Does vitamin C decrease after reacting with oxygen free radicals?
Correct, vitamin C (ascorbate) acts by donating 1 electron to a free radical (reducing them to a stable compound with paired electrons), and is thereby itself oxidized to semidehydroascorbate. This is actually a radical itself, but can be reduced back to ascorbate by thioredoxin reductase or cytochromes, using NADH or NADPH as the reducing agent. A pathway diagram with references is found here.

So to answer (1), ascorbate is continuously recycled after neutralizing free radicals, and is therefore not consumed to any large extent. Therefore, vitamin C is only needed in the diet to replenish the small fraction that is lost from the body (about 1--3% per day; see this book).

And yes, vitamin C is very important in defense against free radicals; it is considered the major water-soluble antioxidant in humans.