Technically in a set you can't have repeated values, which is why GMAT stats questions which permit repeated values always talk about "lists" of numbers, or "data sets" (which can have repeated values). So here, when you use Statement 2, you don't need to use the property that "If x is in S, then 1/x is in S" to prove that you have another '1' in the set -- you already know '1' is in the set, and there can only be one '1' in a set. The only question is, reading this, "If both x and y are in S, then so is x + y", whether x and y can represent the exact same value from the set. If so, then when 1 is in the set, so is 1+1 and so is thus 2+1, but if not, the set could just be {1}. Because of the word "both", I'd be inclined to think that x and y need to be different values, but there's no unambiguous answer to that question.
So really we're just left to guess what the question writer meant. Bunuel has certainly correctly interpreted the intentions of the question writer, but the wording of the question doesn't convey those intentions properly. There are official questions (rare ones) that test a similar concept that have none of the issues that this question has, and those might be worth looking at, but this question is not.