One and two are more of a personal choice. As far as SEO goes I don't think it makes any difference.
If the blog is about the shop, you should really keep it on the same URL, this way you can blend the blog into the site theme and link from the blog back to your shop and even incorporate "deep link".
This will help your pages get indexed better seeing as when you post on a blog it pings spiders.
KP



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