The formula I suggest is essentially intrinsic value plus value added by labour, which is more realistic and would be easier to feed into economic models. The current system makes no sense at all from an economic standpoint.
Ahh now I get your point.
In that case however, I am afraid that the effect of the formula that you proposed would still be a heavy nerf to precious metals, even if it was not your intention. Because only the labour term is affected by the quality modifier. That means the difference in value between a masterwork platinum statue and a masterwork microcline statue would become negligible.
I would also like to point out that art prices are not a rational sum of material and labour cost, but based on intangible subjective factors.. most of the valuable goods in DF are artwork.
Edit to respond to your edit, about steel:
I disagree when you say steel is plentiful. First off, a majority of embark sites have no iron, so in the DF world iron is really scarce and fought over.
Second, the goblins can't make steel, they haven't figured it out. It is a cutting-edge technology in this world. It also requires two more ingredients, flux and coal, both of which may be hard to get locally even if you do have iron.
If we are looking at game balance rather than realism, please keep in mind that steel is not renewable and takes a lot of dwarf power and preparation to produce. Look at the value of renewables like masterwork pig tail socks and masterwork hen egg roast. Both of these are available in infinite amounts on any embark site. They are easily enough to buy out all merchants, once you have an experienced clothier / cook.
Really a player who uses steel to make statues is already wasting his resources, big time. It does not need to be further discouraged.
Ps I am sorry for the blunt tone, somehow that always happens on the internet. It is an interesting discussion.