1) I use Maximus Arcade. Never tried anything else because it fit my needs so well.
2) Ask yourself, "Do I have enough friends that a 4 player CP will get consistent (or occasional) use?", "How many 4 player games do I like to play?"
I went with 2 players because my answers are "No" and "Few". I'm sure this saved me a lot of headaches in design and cost.
3) See Nacimroc's response
4) I have about 100 games in my MAME list, and I play most (if not all) of them. They are mostly common / classic titles that people recognize. If I included all the MAME games available, the list would be so long and full of junk that any guests would be overwhelmed. Whenever someone suggests a good game, I add it to the list. Search the boards and see what other people are playing, I found a lot of fun games that way. See KLOV's top 100 for a good start:
http://www.klov.com/TOP100.phpTying in with #2 above, I only include 2 player versions of roms - for instance TMNT 4-player only allows player 1 to be Leonardo, 2-player version lets both players choose from the 4 turtles.
Good luck and take your time!