When a firm increases its output and the average cost rises, this phase in the production process is shown as?

Decreasing Returns to Scale.

The correct answer is Option (1) → Decreasing Returns to Scale.

When a firm increases its output and the average cost rises, it means the firm is facing decreasing returns to scale. In this phase, the proportionate increase in inputs leads to a less than proportionate increase in output, making production less efficient and raising the average cost per unit.