You definately have to INCREASE latency to reduce costs. As far as I 
understood, the sliders work like this:
min latency: once it is reached (=a request waits in queue for that time), 
app engine might start another instance (I don't know on what it bases the 
decision whether to actually do it)
max latency: once it is reached, app engine ALWAYS starts a new instance.

There are no free instances, at least not directly. Since you have 28 free 
instance hours per day, you can run one instance for free during all of the 
day though, and another one for a few hours. Or you can run 14 instances 
for 2 hours.

If you exceed the daily 28h-limit on a regular basis, you should absolutely 
get discounted instance hours since they are 0.5$ instead of 0.8$ (0.25 
instead of 0.4 right now). You have to calculate the cost of each unused 
discounted instance hour as 0.5$ and the cost of each full-price instance 
hour (which could have been a discounted unit) as 0.3$. Or in other words: 
It is better to buy 10 discounted hours too much than buying 20 too little.

This is my personal understanding of the matter. If I am wrong, please 
correct me.

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