Line \(AB\) has slope \(m = \frac{1 - 2}{2 - 1} = -1\), so its equation is:
\[
y - 2 = -1(x - 1) \Rightarrow x + y = 3
\]
Distance of centre \(C\) from this line is \(\frac{7}{\sqrt{2}}\), and \(C\) lies in the third quadrant, say at coordinates \((a, b)\).
Use distance from a point to a line: \(\frac{|a + b - 3|}{\sqrt{2}} = \frac{7}{\sqrt{2}} \Rightarrow |a + b - 3| = 7\)
So, \(a + b = -4\) (only valid in 3rd quadrant)
Now, center lies on the perpendicular bisector of \(AB\). Midpoint of \(AB = (1.5, 1.5)\), and slope of perpendicular = 1
So equation: \(y - 1.5 = 1(x - 1.5) \Rightarrow y = x\)
Solving: \(a + b = -4\) and \(b = a\) ⇒ \(2a = -4 \Rightarrow a = -2, b = -2\)
So center = \((-2, -2)\), radius = distance to \(A(1,2)\) = \(\sqrt{(3)^2 + (4)^2} = 5\)
Now, check if \(P(1, -2)\) lies inside the circle:
Distance to center = \(\sqrt{(1 + 2)^2 + (0)^2} = 3<5\)
Hence, point lies inside the circle.