Final answer:
Firms enter an industry when they know that in the long run economic profit will be zero because this scenario still entails a normal return on investment, sufficient to cover all opportunity costs. New entry occurs as long as firms can earn more than in their next best alternative, and continues until competitive dynamics drive economic profits down to zero.
Step-by-step explanation:
Firms may enter an industry even when they anticipate that in the long run economic profit will be zero. This scenario often occurs in monopolistically competitive markets. The reason is that a zero economic profit equates to a normal return on investment, meaning the firm's accounting profit is sufficient to cover the opportunity cost of all resources, including the capital provided by the firm's owners.
When firms in an industry are earning positive economic profits, entry of new firms occurs because these profits signify the possibility to earn more than in their next best alternative. As new firms enter, the increased competition tends to reduce prices and profits until only normal profits remain. Conversely, if firms are suffering losses, firms will exit the industry until losses are eliminated, and the remaining firms can earn a normal profit. Therefore, entry into an industry occurs up to the point where price equals average cost, resulting in zero economic profit but a normal rate of return on investment.