Jim: Have a donut.
Steve: Don't mind if I do! [grabs honey cruller]
What exactly is Steve telling Jim here:
- Steve doesn't mind if he has a donut
- Steve warns Jim, lightly, not to mind if he takes a donut (Jim did offer, after all)
Jim: Have a donut.
Steve: Don't mind if I do! [grabs honey cruller]
What exactly is Steve telling Jim here:
Don't Mind If I Do was a catch-phrase popularised by Colonel Chinstrap in the radio programme It's That Man Again. It means "thank you very much, I am pleased to accept your kind offer".
It is chiefly used in accepting the offer of a drink (well, that's usually when I use it, anyway), but will do for any other small gift.
Beginning in 1910, and then especially by the late 40s, this phrase was a very popular British way of accepting an offer - meaning "Yes, please!"
[I've summarised the gist of the article in A Dictionary of Catch Phrases here.]
To me, it now sounds a bit quaint and old-fashioned, maybe even with a tendency towards lower class. But this is a purely personal impression.
Adding a little to the good information in the other answers...
I think key to seeing why the answer is "1" and not "2" (Steve warns Jim, lightly, not to mind) is to realize that there is an elided "I" at the beginning of the idiom. That "I" is often explicit. See e.g. the song
I entered the kitchen, 'twas cosy and bright
Soon a fine hearty supper, I put out of sight
Says she "Have a drop of the old mountain dew"
And me darlin', says I, I don't mind if I do
(http://www.shamrocksinthewind.com/lyrics_frolickn.html) The Rovers perform this song at http://www.youtube.com/watch?v=EKi00SVmLJ4
The other aspect to understanding the form of this idiom is British humorous understatement. "I don't mind", taken literally, is a very weak and modest affirmation. But it's understood as understatement for a stronger "I'd like that" or even "I'd love to", with humorous effect. I think, the greater the disparity between the literal and understood meanings, the funnier it is.