a) Earlier versions of Tunnelblick will not be affected; they will ignore the setting. They will NOT allow Tunnelblick/OpenVPN to modify manually-set DNS settings.
b) That is the only setting that affects this behavior (there are many more settings, of course!). The manual setting will be in effect whenever the VPN is not connected. While connected to the VPN, whatever DNS servers that are specified in the OpenVPN configuration file or pushed by the OpenVPN server will be used instead of the manually-set DNS servers.
In more detail:
Before this setting existed, Tunnelblick would refuse to change a manually-set DNS setting (or other network setting), even if the VPN server told it to. The failure to change DNS was put in the Tunnelblick log. Tunnelblick **would** change a DNS setting that was set via DHCP.
So if the user manually set DNS to 8.8.8.8 and the VPN configuration (or an option pushed by the VPN server) told OpenVPN to set it to 1.2.3.4, OpenVPN would ask Tunnelblick to set it to 1.2.3.4. Tunnelblick would refuse to do that because it had been set manually. (That was a policy decision based on the idea that if someone set something manually, it shouldn't be overridden by some automatic process.)
Now, in the same situation, if the setting is set "true", Tunnelblick will change the DNS setting to 1.2.3.4 for the duration of the VPN connection. When the VPN is disconnected, Tunnelblick will restore the setting to 8.8.8.8.
Note that Tunnelblick does not support "split tunnels", with different DNS servers for different domains. To do that you would need to write your own scripts (or modify Tunnelblick's standard scripts).