Final answer:
When the NOFMTERR option is active, SAS uses the default $w. or w. format for character or numeric variables respectively and continues with program execution.
Step-by-step explanation:
When the NOFMTERR system option is in effect and SAS encounters a format it can't locate, the correct answer is: b. SAS substitutes the $w. or w. format and continues processing. The NOFMTERR option instructs SAS to handle missing formats without stopping the program execution.
Instead of generating an error that halts processing, SAS uses a default format based on the data type (character or numeric) to represent the data. For character variables, the default format is $w., and for numeric variables, it is w., with w representing the width of the variable.