1. After any B1G teams that make the College Football Playoff, The Rose Bowl is obligated to take the next highest ranked B1G team. If both Michigan and OSU were in the CFP, even with a Purdue win in the B1G Championship game, I believe that Penn St. would be the Rose Bowl representative for B1G (currently at #11 and moving up due to losses ahead of them this week). Otherwise, I think it's more likely to be Michigan in CFP, OSU to the Rose Bowl, and Penn St. to the Orange Bowl (at-large) and then Purdue/Illini or Illini/Purdue for the next slots.
2. It's possible, but not likely, that we could pass Purdue if they get stomped in the B1G Championship game. Granted, they beat us in Champaign, in a game in which we were a TD favorite. In conference games this year the Illini had a +74 point differential. Purdue was +11. If Purdue gets spanked by the Michigan team we lost to by 2 points (and shouldn't have) in Ann Arbor, then I think it's a toss-up between Illini/Purdue. I'm certain that if the Illini and Purdue played tomorrow, on a neutral site, that the Illini would be a field goal favorite.
3. I agree that I'd rather see Purdue get stomped in their bowl game and the Illini getting a lesser bowl game opponent, especially if both are playing on January 2nd (Citrus Bowl - Orlando and ReliaQuest Bowl - Tampa Bay).