Thanks guys! But I'm still a little confused. Paul as you said that the force pulls it towards the centre, which other force keeps it from crashing into the centre? Also the answer states that "since the gravitation force of attraction between the earth and the satellites is always perpendicular to the satellites velocity, the speed of the satellite remains constant and therefore its change in kinetic energy is zero." I am not sure what that means either :-/
To keep an object travelling in a circular path, we need to have a force that is perpendicular to the direction that the object is travelling in, in order to change the direction that the object is moving in. Think of it this way, if you have a rock tied to the end of a string and you whirl it around you. To keep the rock moving in the circular path, you're applying a force towards you from the rock, as you're pulling on the string.
For the satellite to move in a circular orbit, we need this constant force towards the centre of the circle to be perpendicular. If it were not perpendicular then the speed would change as we would do work on the object, and well the balance of GPE and kinetic energy would be thrown out and so the height of the satellite would change, we would send it out of the circular orbit. If the speed is constant, then there is no change in kinetic energy, which for a circular orbit, GPE+K=constant, so the height wouldn't change either.
also why is it not possible to place a satellite in orbit so that it is always directly over Melbourne?
The only way to keep a satellite directly above a point on the earth is to put it in a Geostationary Orbit, where the period of the satellite matches that of the rotation of the earth, i.e. ther period will be one day. But the earth is spinning along an axis, so this orbit has to be above the equator, otherwise it will spin with the rotation of the earth, but it will be moving up and down the latitutudes of the earth (i.e. long N-S direction).
That wasn't the best explanation for it, but I hope it helps... would really help if I could draw orbit paths out on here..
EDIT: What I'm trying to get at with the last bit is say with the diagram below, we can have the first three options, but we can't have the fourth. If we were to have the satellite always stay above melbourne, then we would have to have the fourth option, but we cannot actually get the fourth option, as to keep the satellite moving in this path, we need the net force to be towards the centre of the circle, but the net force is towards the centre of the earth, which in that case is not in the centre of the circle. Hence we cannot have that path and so we cannot have a geostationary orbit that stays above melbourne.

EDIT2: Fixed diagram