The way I think of it is:
500 can hide the scuff marks from 500-grit sandpaper. 1000 can hide the scuff marks from 1000-grit sandpaper.That's not 100% accurate, but it sets you off in the right direction, anyway.
500 has more filling property than 1000. 1000 dries very smooth -- semi-gloss.
Both!
I spot prime 500 with a sable brush. When I am ready for final inspection I airbrush with it thinned down with Mr. Thinner.
Wait until you can't smell it any more.
But you can cheat on that. Anywhere from 1 hour to overnight.
Both.
I use 500 while I am developing the surface. I don't care if it is sanded all the way off or not. There is usually a laminate of primer and putty in very thin applications. When I think I've got it about right, I do an all-over with 1000. If I do any corrections to the 1000 coat, it is usually just to smooth out dust specks and similar light flaws.
I let it get good and dry, frequently using a food dehydrator to help it along. Then I polish the surface with 1200 grit or finer -- sometimes even micromesh cloths. Depends on what is going over it. If I am going with a thin finish like Alclad, I will polish the primer very fine. If I am doing automotive colors I will be color sanding anyway so I am not as critical.
--scott