Show the effects on the number of firms

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The Internet is affecting holiday shipping. In years past, the busiest shipping period was Thanksgiving week. Now as people have become comfortable with e-commerce, they put off purchases to the last minute and are more likely to have them shipped (rather than to purchase locally). In December 2004, FedEx handled a 40% increase in packages over the previous year (Pia Sakar, "Shippers Snowed Under," San Francisco Chronicle, December 21, 2004, D1, D8). FedEx, along with Amazon and other e-commerce firms, has to hire extra workers during this period, and many regular workers log substantial overtime hours (up to 60 a week).

a. Are a firm's marginal and average costs likely to rise or fall with this extra business? (Discuss economies of scale and the slopes of marginal and average cost curves.)

b. Use side-by-side firm-market diagrams to show the effects on the number of firms, equilibrium price and output, and profits of such a seasonal shift in demand for e-retailers in both the short run and the long run. Explain your reasoning.

Reference no: EM131345735

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