In SQL Server, how do read locks work?
I recommend you read Understanding how SQL Server executes a query, it has an explanation of how reads and writes work and how locking works.

The 10000ft view goes as follows:


read operators acquire shared locks on the data they read, before reading the data
write operators acquire exclusive locks on the data they modify before modifying the data
data locks are just strings, eg. a hash of the key being read scoped by database and object. 
the lock manager maintains a list of all locks granted and detects incompatibilities, according to the Lock Compatibility matrix
incompatible requests are suspended until the incompatible grant blocking them is released
operators use a lock hierarchy to declare intent to read or update data at higher level (page or table level, ignoring partition level options). This allow operators to lock entire tables w/o locking every individual row
lock lifetime and range locks are used to enforce higher isolation levels


This is really just the tip of the ice berg. The subject is vast. In your example, nobody can answer your question about what is being actually locked because it will depend on many factors. Of course, no application should issue a SELECT * FROM Table1  because it's missing a WHERE clause and is using *. These are bad practices because, among other things, they will lead exactly to lock contention.

If you encounter read vs. write locks you need to look into row versioning and snapshot isolation. Read Understanding Row Versioning-Based Isolation Levels.