Or rooms within rooms, for example a cage in a circus ring, a boat on a lake. What is the best way to do this?

A container object in a room which can be entered?
A room as a sub room with a direction into it?
An object and/or room object?

All seem to work, each with their own quirks. Which is best?

Also an object can also have object is a room option. Does this do anything other than allowing you to access the object in lists of rooms for example?

Thanks in advance.

In practice, the difference between objects and rooms is mostly arbitrary. Any object that the player is inside is treated like a room. The main difference between "Object", "Object and/or Room", and "Room" on an object is pretty much just which tabs show in the editor. I believe in 5.8 there's a new tickbox for "is a room", which just seems to put it in the list of rooms returned by AllRooms.

In this case, I'd suggest making it an Object/Room; so you have the tabs necessary to enter the description from inside and outside. You'll probably want to create in/out exits to let the player in. If the cage is a container, then you could have the exits check its isopen attribute if you want it to be openable or lockable.

Pretty much as I thought, thanks for the clarification.