1. Yes (to the first question).
2. No (to the second question).
If the above photo shows the head of the cable as far in as possible, then Crankycrank is right; you must not have clicked the small STI lever enough times (as if you are shifting the chain to the physically smallest cog of the cassette). He might be right regardless.
You can test the STI lever by routing the new cable only through the lever body, without routing it the rest of the way, and while keeping tension on the cable, shift up and down. If that works fine, the issue is further down somewhere toward the RD, which is not surprising because it appears that you somehow managed to thread a new cable through the old housing. There may be other obstruction along the way, including you may have somehow tangled the cable with something else on the way to the RD.