Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1] Briefly explain under what conditions would the total cost curve be horizontal.
2] Shortly discuss what characteristic does Amazon Go have that keeps fixed costs closer to total costs than its competitors in the grocery sector.
3] Briefly explain why Amazon created its Go stores.
Transcribed Image Text:Amazon in 2018 has introduced Amazon Go in selected US cities. Amazon Go is a new kind of store which is fully automated
and with no checkout required. A collection of cameras and sensors pair the customer's selection to their Amazon account,
registered at the shop door via a smartphone app.
Why has Amazon created Amazon Go? There may be many possible reasons, but we can use the analysis on costs done in
this chapter to provide a possible answer.
Without cashiers in the store, marginal costs are kept very low. For a normal convenience store, to serve an extra customer, it
requires some time (and cost) by cashiers. Amazon Go gets rid of that cost. By reducing the costs of manual labour Amazon
Go can become more competitive compared to other convenience stores that rely more on labour input.
Most of the costs in Amazon Go are therefore fixed. If most of the costs are fixed, then the average total cost follows closely
the average fixed cost. This means that average cost is decreasing with output. By selling more, average costs decrease and
profitability greatly increases. This is true for other convenience stores, of course, but to a lesser extent.
Finally, a peculiarity of the fixed costs of Amazon Go is that most of them are not sunk costs. The expenditure on R&D to
develop the technology used in Amazon Go stores can be used by other firms and in other industries. It has a re-sale value.
The same for the cameras and sensors used in the store.
Source: Adapted from Bloomberg (2018), 'Amazon Will Consider Opening Up to 3,000 Cashierless Stores by 2021', available
at: https://www.bloomberg.com/news/articles/2018-0419/amazon-is-said-to-plan-up-to-3-000-cashierless-stores-by-2021.
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