For some unknown (to me) reason, the OS now recognizes the .mpkg properly and when selecting open it launches the installer (this is after 4/5 reboots).
This means that the correct icon is now shown, and when ctrl-clicking on the icon in the contextual menu "Open with" now points to the default 'Installer'. The reason why it did not do before this I don't know. In any case, as suggested a package file can also be installed by selecting "System/Library/CoreServices/Installer", or the installer command via the terminal.
Remember not to confuse the system command 'install' with 'installer' - they are totally different.
So I tried both approaches and the terminal gave the following:
ronBook:Optional Installs ronanoc$ sudo installer -pkg "Optional Installs.mpkg" -target /Developer
Password:
installer: Package name is Optional Installs
installer: Installing at base path /
installer: The install was successful.
However the installer did not actually install the package and terminated very quickly. Perhaps it is because the developer tools for xcode were already installed in the same path and the command did not differentiate, but gave a 'success' command response all the same. I would think this message is incorrect, as in any case the command returned much too quickly.
Now back to the GUI, and it did not install correctly.
"The following install step failed: run postinstall script for CHUD.Contact the software manufacturer for assistance."
There is a discussion on this error here:
http://discussions.apple.com/thread.jspa?messageID=5645479
Upon deleting the /Developer folder and reinstalling, it solves the problem.