A smaller form of や, ゆ or よ means that it combines with the kana in front of it to make a slightly different sound. So, きゆ is read as "ki yu ," but きゅ is read as "kyu," like the first part of the word "cute." There are quite a few sounds made this way. This link should show you all of them.
Yes, English answers do allow numeral answers.
As a note though, Duo will say you are correct 'with a typo' when you are one numeral off so many of these single-number questions will accept any single-digit number as a typo. If you actually do have trouble with something it may be more difficult to spot and correct if you don't type the full word out.
They are spelled the way they are pronounced,
The small kana combines with the one before it to alter the pronunciation, so きゆ"kiyu" with big kana is two syllables long and きゅ with a small kana is only a single syllable "kyu"
They sound different in speech so the way they are written reflects that.
尾・び means "tail"
九尾・きゅうび is then "nine-tails".
九尾の狐・きゅうびのきつね is "nine-tailed fox" a mythological creature in several Asian countries. 狐・きつね meaning "fox". When the nine-tailed fox is referred to though often the "fox" part is omitted as it would be understood from context in folklore already what animal the nine-tails is.