What is the economic interpretation of shadow price in resource allocation?
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The shadow price represents the marginal economic value or opportunity cost of a resource, indicating the change in the objective function's value resulting from a one-unit increase or decrease in the resource's availability.
The economic interpretation of shadow price in resource allocation is that it represents the marginal value of a resource. It indicates how much the objective function (such as profit or cost savings) would improve with a one-unit increase in that resource. A higher shadow price suggests that the resource is highly valuable and scarce, while a zero shadow price indicates that the resource is abundant and not limiting. This helps decision-makers prioritize resource allocation effectively.