In how many different ways can the ATM serve a customer who gives 500 rupee notes as her preference?

It has been given that the customer gives 500 rupee notes as her preferred denomination.
Therefore, the number of 500 rupee notes dispensed must be greater than the number of the notes of other denominations dispensed.

If Rs.3500 is dispensed as 500 rupee notes (7 notes), the remaining 1500 rupees should be dispensed using Rs.100 and Rs.200 notes. The minimum number of notes of other denomination required in this case will be 8 (7*200 + 1*100). Therefore, at least Rs.4000 should be dispensed as 500 rupee notes. 

Case (1):
Rs.4000 is dispensed using 500 rupee notes, 8 five hundred rupee notes will be dispensed. 
The remaining 1000 rupees cannot be fully dispensed as 100 rupee notes (since 10 notes will be required).
If 800 rupees is dispensed as 100 rupee notes, then 9 notes will be required to dispense 1000 rupees (8*100+200). 
Therefore, we can eliminate these 2 cases. 
If 600 rupees is dispensed using 100 rupee notes, then a minimum of 8 notes will be required to dispense 1000 rupees (6*100 + 2*200). Therefore, we can eliminate this case as well. 

If 400 rupees is dispensed using 100 rupee notes, then 7 notes will be required (4*100+3*200). This is a valid case.
If 200 rupees is dispensed using 100 rupee notes, then 6 notes will be required (2*100+4*200). This is a valid case. 
1000 rupees can be dispensed using 5 notes of Rs.200. 

Therefore, there are 3 valid cases. 

Case (2):
Rs.4500 is dispensed using 500 rupee notes. 9 five hundred rupee notes will be dispensed in this case. 
The remaining 500 rupees can be dispensed as 100 rupee notes ( 5 notes) or a combination of 100 rupee and 200 rupee notes.
200*a + 100*b = 500
'a' can take 0, 1, and 2.
Therefore, there are 3 valid cases.

Case (3):
5000 rupees is dispensed using 10 five hundred rupee notes. 
There is only 1 valid case. 

Total number of valid cases = 3+3+1 = 7. 
Therefore, 7 is the right answer.