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9.4: The Shadow Value
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- If a firm faces constraints on its behavior, how can we measure the costs of these constraints?
- When an input is fixed, its marginal value is called a shadow value.
- A shadow value can be negative when an input is fixed at too high a level.
- Every constraint has a shadow value. The term refers to the value of relaxing a constraint. The shadow value is zero when the constraint doesn’t bind.
- The effect of a constraint on terms that are optimized may be safely ignored in calculating the shadow value.