1. Does the engine use the letter grade or a number that the letter grade merely approximates?  for instance, does a player receive a large boost when he goes from B+ to A-, or does he receive gradual boosts the entire way as he goes from 3.3 to 3.35...to 3.65 to 3.7?

2. Are there diminishing returns for IQ practice minutes above 25, as there are with other practice minutes?  Any idea how valuable, say, the 40th minute is compared to the 10th?

yes and yes. 
As for ratios of decline, I don't know, but the only time I go near 40 minutes is when there is nothing left...

ETA: yes, presumably to the first question, but mostly because, as a computer program, everything it values it does so in numbers. So I don't know what else it would do. Why they chose a letter grade representation I don't know...

well, using numbers doesn't mean IQ improvement has to be gradual.

IQ could go directly from 3.3 to 3.7 when it goes from B+ to A-, or it could move gradually with every practice

no I mean that I believe it is gradual.

Letter grade is just a graphical representation of the # behind the scenes.  IQ/FT shooting is a gradual numerical growth - for example, 80-84 (A-)/85-95(A)/96-100(A+).

They likely don't want us to figure out the exact formula for IQ growth, even though people like Iguana basically have it figured out.  Or maybe they just wanted to switch it up a bit, who knows.