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Microsoft Certified: Azure Administrator Associate · Microsoft
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If you do a bit of a research you will find out that the answer is actually D. Dankho is right but he is not explaining his logic or knowledge. Basically, inheritance do not work if you apply the license to "nested" group. This means that if you apply to Group 2, licenses will not be automatically inherited by Group 3. However, Group 1 is not "nested", which means that the licenses will propagate to all other groups, regardless if these are direct member of Group 1 or not.
Changed my mind to B. I thought my logic is correct, but I am not conviced now...
"Group-based licensing currently does not support groups that contain other groups" here: group1 is containing group2, group2 contains group3. so, group2 & group 3 are nested groups. so licensing not support for group1 (contain other group). " If you apply a license to a nested group, only the immediate first-level user members of the group have the licenses applied" if apply for nested group2, license is effective for only users in group2, and not effective for group3.