Final answer:
Competition in an industry does not typically drive returns on capital towards perfect competition levels; rather, in monopolistically competitive markets, entry and exit of firms tend towards zero economic profits in the long run.
Step-by-step explanation:
Competition in an industry does not necessarily drive rates of return on invested capital up towards the level of perfect competition, which is where the answer to the student's question leans towards False (B). In a monopolistically competitive industry, firms earning economic profits will indeed attract new entrants, which increases competition and drives profits down. Conversely, if firms are suffering losses, some will exit the market, which lowers competition and allows the remaining firms to increase their profitability. Ultimately, this dynamic movement tends towards a state where economic profits are zero, a situation known as normal profit, where the return on capital is equivalent to its opportunity cost.