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The answer in the solution is b. My confusion is that adding word to a block will reduce Miss Rate and not Miss Penalty. So shouldn't the answer be c, i.e. only S2 is correct?

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Well technically, A miss Penalty only occurs when there is a cache miss, therefore, if more words are put in one cache block it will reduce the cache misses and hence reduce the miss penalty.

Although i get your confusion, you might think they are talking about the AMOUNT of penalty, but this is not the case, the question says "reduces penalties" meaning reduction in NUMBER of penalties.
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