Give an example that shows what happens to economic profits when firms enter a monopolistically competitive industry.

What will be an ideal response?

Examples will vary, but should show a thorough understanding of what happens when firms enter a monopolistically competitive industry. For example, let’s say the ping-pong market is earning large profits because of the increased popularity of the game. Soon more firms want to enter this industry and start producing ping-pong tables and paddles. Gradually, the increased production of ping-pong equipment will reduce the demand for each individual firm and thereby reduce profits. This process will continue until the industry reaches zero economic profits. Also, the demand becomes more elastic because buyers have more substitutes to choose from.