Final answer:
In the short run, an increase in fixed costs will not affect the output of a competitive firm, as output decisions are made based on where P = MR = MC. The correct option is C) No change in output.
Step-by-step explanation:
When competitive firms and a competitive market are in long-run equilibrium, an increase in fixed costs for the firms will not affect the output of a typical firm in the short run. In the short run, output decisions are based on marginal cost (MC) and marginal revenue (MR), and not on fixed costs.
The firms will continue to produce the quantity where P = MR = MC. However, it should be noted that the firms' economic profits will be decreased as the higher fixed costs will raise the average cost (AC).
If the fixed costs increase enough such that the new AC exceeds the market price (P), the firm may start incurring losses, but the output will not change immediately. In the long-run, firms may exit the market, which will affect the industry supply and hence market prices, but in the short term, output remains unchanged.