Basically yes to the photos….size them to what you need them for. It’s a little extra work but beneficial….of course, this is only my recommendation and not a requirement.
The quotes is structured with a container already built into the layout which is just 3 grid columns wide which is why the image downsizes to fit that container. The image regardless of it’s size will become the size you see (just like on the live demo site). Post formats are styled differently on themes, depending on how the designer chooses to make it look for that theme and for what post format. Post formats are part of WordPress http://codex.wordpress.org/Post_Formats
For the quote format…again, this can be styled in many ways depending on what the theme developer has done. I made it so that you can use it for quotes or testimonials. They do not have to have a featured image either, it can just be the quote.