Introduction:
Mirage is a natural optical phenomenon that occurs due to the refraction of light. It creates the illusion of water or a mirror-like image in the distance, especially in hot deserts or on hot roads. In this phenomenon, light rays bend as they pass through layers of air with different temperatures, resulting in the appearance of an image that is not actually present.

Explanation:
To understand why mirage is formed, let's analyze each of the given phenomena and their relation to this optical illusion:

1. Terrestrial heating:
Terrestrial heating refers to the heating of the Earth's surface by the Sun. In hot deserts, the temperature of the sand or asphalt can rise significantly during the day. This creates a temperature gradient in the lower layers of the atmosphere.

2. Reflection of light:
Reflection of light occurs when light waves bounce off the surface of an object. While reflection plays a role in the formation of mirages, it is not the primary phenomenon responsible for creating the illusion.

3. Refraction of light:
Refraction of light is the bending of light rays as they pass through different mediums with varying optical densities. This bending occurs due to the change in the speed of light. In the case of a mirage, the hot air near the ground has a lower refractive index compared to the cooler air above it. As a result, the light rays from distant objects, such as the sky or a distant object, bend as they pass through the layers of air with different temperatures.

4. Diffraction of light:
Diffraction of light refers to the bending or spreading of light waves as they pass through an opening or around an obstacle. While diffraction is a phenomenon that occurs in the presence of obstacles, it is not directly related to the formation of mirages.

Formation of a mirage:
The mirage is primarily formed due to the phenomenon of refraction of light. As light rays pass from cooler air above to hotter air near the ground, they bend away from the normal, creating an inverted image. This bending of light causes the image of the sky or a distant object to appear as if it is coming from the ground, creating the illusion of water or a mirror-like surface.

Conclusion:
In conclusion, the formation of a mirage is primarily due to the refraction of light caused by the temperature gradient in the lower layers of the atmosphere. While terrestrial heating and reflection of light play a role in creating the conditions necessary for a mirage to occur, it is the refraction of light that is the key phenomenon responsible for the optical illusion. Hence, the correct answer is option 'c' - terrestrial heating and refraction of light.