Impossible to vary square wave FREQUENCY output based on a PWM input?

Thanks for the explanation @chrisknightley - I'm not experienced with ESC's, but I have read what you said about them. Yes, it makes sense. So my question to OP still stands: what kind of resolution is desired for reading the 1~2ms pulse width from the RC? In principle it's a sufficiently slow signal to allow for decent results by simply measuring the pulse width using an ATMega etc. If nothing much else happens in the sketch besides this and outputting a PWM signal, even polling from the loop and counting time using micros() is likely to give sufficient resolution and no interrupts or timers are needed to measure the pulse width of the incoming signal.