6. One of the hardest issues to understand is why manipulating prices as means of controlling short term undesirable market trends is dangerous and unpopular. This is what happens when price controls are used instead of encouraging demand and supply to alter. In the graph below, assume that $2.50 is too high of a price. The options proposed include imposing a price ceiling of $2.00 (Pc). Explain why the market solution below as presented by the graph is much better than imposing a price ceiling at $2 to bring down the price. Answer: 3.5 3- S₁ 2.5 EX 2- 1.5- D₂ 0.5- D₁ 5 T 10 20 30 40 50 60 70 80 Exchange Rate of Peso Measured in U.S. Dollars/Peso Quantity of Pesos Traded on Foreign Exchange markets

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.