The Cut-Off Grade and the Theory of Extraction

Jeffrey A. Krautkraemer

Canadian Journal of Economics, 1988, vol. 21, issue 1, 146-60

Abstract: The cutoff grade problem arises when technological infeasibility or high cost prevents an extractive firm from exploiting a heterogeneous deposit in strict sequence. The optimal cutoff grade varies directly with anticipated changes in present value price. A stochastic price path induces a higher (lower) initial cutoff grade if the marginal profit function is concave (convex). The optimal response to an unanticipated price change depends on the difference between the rates of change in price along the new and original price paths and whether or not the firm can increase extractive capacity, including the life of the mine.

Date: 1988
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