Step 1: Understanding the Concept:
Mutual inductance ($M$) relates the flux linked with one coil due to the current in another: $\Phi_1 = MI_2$.
Step 2: Detailed Explanation:
Let current $I_2$ flow through the large outer coil. The magnetic field at the center is $B_2 = \frac{\mu_0 I_2}{2r_2}$.
Since $r_1 \ll r_2$, this field is approximately uniform over the area of the small coil.
The flux $\Phi_1$ linked with the small coil is $B_2 \times A_1$:
$$\Phi_1 = \left( \frac{\mu_0 I_2}{2r_2} \right) \times (\pi r_1^2)$$
Comparing this to $\Phi_1 = MI_2$, we find $M = \frac{\mu_0 \pi r_1^2}{2r_2}$.
Therefore, $M \propto \frac{r_1^2}{r_2}$.
Step 3: Final Answer:
The correct option is (c).