ACCA Performance Management (F5) Certification Practice Exam

What is meant by 'shadow price' in resource allocation?

1. A fixed cost of resources

2. The price set by suppliers

3. The increase in value from one additional unit of a limited resource

4. The average cost of production

The correct answer is: The increase in value from one additional unit of a limited resource

In resource allocation, the term 'shadow price' refers to the concept that captures the value of one additional unit of a limited resource. It signifies the marginal benefit gained from using an additional unit of a resource, reflecting how much the overall value or output would increase if more of that resource were used. This is particularly important in decision-making and optimization scenarios, where understanding the true value of constrained resources helps managers make informed choices about how to allocate those resources efficiently. In contrast, options that refer to fixed costs, prices set by suppliers, or average costs of production do not encapsulate the dynamic nature of resource valuation that shadow pricing represents. Fixed costs represent expenses that do not vary with production levels, while the price set by suppliers dictates the market cost of goods, independent of their marginal value to the producer. Average costs of production relate to the total costs divided by output, failing to consider the incremental value that additional resources can generate. Thus, the concept of shadow pricing is crucial in identifying the true economic value of constrained resources when making decisions regarding their allocation.