> . . . if you select "show better performing ads more" or ad optimize or whatever it's called, are Google showing the best ads more of the time in terms of CTR or conversion % or a mixture of the two? <
Google looks only at the "effective CPM" that it earns from advertising, so it will never look at your conversion rate or profitability. Instead, it looks only at the CTR (Click-Through Rate) in deciding which of several ads to display.
I'm not sure whether Google's algorithms make any effort to identify any "cross-effects" of ad variations; that is, if you have two ad variations and your main competitor also has two ad variations, and the performance of your ads is different depending on which of the competitor's ads are shown, I don't know whether Google attempts to determine which of the two ad pairs work best together.
But it's always important to recognize that the algorithms behind Google AdWords look almost exclusively at the "revenue generated per pageview." (Google does have some overriding "relevancy" algorithms that may block a more-profitable ad from being shown if it would make the search results appear significantly less relevant to a consumer.)
Google does not use your conversion or ROI/ROAS data when choosing which ads to display.
Suppose you have two ads:
(1) one ad draws a 1.0% CTR with a 10% conversion rate (10 conversions per 10,000 adviews),
(2) the second ad draws a 1.2% CTR with a 1% conversion rate (1.2 conversions per 10,000 adviews).
Google will show the first ad more often, even though the second ad is MUCH more profitable for your company. It's up to you to monitor ad performance and disable the first ad, in this example.