My impression of Facebook's feed algorithm is that it takes your activity and the popularity of posts into account. If you look at the feed often, you'll see all the content. However, if you've been away for 5-10 hours, facebook will show you the most popular stuff of that time period. It may be that they stick the rest in "under the fold" of feed, but I'm not sure.

No, you really, really don't. Because then your feed would be totally worthless, dominated by whoever pumps out the most stuff.

You are correct. But then, how does it help me when my feed shows posts just because someone paid Facebook to promote those posts? If a post is going to create bad experience for me, it will be a bad experience irrespective of whether its paid or free.

The thing is: there's going to be a lot fewer such bad experiences when they cost the person wanting you to have them money. And it may provide an incentive to make promoted content a less bad experience, because in order to maximize revenue, Facebook had to balance the price of promoted content with its acceptance by users: content that is a better experience will cost less to promote because more of it can be shown to users before they get annoyed and leave Facebook.