Does the windows 7 backup system version the files? Or does it just backup and erase the old set of files?
Can I set it to backup every hour? Does it only backup the changes in files, or erase them all and save them again?
Yes, if system protection is turned on.
Not sure exactly what you mean here.
Only the files you change are updated, backups of the other files already exist from the previous restore point.
I think all of these questions are answered in more detail here.
It does do incremental backups, so there may be multiple copies of a single file. When a something is changed, the entire file is saved again in the next backup.
this article should help answer your question: http://social.technet.microsoft.com/Forums/en/windowsbackup/thread/c200e540-b36d-40c8-9957-690d447dbef9
Also: (Answer provided by A Dwarf (6,504) From this question Does built in Windows 7 backup perform differential (incremental) backups?)
This means each block in a file is examined and if a duplicate already exists on the last backup, and this is the important bit, even if from a different file, that block is not saved. Quite good :)
The first backup is always a full backup. The following backups will only save changed blocks. Disadvantage is you cannot manage your backups individually