Final answer:
Considering the water-soluble nature of the ligand and its effect on gene transcription, it likely binds to an external cell-surface receptor. Internal receptors usually bind hydrophobic ligands, while external receptors bind hydrophilic ligands and start signaling cascades indirectly affecting gene expression.
Step-by-step explanation:
A scientist observes that cells turn off transcription of a gene upon adding a small, water-soluble molecule, suggesting that this molecule serves as a ligand binding to a specific receptor. Considering the water-soluble nature of the ligand, and the fact that it affects gene transcription, the ligand likely binds to a(n) external cell-surface receptor. Internal receptors tend to bind hydrophobic ligands, which can go through the plasma membrane directly to influence gene expression within the cell nucleus. Cell-surface receptors, conversely, typically bind hydrophilic ligands and initiate a signaling cascade that influences the creation of a functional protein indirectly. Therefore, since the molecule in question is water-soluble, it cannot pass through the plasma membrane on its own and points to the ligand binding to an extracellular receptor on the cell surface, which then communicates the signal intracellularly to affect transcription.