My website is running quite well and serving lacks of pages on daily basis. We want to add one more web server to share load on server at heavy traffic times. Instead, can I go with Amazon Elastic Compute Cloud (EC2) or any other cloud service as an alternative solution.
In cloud server environment, need I to install multiple instances as traffic increases or a single instance can scale based on the traffic?
I would suggest Windows Azure
You're right in that you would have multiple instances that scale to meet traffic. With the Azure platform you would design your application into Roles (chunks of functionality), where they make sense to create multiples of, like a page that displays store contents should be highly scalable, whereas the login portion may not. Windows Azure already runs services for Microsoft like Xbox Live and their BPOS offerings, plus there are great tools to develop for the Azure Cloud. You can read more about cloud development at MSDN.
We are using EC2 for our ASP.NET app and it works very well. Simply select Win 2008 as OS when creating a new instance.