 Solution

Decreasing the source diameter increases spatial optical coherence and moves the illumination towards the coherent on-axis limit. Here the grating frequency is onlyThe zero and first orders are comfortably within the pupil for on-axis illumination. Reducing an extended source can prevent some off-axis source points from losing diffraction orders at the pupil edge, and can therefore increase the grating modulation, or leave it approximately unchanged if the relevant orders were already fully passed. It need not give a universal numerical increase: higher orders, source shape, defocus and optical aberrations matter for a binary grating.

The resist's $\gamma$ and critical modulation $M_c$ in part (i) are material/process properties and do not change merely because the source becomes smaller. What may change is part (ii)'s comparison between the actual image modulation and $M_c$. If the improved image exceeds about 0.667, an exposure window opens; the source information alone does not establish a new numerical value.