1)Well people pay that much because they can afford it, at least for the time being.
2)Your account is active right? or are the ads still to be approved? There are many reasons you might not see your listinings. Some of them are - 1)your daily budget might not be high enough to show your add all the time. 2)google will not show your ad 100% of the time, even with you daily budget high enough 3)your position might be much lower than what your looking at when your searching. 4)(hate this reason but the adword support always adds it in a response to this sort of question) Your language and location targeting setting might be different as compared to your search. There are a few other like inactive words, disapproved ads but I'm sure you are checking words that are running in your account.
You should try the ads diagnostic tool and see what results it gives you. You can always write to google and find out whats up.
"Why do people set their max bid to $3, $4, $5 per click? I'm pretty sure nobody converts that well I don't care if you giving out free gold."
Why do companies sell stuff lower than wholesale prices? Why do folks give away free products? It's called business. By doing this you establish the reputation of your company or brand. In this case, companies pay a lot to get the number one spot in Google, that's worth something. But remember that if folks set their maximum bid to $5, it doesn't mean they are actually going to pay $5. What they actually pay depends on many other things...