The correct answer is (b) decrease their size because they are not fulfilling their purpose.

This is the correct answer because with the increase in transaction cost and keeping the remaining variables fixed, there will be an increase in the variable cost for the firm. It will lead to an increase in the per-unit cost of production and thus a reduction in firm profits. Thus the firm will reduce its size to cover the increased transactional cost and in an attempt to reduce the overall cost per unit of production.