The correct answer is option 3: Both statements 1 and 2 are correct.

Statement 1 states that if a piece of a bar magnet is broken into two equally long pieces, the pieces will not lose their magnetic properties. This is true because the magnetic properties of a magnet are intrinsic to the material it is made of. Breaking a magnet into smaller pieces does not affect the individual magnetic properties of each piece. Each piece will still have a north and south pole, and will exhibit magnetic behavior.

Statement 2 states that magnetic properties of a substance lie at the atomic level. This is also true because magnetism is a result of the alignment of atomic magnetic dipoles within a material. The atoms or molecules in a substance have magnetic dipole moments, which can align in a coordinated manner to create a magnetic field. This alignment of atomic or molecular magnetic dipoles determines the magnetic properties of a substance.

Therefore, both statements are correct. Breaking a magnet does not affect its magnetic properties, and the magnetic properties of a substance are determined by the alignment of atomic or molecular magnetic dipoles.