A: 1) Are eash site on each server isolotaed so that issues with one WordPress installation (such as plugin conflicts or misconfigurations) won’t affect other sites running on the same server?
Ans: Correct.

2) Can I run multiple WordPress instances on the same server without worrying about software version conflicts (e.g., one site might need PHP 7.4, while another might require PHP 8.0).

You can do that, you can assign multiple PHP versions in the same server.

Please note, PHP7.4 is only available on Ubuntu 20.04 LTS