Q1: You get a total of 10 MB of RAM. 8 MB of FAST RAM and 2 MB of Chipmem.
Fast RAM will be used only by the CPU and Chipmem is used by the Chipset and CPU. Chipmem gives the chipset piority above the CPU. That's why your Amiga is very slow.
Q2: You can run OS 3.5 with kickstart 3.1. I also have a memory card with 4 MB of RAM. It runs nicely on your setup. If you like, you could even run OS 3.9 on your setup. It needs 6 MB of fast RAM to run. I tried it on my setup, but I got an out of memory with the backdrop.
