Final answer:
The sentence that properly applies capitalization rules is option C: My favorite short story is "The Call of Cthulhu" by H.P. Lovecraft.
Step-by-step explanation:
The sentence that properly applies capitalization rules is option C: My favorite short story is "The Call of Cthulhu" by H.P. Lovecraft. In this sentence, the first letter of the first word is capitalized, as well as the first letter of the proper noun 'Cthulhu'. Additionally, the rest of the sentence follows standard capitalization rules, with only the first letter of 'H.P.' being capitalized since it is an acronym. The other options either capitalize unnecessary words or fail to capitalize proper nouns.
Learn more about Capitalization rules in English grammar