ACCA · Question 07 · Decision-making techniques
Section A
GreenFields Farm uses linear programming to determine the optimal mix of two crops (Wheat and Barley) to plant, given constraints on land and fertilizer. The optimal solution has been found, and the shadow price for fertilizer is calculated to be $15 per kg.
Which of the following best describes the meaning of this shadow price?
Answer options:
GreenFields Farm should sell its fertilizer if it can get more than $15 per kg.
The total cost of fertilizer in the optimal production plan is $15 per kg.
GreenFields Farm would be willing to pay up to a maximum premium of $15 per kg above the normal price for one additional kg of fertilizer.
If fertilizer supply decreases by 1 kg, the total revenue of the farm will decrease by $15.
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