To test if your browser is proeprly applying PAC files, create the following simple PAC File.

function FindProxyForURL(url, host)
{
  var direct = "DIRECT";
  alert ("using PAC");
  return direct;
}

When this PAC File is applied in the browser, it should cause a window every time the PAC file is run (initially for every object, but the results are cached). If it doesn't, then you're probably not specifiying the PAC file properly in the browser.

Applying a PAC file:

For IE:
In Tools -> Internet Options -> Connections -> LAN Settings, Uncheck "Automatically Detect Settings"
    Check "Use automatic configuration script"
    Set Address as: file://C:\PROXY.PAC

For Firefox:
In Tools -> Options -> Network Tab -> Settings, Uncheck all the top 4 options
Check the bottom one 'Automatic Proxy Configuration URL'
Set Address as: file:///c:/proxy.pac