I would not personally copy the entire folder, only the default_wallet (or whatever you named the wallet file) file to the wallet folder of the 2nd user.
I am not entirely sure what exactly electrum looks for, however I know that it looks in the wallet folder by default.
For my understanding, if I was to "restore an existing wallet from its seed" (and I do have the seed saved in a few places) does that automatically create the watching-only wallet since there is no private key present?
No, electrum calculates each of the private keys based on the seed. If you restore from the seed then it will create a wallet with the same private keys associated with any other wallet with that same seed (assuming that you copied the seed properly).
I don't get the last part of your reply. If I was to restore a wallet from seed, why would I need to access a backup? I thought the seed was all that was needed in "restore the wallet from seed" scenario.
You should have at least 3 backups of your wallet file (/seed), stored in at least 2 storage mediums, one of which should be offsite. If you are accessing one of these backups on a regular basis then the chances of this backup being damaged and/or compromised would increase.
If you are frequently restoring from you seed, then you will need to frequently access a written (most likely) version of your seed, which means that any time you restore your wallet from your seed, it would be possible that an attacker would be able to physically steal your seed which would give them access to all your bitcoin. The risk of this happening is most likely overall low, however it is still greater then if you maintained a password encrypted/protected wallet on your computer. It is always best to minimize the risk of loss of your bitcoin as much as possible.
Do you happen to have any knowledge of the procedure to update to a newer Electrum version in a watching wallet/cold storage configuration?
No, sorry. However as long as the method of calculating the private keys remains the same across versions it should not be an issue to upgrade on your online computer but not your offline computer (you want to introduce as little outside software as possible to your offline computer)