The correct option is D Both statements 1 and 2 are true but statement 2 is not the correct explanation of statement 1.
The atmospheric pressure decreases with altitude. This is because with altitude, the depth of the air column decreases and also the density of the air decreases.
Since, pressure surrounding the balloon at high altitude is lesser than the pressure inside it, its size increases.
The balloon is made of stretchable materials so that it can easily be stretched when the pressure surrounding it decreases.
However, the reason for increase in size of the balloon is not the stretchable material of the balloon but it is the decrease in atmospheric pressure.
Therefore, the correct option is (b).