Well, don't forget that with 1080p you can't really tell the difference between 720p and 1080p on TV's between 27" and 40" (anything 20" and below you are perfectly fine with 480p for HD). For good 1080p playback you need at least a 40" screen.
Sure you can. I own both a 720p and 1080p 32" set and a 40" 1080p set. When feeding the 32" sets with 1080p material, you can definitely tell a difference.
Of course, only some video games and Blu-ray offer full 1080p material for viewing. So if you're using your TV for viewing cable/OTA material, 720p is sufficient.