Oops, I didn't even read all your Q's.
Regarding the rest....
It says "working in stockinette stitch," so odd rows should be knitted, even should be purled.
Increase at the very edge, or one or two stitches in if you want to have a neater edge for easier seaming. Totally personal preference. The first SNB book has a nice feature on what increasing on the edge looks like using a couple of different techniques.