Passwords are clearly a badly broken model. Even if each entity handles your password safely (you can easily argue that most don't) the weakest link in the chain is still the human being.
It's pretty easy to keep your password manager secure against the threats that most people actually face, and this removes the worst elements: password reuse and low-entropy passwords.
1Password is probably my favorite app/suite of apps ever. And I willingly shelled out for them. But most people balk at paying $.99 to remove advertising in mobile games, so I don't see this catching on.
(Plus sync, plus backups, plus...)
It can be, but it doesn't have to be. There's perfectly good password managers[0] which are free and open source. The problem in this case is getting people who aren't technically literate to use them.
Password Managers are not the solution to the problem, they are a bandaid.
Have your master pw compromised: have all passwords compromised
You're taking multiple failure points (which certainly has a higher chance of a failure than a single failure point) and replacing it with a single point, with lower chance of failure BUT with bigger consequences
The following is a password manager developed by Bruce Schneier:
Then don't.
I rely on similar passwords for non-important services, but important ones have an unique password/2FA
You're still vulnerable some attacks like keyloggers but I think your description downplays many of the benefits (mitm or a poorly secured remote database wouldn't expose your master password). There are other great features password managers are starting to add; letting you know how long ago you changed your password, informing you if you haven't changed a password after a site had been compromised, changing your password for you (each site is different and updating passwords is very time consuming).