The city council of Ottawa is studying consumer preferences between water (good 1) and all other goods (good 2). Economists have determined that the utility function describing these preferences is u=q1−−√+q2u=q1+q2, where q1q1 is the quantity of water consumed, and q2q2 represents all other goods. It is also known that consumers have positive demand for both goods (they don't consume only one good).
To provide relief, the city council issues a $1,000 cash grant to every household.
What will be the effect of this grant on the demand for water?
A
The demand for water will increase, as the additional cash allows consumers to afford more water.
B
The demand for water will remain unchanged because quasilinear preferences imply that only the substitution effect matters, not changes in income.
C
The demand for water will decrease since consumers will now allocate more money towards other goods.
D
The cash grant will lead to a small increase in water demand due to higher overall purchasing power.
E
The subsidy will cause consumers to shift their spending towards water, resulting in a higher demand.