In the short run, when the output of a firm increases, its average fixed cost

The correct answer is: A. Increases.

Average fixed cost (AFC) is a firm’s fixed cost per unit of output. It is calculated by dividing the firm’s total fixed cost (TFC) by its output (Q). In the short run, a firm’s fixed costs are constant, so AFC will decrease as output increases. However, as output increases, the firm will eventually reach a point where its variable costs begin to increase more rapidly than its fixed costs. This is because the firm will need to hire more workers and purchase more materials in order to produce more output. As a result, AFC will eventually start to increase.

Here is a brief explanation of each option:

• Option B: Average fixed cost decreases as output increases. This is because the firm’s fixed costs are spread out over a larger number of units of output.
• Option C: Average fixed cost remains constant as output increases. This is not possible, as the firm’s fixed costs are constant.
• Option D: Average fixed cost first declines and then rises as output increases. This is the correct answer, as explained above.