I am really confused with the concept of cloud computing. for example if we have the physical systems processor with dual core processor, can i add a quad core or octa core processor as a VM to the physical system. If yes, please give the clarifications and how will it effect the performance of the physical system.
Effects with multi core processors
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You are asking about overcommitting the CPU. Eucalyptus will allow you to have more Instances running then the number of cores would allow, but I am not aware of any hypervisor that will allow you to have more cores than physically presents on a single instance. QEMU should do it, but that's emulated (ie slow).