Ecology, Environment and Conservation Paper

APPLICATION OF THE THEORY OF INTEREST AND EXHAUSTION TO MINERAL INVESTMENT DECISIONS

Francis D. Udoh

Abstract

This paper presents some extensions of Fisher’s theory of interest and Hotelling’s fundamental economic theory of extraction of exhaustible resources as applied to the mineral firm. The optimal rate of depletion is applied to the operation of a single mine and the equilibrium rule by which the firm would allocate production to one period rather than another as a function of the rate of interest is described and what happens when the rate of interest rises is shown. Fisher opined that the fundamental rule for individual equilibrium is that, the amount borrowed or lent is always determined by the rule that the marginal time preference must be equal to the given rate of interest or expressing this geometrically, that the slope of the indifference curve at the chosen point must equal the slope of the interest line. The marginal return on investment will equal the market rate of interest and the amount of investment would be determined by a ranking of projects whose rates of return would be over the market rate. Given the diminishing marginal rates of return, the view of supply and demand is given by the supply or market rate of investment. Therefore, for the mineral firm to remain competitive, corporate managers will have to employ improved and systematic decision processes that will explicitly embody the mineral firm’s objectives and desired goals while taking into consideration the firm’s resource constraints.