Yes it does.
PSK, in this context, is a mode of operation of WPA. In your case, PSK is the best choice. (For environments in which there is a geeky system administrator at hand, I would advise RADIUS, but that requires a whole lot of other stuff to be set up on the network.)
Use the one that offers PSK.
Big question. It doesn't have a simple answer, which is why security issues are hard. If someone gets passed WEP, it means that they've gotten on to your network. The analogy that I like to use, is imagine if you had a wired home network and you ran some wires out from your house into the neighborhood for any to connect to.
The rest depends on the security of any internal firewall you may have (say between your wireless and wired internal networks) and the security of the particular hosts on those networks and the communication between those hosts.
So it is best to secure each machine on the network as best as possible on its own. Keep in mind that someone who gets onto your private network can sniff all the network traffic, so you don't want sensitive information (particularly) passwords traveling around your network unencrypted. If you have highly sensitive information, you should consider keeping that encrypted even on the disk. With Linux you can set up entire encrypted filesystems. (But if you forget the pass phrase, you're data is truly unrecoverable.)
I'm sorry that there isn't a simple answer. For some purposes it is "good enough" to be better secured then your neighbors. There is the old joke of two men camping, and a bear starts threatening them at their campsite. One man starts to put on running shoes. The other says, "What are you doing? You can't out-run a bear." The first answers with, "I don't need to out-run the bear, I just need to out-run you."
On the whole, this "good enough" is a bad approach. But nearly everything needs to be evaluated on a case by case basis. If you wish to publicly be more specific about your concerns, it will be much easier to give specific advice.
-j