>can i use starter strips?
Yes.
>can they raise their own queen?
Yes, but the population of an observation hive tends to go up and down a lot and raising a queen will cause it to go down as the new queen won't be laying for 25 days or so.
>how critical to the success of the hive is the number of frames it can hold?
Pretty critical if you want it to be self sustaining and if you want it to get through the winter.
> is 3 much better than 2?
I think 3 deeps or four mediums is the right size. Smaller is more difficult to maintain. Larger is too hard to carry outside to work.
Here is what I think:
http://www.bushfarms.com/beesobservationhives.htm