If a Tumblr blog is deleted, is the subdomain available again for re-registration

Nope, tumblr as a service will not automatically put ads on your page, but you can always ad them in yourself via their 'additional html' box or if you create your own theme you could put the code for ads in there too.

Add the {Permalink} option using the anchor tag and the div tag applied to your Photo block

{block:Photo}
   <div class="photo post">
      <a href="{Permalink}">
         <div>
            <img src="{PhotoUrl-500}" alt="{PhotoAlt}">
         </div>
       </a>
      {block:Caption}{Caption}{/block:Caption}
   </div>
{/block:Photo}