Yes. Kinetic energy is a form of mechanical energy and friction will turn that kinetic energy into heat.
A child climbing a ladder is transforming kinetic energy into potential energy.
2nd and only 2nd option is right
The mass needed at peg 1 is a 5g mass.
The 15g should hang at peg 5.
The reason is force x distance clockwise is equal to force x distance anti-clockwise