Though I do not have CS5, I would assume that the Rendering of the Work Area (can be constrained with the WAB, Work Area Bar) should work, just as it has in previous versions. If it has been changed, maybe some kind soul will correct me.
Also, with any change, like Effects, or new Transitions, for the best possible playback, that altered portion will require a new Render.
Remember that Rendering is just for playback. Some Projects make it to completion with no Rendering, but some have segments (especially Keyframed Effects) that get Rendered dozens of times.
Yes, you can still render the work area if desired.
Re-rendering only sections that change; generally true; improved in CS5 in the area of nesting.
Does the mercury playback engine provide for decent real time, no need to render the timeline, performance when you are using 1920x1080 AVCHD files as input? Or is it only good from the "output" end of things, after the files have been decoded. Let's say you have a 4 core, core i7 CPU (3.2ghz), 12 GB of ram and a GTX 285 card. Assume most of the project has 1 video track, and you have 1-3 effects per clip, and one transition between each clip (cross dissolve or fade to black etc). With those sorts of projects can you expect reasonable real time performance without the need to render the timeline from such a system running CS5?
Decoding the video codec of you clips is done by cpu; applying accelerated effects can be done on the gpu. So you still need a beefy system for highly compressed formats like avchd. But if they play with no effects, adding accelerated affects; they should still play smoothly using gpu.
I dont use avchd myself, so I cant give you a personal experience. my goal is to avoid avchd. The consensus Ive seen is; CS5 handles avchd better because of sw improvements, 64 bit, usage of more mem. So a faster system improves avchd editing more than a faster system would in cs4.