1) At the moment we only support jpg and png. So a copy of your 1000s of avg 10MB (max worst case global image size average, probably lower). Which is fine.
2+3) Our motivation with single tier was simplicity. Simplicity of the homepage, simplicity of thinking while you read something before you hit that 'Try' button..
I am not sure if a general user thinks about our margins and I can be wrong, but I think we should try to match the value he gets + position ourselves regarding to competition. If somebody cares about margins the S3 prices are a pretty good general storage reference point ;-)
To be completely transparent, we currently think that with an unlimited account we shouldn't get much more than ~40GB of jpegs from a user over his lifetime ON AVERAGE. Once this is amortized across big enough number of users I doubt it will get much more than that. zenfolio.com has been around for many many years and they have an unlimited account for $50/year and cater to professionals with huge files (think a wedding photographer who uploads couple GBs each other weekend).
Our average target user is not a pro (we are not aspiring to be a portfolio website at the moment) but has photography as a hobby and wants a clean no-bulshit way to upload and share his photos across online and offline personas.
4) All server side, with aggressive caching and on-the-fly scaling. No scaling on the client.
5) Just a jpeg and png to simplify the pipeline in MVP, if we see an interest in other formats we will investigate. Would you like to see a support for jpeg2000? For upload or also for serving? At the moment, the browser support seems still weak.