matter of personal taste really. how high the strings are is called the action,personal preference. about the tone, i think it's best to leave the tone pot on the guitar all the way up and eq it at the amp or pedal or board. tone pots on guitars are just cheap roll off filters.
The tone knobs are two of the three rollable controls. The ones that don't control the guitars volume are them. One is for the Neck pickup, and one is for the Bridge pickup.
The 5 position switch is a pickup selector.
1. Neck
2. Neck&Middle
3. Middle
4. Middle&Bridge
5. Bridge