The correct answer is option 'D', diagram factor.

Explanation:
In a steam engine, the ratio of actual indicated work to hypothetical indicated work is known as the diagram factor. It is a measure of the efficiency of the steam engine and indicates how well the engine is converting the energy from steam into useful work.

To understand the diagram factor, let's break down the different terms involved:

1. Actual Indicated Work:
The actual indicated work is the work done by the steam engine as measured by an indicator diagram. It represents the useful work output of the engine.

2. Hypothetical Indicated Work:
The hypothetical indicated work is the work that would be done by the steam engine if it operated under ideal conditions, with no losses or inefficiencies. It represents the maximum possible work output of the engine.

3. Diagram Factor:
The diagram factor is the ratio of actual indicated work to hypothetical indicated work. It is calculated by dividing the actual indicated work by the hypothetical indicated work.

Importance of the Diagram Factor:

The diagram factor provides a measure of the efficiency of the steam engine. A higher diagram factor indicates that the engine is operating more efficiently and converting a larger proportion of the energy from steam into useful work. On the other hand, a lower diagram factor indicates that the engine is less efficient and losing more energy due to various factors such as friction, heat losses, and mechanical inefficiencies.

By analyzing the diagram factor, engineers can identify areas of improvement in the steam engine design and operation. They can make adjustments to reduce losses and increase the overall efficiency of the engine. This can lead to cost savings, improved performance, and reduced environmental impact.

In conclusion, the diagram factor is the ratio of actual indicated work to hypothetical indicated work in a steam engine. It provides a measure of the engine's efficiency and is used to identify areas of improvement in the design and operation of the engine.