The correct ruling is (B). You make 2 paddock capacity upgrades (on the same paddock) but only pay the second upgrade cost, rather than both.
Example: I have the Builder and I'm upgrading my Allosaurus exhibit from size-2 to size-4. It only takes 1 worker at the Tool Bench and I only pay $4 (instead of the usual 2 workers and $7 this would normally cost).
This is correct.