When there are cases where there is ambiguity, such as here where the consonants are the same and the only difference is the nikud, it's acceptable. Without the nikud, there would be no way to know if this sentence were ani shoteh or ani shotah, but when there is no ambiguity, they are almost never used outside of religious and children's text.
To listen to the pronunciation of all words go here:
Both. The latter yod can be either the vowel /i/ (מיץ) or the semi-consonant /y/ (מים). Indeed, the מ would get a different niqqud. But of course, the causal order is the opposite. First there was pronunciation, then came spelling. Here are two words that are pronounced differently, but it just so happened that their spelling, especially without niqqud, is similar.