Both of them appearing in Midgar makes like zero sense.
Shinra mentioning Wutai does make sense considering the history Shinra and Avalanche have with Wutai. Shinra took the area by force, Avalanche had a base of operations there.
I am not opposed to more of the group appearing but I highly doubt it: this is why characters like Jessie and Biggs are being expanded upon I feel, and I do think they they would not have had enough time to develop the fighting for all the characters by the time this releases
I agree with this, I don't even think we will get Red XIII in the first chapter. Most likely we will get Red and Cat Sith in chapter 2 and Yuffie, Vincent and Cid in either the same chapter or chapter 3. My biggest question is how big these following chapters will be, going by this first chapter we could end up with 5+ games xD