I agree with what you put in #1. It may be easier to just increase the level cap of trained units rather than making them 50% more powerful. I think should be good for quickly filling a hole in your army, but long term there should be a reason to use the buildings in the cities once you have all the upgrades.
I don't know how I feel about #2 though. This seems like it would be complex to implement and manage. At the end of the day you would be better off filling in your army with level 15 trained knights than level 10 merc knights.