marginal_and_market_prices

marginal_and_market_prices - ORIE 3300/5300 Professor Bland...

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ORIE 3300/5300 Fall 2011 Professor Bland Marginal Prices versus Market Prices Part I: The Sausage Scenarios The significance of π * 1 given a market price μ 1 per ton of beef depends on how the ob- jective function coefficients c j on the products were determined. Specifically, it depends on how the cost of the 80 tons of beef is reflected in c 1 and c 2 . Where did the objective function coefficients c 1 = 20 and c 2 = 30 come from??? Two Scenarios: Scenario A. The cost of beef was not considered by Grandma’s accounting department when they calculated c 1 = 20 and c 2 = 30. Perhaps because we are maximizing total revenue, not profit, and each c j = revenue per unit from product j for j = 1 , 2. Why total revenue, not profit? Possibly because meeting the company’s revenue target for this period is more important to manage- ment in the short term. Or, perhaps the cost of beef was regarded to be a fixed, sunk cost. Grandma may have contracted to buy exactly 80 tons of beef at a fixed price. The contract prohibited
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This note was uploaded on 10/31/2011 for the course OR&IE 3300 at Cornell.

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marginal_and_market_prices - ORIE 3300/5300 Professor Bland...

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