Ice melting in a glass?

Think about what happens when you freeze a bottle of water. Does the ice take more or less space? So when the ice melts the effect will be the inverse. The stone has not changed, only it's position in the glass. So.....

I've been trying to find an explanation for why the answer is D.

I agree, though I'm not sure how this explains the water level remaining the same at first.

When I only consider the ice, I would expect the level to remain the same. More water in the glass would cause the level to rise but this effect is cancelled by the smaller volume of ice that displaces water. That's how I would explain the first part.

In the second part, does the stone have no effect on the water level? Or is it the ice only that causes the water level to fall?

Thanks!

While the ice with the stone in it is floating, it displaces a volume of water whose mass equals the combined mass of the ice and stone. As the ice melts, the volume of water displaced decreases, but is exactly balanced by the increased amount of water from the melted ice, so the water level remains constant. At a certain point, once enough ice had melted that the average density of the remaining ice and stone equals the density of the water, the ice will start to sink, displacing a volume of water equal to the combined volume of the ice and stone, but as noted, the average density of the ice and stone is now the same as the density of water, so the displaced volume is also the same and the water level unaffected. However, now the submerged ice continues to melt, becoming water, with a higher density, hence a lower volume, so the water level now falls.