After you have studied Economics in the News on pp. 306–307, answer the following questions.

a. Explain the distinction between the short run and the long run, and identify when Amazon would want to make each type of decision.

b. Explain constant returns to scale. Why does Amazon reap constant returns to scale in the example with the assumed costs on p. 307?

c. Amend the graph in Fig. 2 on p. 307 to illustrate Amazon’s ATC1 and LRAC curves if it experiences economies of scale.

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In 2020, Amazon's 1,298,000 employees processed around 1 billion orders from its 295 fulfillment centers. Two of Amazon's fulfillment centers are in Arizona in Goodyear and Tucson. The number of orders processed by Amazon increases every year, and the firm must decide how to meet the growing demand for its service. Amazon can increase the number of orders it fills either by increasing the output of its existing centers or by building more centers. Amazon has decided that the least-cost way of increasing output in Arizona is to open a new technology-intensive center in Goodyear. Amazon could have processed a greater number of orders by hiring more workers and installing more robots in Tucson. But the Tucson center would have become congested and the cost of filling an order would have increased. By building the Goodyear center, Amazon can increase its output at a production cost that is the same as in its other centers. We don't know Amazon's costs, but we can gain insight into the firm's decisions with an example using assumed costs. Figure 1 graphs the (assumed) marginal cost (MC) and aver- age total cost (ATC) curves for Amazon's Tucson fulfillment center. This center can fill 300,000 orders per day at an average total cost of $1 an order. (This cost doesn't include the cost of the items shipped.) If Amazon increased the output of this center to above 300,000 orders per year, its marginal cost would increase sharply, which would increase average total cost. Amazon can avoid the higher average total cost by build- ing its new Goodyear center. Figure 2 shows Amazon's average total cost with a new center. Amazon will pay the same wages and employee benefits and use the same technologies in Goodyear as in Tucson, so the new Goodyear center has the same average total cost curve as the Tucson center. The Tucson center's average total cost curve is ATC, so when the new center is opened, Amazon can fill 600,000 orders at a cost of $1 an order on ATC. By building a new center, Amazon is expanding along its long-run average cost curve (LRAC). At small outputs, the average total cost of filling an order is lower at one center than at two. And at large outputs, the average total cost is lower at two centers than at one large center. In Fig. 2, Amazon experiences constant returns to scale (an assumption, but not unlikely).