of unit storage space

Max z = 35x + 10y subject to x + y 2000 4x + y 2300 3x + 2y 2500 x; y 0 Where

x= Number of Sweaters y= Number of Scarves

Initial Table

Cj B.V A1 A2 CB M M

2000 p 1 1 20002M

2300 q 4 1 23002M

2500 r 3 2 25002M

0 S1 -1 0

0 S2 0 -1

M A1 1 0

M A2 0 1 SOLUTION 35 10 RATIO 35 10

Cj-Zj

Optimal Solution

Cj B.V q r Cj-Zj CB 2300 2500

2000 p -1/5 3/5 960

2300 q 1 0 0

2500 r 0 1 0

0 S1 -2/5 1/5 420

0 S2 3/5 -4/5 620 SOLUTION 8 1

Economic Interpretation

The values corresponding to p , q , r in the optimal table show the shadow prices i.e. the price that will be incurred when we use one more unit of crest, yarn and storage, respectively. If we employ one more unit of yarn, for example, the cost of using that one extra unit will be Rs. 8. This price is known as the Shadow Price.

This shadow price computed from the dual is same as the value of slack variables calculated from the optimal table of the primal
Thus, shadow prices are the solutions to the dual problem. Also, the payoff is the same in both the primal problem and the dual problem

Complementary Slackness Theorem

The principal of complementary slackness establishes relation between the optimal value of a primal variable in one problem with a slack or surplus variable of the dual problem

If at the optimal solution of the primal problem a primal constraint has a positive value of a slack variable the corresponding resource is not completely used up and must have a Zero Opportunity Cost. But if the value of slack variable is Zero in that constraint the entire resource is being used up and must have a positive opportunity cost. Therefore mathematical condition is
Primal Slack Variable x Dual Variable = 0

Thank You
FOR YOUR ATTENTION