Which of the following is a characteristic of the 'Habit-Formation' models of consumption?
A. Utility depends only on current consumption
B. Only permanent income matters
C. Habits are irrelevant for saving behaviour
D. Current utility depends on current consumption relative to a habit stock formed by past consumption
Answer: Option D
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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