If I choose both "Delete versions older than" and "Keep number of versions", what takes precedence? Do both criteria have to be true before a file version is removed, or is it either one?

Cloudberry will check for both conditions and in a case at least one is true - it should be in place. Example: you want to delete versions older that 1 day and you want to keep 3 versions. How it works: you have 1 version and file older than 1 day. Will it be purged? No! Cause you still have only 1 copy of your file. Let's imagine that then you have 4 versions of your file and all of them older than 1 day. In this case, the eldest version will be purged. Just specify your retention policy as simple as it possible.

How is option "Delete files that have been deleted locally" interpreted? If I deselect files from the backup source, is that interpreted as a deletion?

No. It means that in case you removed a file from the backup source and this file won't be found for a number of days that you specified in agent - it will be deleted from the backup destination.