Revisiting operating cost in resource extraction industries

A modified version of the Cobb-Douglas production function is proposed for simulating production costs in resource extraction models. The resulting average cost function is U-shaped with a wide bottom, and as such should be more representative of the economies of scale associated with bulk operations. It also possesses a minimum which is obtainable from the characteristics of the operations. The viability of the proposed cost function is demonstrated in a profit maximisation exercise constructed as a problem in optimal control, rendering results consistent with what could be seen in a real-world resource extraction operation with similar constraints.