When viewed from the side, how does the pencil's image appear?
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Imagine an object inside water. An observer looks at it from above. The light rays emerging from the object hit the air-water boundary and bend away from the normal following the snell's law . According to which, when a light ray travels from a denser medium to a rarer medium, bends away from the normal.
The image of the object can be located by intersecting the two refracted rays. The above diagram shows the image is nearer to the surface than the object. Hence, whenever an object placed inside the water is seen from the top, its image appears to be shifted towards the surface.
The same phenomenon occurs when we dip a pencil inside the water. The portion which is inside the water appears shifted towards the surface and the pencil appears bent.