How could the team and other stakeholders know if a product backlog item is done?

Hi Nitin, Is this question from a third party practice exam? I don't recognize it as a Scrum.org style question. Be careful with third party exams as they may be outdated and/or incorrect. 

I am not aware of anything in the Scrum Guide that would support this answer/explanation. 

Some supporting sections from the Scrum Guide (Increment)...

The Definition of Done creates transparency by providing everyone a shared understanding of what work was completed as part of the Increment.

The moment a Product Backlog item meets the Definition of Done, an Increment is born.

What practice test(s) are you using?

1 is closer to what I would consider correct, but it's not how I would phrase it based on the Scrum Guide. No comparisons are necessary. The Definition of Done describes the state of a Product Backlog Item and/or the Increment when it is Done. This clear description of the state gives transparency to all stakeholders, including the Developers. The entire Scrum Team can create the Definition of Done, or build upon any organizational standards that may exist.

That answer could be true in some version of the Scrum methodology but it certainly is not true based upon the Scrum framework as described in the official Scrum Guide.

Be careful of third party practice tests.  They often reflect a misinterpretation of the Scrum framework. 

Thank you all for your explanation.

I was preparing for CSM and found this question in one of the practice test which I purchased. The group who created the practice test is adamant that PO will only decide.

The group who created the practice test is adamant that PO will only decide.

It can't be, because the PO isn't the one who is doing the development work and who can therefore make a commitment to achieving Done. The result will be a weak accountability for quality. For example, it seems no-one developing that test was truly accountable for ensuring it met the standard established in the Scrum Guide.

Make sense. Thank you Ian.

The group who created the practice test is adamant that PO will only decide.

Since the PO isn't responsible for development, they lack the authority to commit to getting the job done. Weak accountability for quality is the end effect. For instance, it appears that nobody was really responsible for making sure the test adhered to the criteria laid out in the Scrum Guide when it was being developed.