Detail

This is a case of an increase in a variable cost since the firm only needs petroleum when it is manufacturing plastic knobs. As shown in the graph below, when a variable cost increases there are several immediate short run effects even within individual firms.

From the firm's point of view, price increases, it reduces output and incurs losses. Notice that among all the possible choices given below only one even has price increasing.

16. Suppose that the price of petroleum increases. In the short run within individual firms in the plastic knob industry we would observe that:

price increases, output falls, and firms incur losses.
price falls, output increases, and firms incur losses. Price falls and output increases in the short run only when demand falls or when production costs fall. Neither of these would lead to short run losses, both would lead to short run profits.
price falls, output increases, and firms earned zero profit. Price falls and output increases in the short run only when demand falls or when production costs fall. Neither of these would lead to zero profits in the short run.
price stayed unchanged, output falls, and firms incur losses. Price stays unchanged only when fixed costs alone change, and in this case output also stays unchanged. Based on the explanation given for the use of petroleum it must be a variable cost.
price stayed unchanged, output rises, and firms incur losses. Price stays unchanged only when fixed costs alone change, and in this case output also stays unchanged.