Till now no question has been asked directly on Arden's theorem.
This question can be solved using both Arden's theorem OR by making DFA using relation given among Xo, X1, X2. Actually, a DFA can also be represented in terms of outgoing arrow(right linear grammar) or incoming arrow(Left linear grammar). so first convert outgoing arrow representation into DFA, which will look like this....
The question is asking about "by which set of strings(Regular expression) given in options we can accept it through Xo".
It means consider Xo initial state and try to reach the final state which is X2 because it accepts epislon symbol.
Now try to generate regular expression by state elimination method and you get the option C.
same can be done for X1 and X2 also. I have tried these using Arden's method and state elimination both. and both give the same answer.