Just imagine for a moment that iron arrows do double the damage and cost twice as much. You'd use half as many iron arrows as normal arrows, right? Well, let's pretend you do 100 damage with normal, 200 with iron. Against a monster with 500 health, you'd use 5 normal arrows, and 3 iron arrows. Net cost: 500 for normal, 600 for iron. In fact in this case, iron arrows would frequently be more expensive. But would they be worth it? Absolutely  you'd be killing things so much faster.
Now, while iron arrows do 50 damage and normal arrows only do 25, iron arrows certainly don't do double damage. That's already pretty obvious, but it's important to think about: nearly all the damage you do comes from your bow and your dexterity, but all the money you pay comes from arrows. Iron arrows only do a maximum of 25 extra damage, and that's a best-case scenario, but a good archer will be doing maybe 200 damage a hit, or more. So the effect of the arrows is actually very small compared to the overall damage.
Okay, but is it still worth it for that little bit of extra damage? Well, let's say an archer does a constant 250 damage with normal arrows, and thus a constant 275 damage with iron arrows. Against a snake, with 850 hit-points according to the item db, the number of hits to kill is: 3.4 with normal arrows; 3.1 with iron. Both of these would round up to four, because you can't shoot fractions of arrows. What's that? It takes exactly the same number of hits in the end to kill this snake, taking iron arrows at their best possible 25 extra damage! In fact, this isn't a very atypical case; I've found that there isn't much difference between iron arrows and normal arrows in practice, and I've been using normal arrows for a long time.
If you buy 5000 arrows (the amount I tend to buy when stocking up), you'll be spending 25000 for iron arrows, and 15000 for normal arrows  a difference of 10k. For that much, you could buy 20 iron or concentration potions. Would the extra damage given by iron arrows be equivalent to 20 iron or concentration potions, used judiciously?
Some people, though, use iron arrows because they feel they want to eke out as much damage as they can, and the money isn't as much of an issue. But unless you're going to be using iron and concentration potions continually, you're not doing as much damage as you could, so you're already compromising with respect to money versus power.
I personally keep a cache of iron arrows just in case I run out of normal arrows and I want to finish off a monster or get to some valuable drops before going back to buy more arrows. I also tend to use iron arrows when I'm using iron or concentration potions, just to eke out those few extra damage points, but I personally doubt this practice is really worth it.
Agree, or disagree? Anything else to add that I've forgotten / didn't take into account?
Anyway, good luck in the game; hope to see you killing snakes or skulls with me sometime
![Wink ;-)](./images/smilies/icon_wink.gif)
Edit (an update for skulls): I just felt like I should mention that skulls are a fairly different monster to others. There are two thoughts you could take for this: "I barely hit, so I want to do as much damage as possible when I do"; and "I barely hit, so I'm throwing away heaps of arrows that aren't even doing damage" (actually there's a third: "I'm so awesome that I hit every time", but I'm ignoring them). A miss should be considered a hit that does 0 damage. It does 0 damage no matter what arrow you're using, and its frequency is always the same. Combine that with the reduced damage that skulls take and you're barely adding any damage to your average hit, so the value-for-money of iron arrows is even lower than usual. It's probably better for mid-level archers (i.e. 50–70 or thereabouts) to go against mobs rather than harder enemies, because bows are less accurate and archers are on a "pay-per-hit plan".