Final answer:
It is true that indivisible inputs cause the average production cost to increase as output decreases, because their fixed cost is allocated over fewer units. This is different from variable costs like labor and raw materials, which fluctuate with the level of production output.
Step-by-step explanation:
The statement that an indivisible input is an input that cannot be scaled down to produce a smaller quantity of output is true. Indivisible inputs, such as specialized machinery or equipment, represent fixed costs in the production process. When a production process requires the use of indivisible inputs, the average cost of production indeed increases as output decreases. This occurs because the fixed cost of the indivisible inputs is spread over a smaller quantity of output, leading to a higher average cost per unit.
On the other hand, variable costs are associated with variable inputs like labor and raw materials, which adjust based on the level of output. As a firm produces higher quantities of output, it typically requires more of these variable inputs, leading to an increase in variable costs. However, this is a separate consideration from the cost implications of indivisible inputs on average costs.