OpenCirrus619,
Was one of the possible answers 1,500'?
This would have been put there to give "confirmation" to a wrong initial quick answer/guess.
Although some people might think the wording was designed to entrap, I think it is an excellent single question to confirm someone's knowledge of cloud formation.
Remembering that this is a PPL level question:
ELR = 2 Deg C is completely irrelevant and put there to test that you know that is the case.
A parcel of air (even slightly) warmer than its surroundings will be less dense and hence start to rise.
As it rises it will expand and it is this expansion that cools it.
It will cool at the DALR which, as Low Level Pilot has said, is 3 Deg C per 1,000' - and they are expecting you to know this (it is not an open book exam).
The temperature difference given between the surface (25C) and the Dew Point (22C) is 3 Deg C - therefore the base of any cloud will start to form at a height of 1,000'
Which makes:
Correct answer: C - 1000 ft