We do let my mom believe what she wants, but a lot of times she believes her husband is her dad. That is where we draw the line. When we correct her she has a fit and won't let go of it and wants to go to the YMCA. I am afraid to agree that he his her dad, I don't know where it will lead.
My grandmother, whose husband died 20 years before she went to assisted living, had a man who sort of resembled her husband - he was white and thin, and that's about it - and she called him Herschel, her former husband's name. Mr. X answered to Herschel, even though his name was something like John. His wife had been Mary many years in the past, as was my grandmother. He sweetly kissed Mary on the forehead every night when he dropped her off at her room. They were comforted by each other's presence, even if they did not know who the other person "really" was. The important thing to them is that their loved one was with them by their side, even if we did not see that same vision.
Don't correct your grandma. Speak to the dad here, and let him know that if he can just go along with the story, that helps, but if something extra is called for, he can say, oh no, I'm his son, he just stepped out and he'll be back in a minute. She'll be happier. This is not "LYING" in the Biblical sense, this is treating a patient to keep them manageable and happy.
Arm yourself with all the information you can about this disease so you won't be surprised of other situations in the future. Scroll down to the bottom of the page to the blue area.... click on ALZHEIMER'S CARE where the website has a lot of excellent articles. Once you are reading an article, keep scrolling down pass the other links to read the whole article. There is a store house of information.