- If an attacker compromises the weaker PSK on Router 2, is Router 1 at risk, or would the 32-character PSK stop them?
This largely depends on how exactly your network is set up. Unfortunately, there's not enough detail in your post to give a proper analysis for your specific case. However, for variants of "Router 2 ... is connected to Router 1 by Ethernet cable" there's only two really relevant possibilities.
Internet is connected to Router 2's WAN port. One of Router 2's LAN ports is connected to Router 1's WAN port.
This is the ideal variant of your setup. Here, Router 1 will essentially treat any device connected to Router 2 as if it is just another device on the Internet. Therefore, all firewall and NAT rules will apply. In default configurations, this means that (absent a critical vulnerability in the router software) an attacker with access to Router 2's WiFi network will not gain access to Router 1's network without having to break the stronger WiFi PSK.
Any other configuration.
This includes all setups where Router 1 is the device connected directly to the Internet, as well as where Router 2 is connected to the Internet while the routers are connected to each other via LAN ports on each end. The critical piece to note here is that, in any configurations that would fall into this category, Router 1 will treat all devices connected to Router 2 as if they are part of the local network. At this point, any device connected to Router 2 - either by WiFi or Ethernet - almost may as well be connected directly to Router 1. No cracking of Router 1's PSK is required.
2. Do attackers have to crack the router's administrative User Name/Password before they can attempt to crack the PSK, or can they hack the router's PSK directly?
The administrative username/password only protects the administration interface of the router. It does not prevent people from accessing the WiFi network. Otherwise, you would have to configure every client with both the admin username/password and the WiFi PSK.
3. I asked the ISP manager why router 1 was set up as WPA, not WPA2 (he did the initial setup). He told me it was "difficult" to set up WPA2. Should I believe him? Why is it "difficult"?
These days, there's no reason it should be "difficult" at all. Most modern WiFi access points and clients support WPA2 right out of the box. Configuring WPA2 for PSK mode is no more or less difficult than configuring WPA for the same. The only time it becomes a problem is if there is older hardware (the access point, or client devices) involved which do not support WPA2. However, those are becoming fewer and farther between.
I'd suggest getting the admin password for the ISP's router and taking a look at it yourself. It's really none of their business how your WiFi is set up - apply any level of security you feel fit.
4. How long does it take a skilled attacker to capture the entire network trace including the initial authentication handshake between the device and the router?
How long to capture the network trace? Exactly as long as it takes whatever network traffic they're capturing to occur. Now, how long does it take for them to be able to read that traffic as cleartext? That depends on how strong the encryption key and algorithm are (if any is used at all), and how much foreknowledge the attacker has. It also depends on what sort of hardware and software the attacker has at his disposal.