Why is nitrogen gas used to prevent oxidation in bags containing foods such as chips?

The correct option is: "Nitrogen gas inhibits oxidation by replacing oxygen."

Explanation:
Food products like potato chips contain oils and fats. When these fats and oils come into contact with oxygen in the air, they undergo a chemical reaction called oxidation. Oxidation causes the fats to spoil, leading to rancidity, which ruins the taste, smell, and crispness of the food.
To prevent this, food packaging uses a process called nitrogen flushing. Nitrogen gas ($N_2$) is an inert (unreactive) gas under normal conditions because of the strong triple covalent bond holding the nitrogen atoms together. When bags of chips are filled and sealed, nitrogen gas is pumped in to flush out and replace the oxygen. Without oxygen present in the bag, the oxidation process cannot occur, thereby keeping the food fresh for a much longer period.