Although the ability to echolocate has only been proved experimentally for a few odontocete species, the anatomical evidence - the presence of the melon, nasal sacs and specialized skull structures - suggests that all dolphins have this ability.
The dolphin is able to generate sound in the form of clicks, within it's nasal sacs, situated behind the melon. The frequency of this click is higher than that of the sounds used for communication and differs between species. The melon acts as a lens which focuses the sound into a narrow beam that is projected in front of the animal.
When the sound strikes an object, some of the energy of the soundwave is reflected back towards the dolphin. It would appear that the panbone in the dolphin's lower jaw receives the echo, and the fatty tissue behind it transmits the sound to the middle ear and thence to the brain. It has recently been suggested that the teeth of the dolphin, and the mandibular nerve that runs through the jawbone, may transmit additional information to the dolphin's brain.
As soon as an echo is received, the dolphin generates another click. The time lapse between click and echo enables the dolphin the evaluate the distance between it and the object; the varying strength of the signal as it is received on the two sides of the dolphin's head enable it to evaluate direction. By continuously emitting clicks and receiving echoes in this way, the dolphin can track objects and home in on them.
The echolocation system of the dolphin is extremely sensitive and complex. Using only it's acoustic senses, a bottlenose dolphin can discriminate between practically identical objects which differ by ten per cent or less in volume or surface area. It can do this is a noisy environment, can whistle and echolocate at the same time, and echolocate on near and distant targets simultaneously - feats which leave human sonar experts gasping.
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