ExpertMedium2 marksMultiple Choice
ACCA · Question 03 · Decision-making techniques
Section A
GlobalRelief, an NGO, distributes two types of emergency kits: Standard and Medical. The limiting factor is the specialized labor hours required to pack them. The shadow price of one specialized labor hour has been calculated as $15.
What does this shadow price of $15 represent?
Section A
GlobalRelief, an NGO, distributes two types of emergency kits: Standard and Medical. The limiting factor is the specialized labor hours required to pack them. The shadow price of one specialized labor hour has been calculated as $15.
What does this shadow price of $15 represent?
Answer options:
A.
The total cost of one additional hour of specialized labor.
B.
The maximum premium above the standard rate the NGO should pay for one extra hour of specialized labor.
C.
The standard hourly rate currently paid to the specialized laborers.
D.
The reduction in total contribution if one emergency kit is not produced.
How to approach this question
Recall the definition of shadow price in linear programming/limiting factor analysis. It represents the extra contribution generated by one more unit of the scarce resource.
Full Answer
B.The maximum premium above the standard rate the NGO should pay for one extra hour of specialized labor.✓ Correct
The shadow price is the additional contribution that would be earned if one more unit of the limiting factor became available. Consequently, it represents the maximum premium (over and above the normal cost) that an organization should be willing to pay for one extra unit of the scarce resource.
Common mistakes
Confusing shadow price with the total cost of the resource or the standard rate.
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