Q1. If you work in the inertial frame, there must be a force which will provide the centripetal acceleration towards the centre of the circle.
It cant be the inner wall's reaction because its reaction can only be outwards. On the other hand, the reaction of the outer wall will be towards the centre. So the outer wall will exert a non zero normal contact force on the block.
This can be better visualised if u imagine yourself sitting in a car that's taking a turn. The wall that is in the opposite direction of the turn exerts a force
Q2. (b) is more correct.
Q3. When there is oscillation the magnitude of the tension varies. When the block goes below its equilibrium position, the tension increases So, the string snaps