The first answer is correct (A).
A theocracy is a system of government in which justifications of a religious nature guide the formation of power and its form of governance. Thus, all laws are based on religious principles and beliefs. In this context, the highest governing body is instituted in the hands of a political-religious chief, most often seen as a direct representative of some divine.
An example of theocracy is Iran, where the supreme leader is Ayatollah Ali Khamenei, figure above the president in the hierarchy.