Google doesn't have to know if a conversion has taken place. Google merely needs to estimate whether, based on data about the type of content, user time on site, etc., a conversion is likely to take place.
It might be, depending on how "conversion" is defined. (In one of its early explanations of AdWords/AdSense conversion tracking, Google stated that a conversion could be a transaction or other "business action" such as a registration, viewing of a certain number of pages, etc., depending on the advertiser's chosen definition of "conversion.")
Different ads, different bids.
See "definition of 'conversion'" above.
It's likely that there would be far more PSAs if Smart Pricing didn't exist, because the pool of advrtisers and ads would be smaller. By tying price to actual value (or anticipated value, based on Google's statistical data), Smart Pricing makes the Content Network more appealing than it would be if advertisers had to pay full retail for low-quality traffic.