1. I think thats a fair description... (- the 50%) 50% (fluctuating) would be a reading of the adjustments being made and the plain old base mix is whats being adjusted.
How about
: Is the purpose of the diag signal to allow visibility of the adjustment (whether richening or leaning) the system is making to the base?
2. I am unfamiliar with X11/4 and your specific engine (M119 UK?) but you might find that info. in your factory manual or here:
http://mb.braingears.com/default.htm The manuals are incomplete but There should be a section for your engine under a similar model Look under engine, combustion,... in an appropriate manual for the specific diagnostic technique.
3. If there is O2 in the exaust and the cat is heated up that means more combustion could have taken place but did not. Without O2 no further combustion would be possible.