Explain with the help of a labelled ray diagram, why a pencil partly immersed in water appears to be bent at the water surface. State whether the bending of pencil will increase or decrease if water is replaced by another liquid which is optically more dense than water. Give reason for your answer.

A pencil partly immersed in water appears to be bent at the water surface because of the refraction of light which takes place when light rays pass from the tank of water into air. 

In the figure given below, the portion $BO$ of the pencil $AO$ is immersed in water and it appears to be bent at point $B$. A ray of light $OC$ coming from the lower end $O$ of the pencil passes from water to air and gets refracted away from the normal in the direction $CX$. Another ray $OD$ gets refracted along with in the direction $DY$. The two refracted rays, $CX$ and $DY$, when produced backwards, appear to meet at a point $I$. And, point $I$ is nearer to the water surface than point $O$. Thus, a virtual image of the end $O$ of the pencil is formed as point $I$. So, human eye at position $E$ sees the end $O$ of the pencil at $I$, so the pencil appears to be bent.