Which of the following is a characteristic of the 'Habit-Formation' models of consumption?
A. Only permanent income matters
B. Habits are irrelevant for saving behaviour
C. Current utility depends on current consumption relative to a habit stock formed by past consumption
D. Utility depends only on current consumption
Answer: Option C
Solution (By JKSSB Mock Tests)
Habit-formation models allow current utility to depend on the deviation of current consumption from a habit level determined by past consumption, generating persistence in consumption growth.
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