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Normal operating temp's are what ever thermostat temp is installed in the motors. Gauges can be off compare the actual temps of the motors with a IR temp gun at the thermostat housings. What are the water temps you running in?
Being a 1978 and seeing one relay the wiring should be like this
There should be no connection between the top larger terminals (Red and Blue in pic)
I see a fuse across those and that should not be there (was able to enlarge)
No that is not happening
If the bearing gets cocked even slightly it will dig into the housing. Sometimes its best to hammer it back in and see if there is a ridge
I know this would be older transom then 1980, but does yours have a snap ring holding the bearing in?
Most boats come with the 1.5 unless their real heavy. Props would be in the 19 and 21 pitch. The 302 not being a power house and a 25foot boat, I would go with the 19
You didn't mention which drive but I'll guess it's a R or MR but motor needs to come out, and while your at it check the transom
https://www.mercruiserparts.com/bam/subassembly/30872/2203/40