1. Google is dogfooding it's own products to improve them and make them competitive and stop potential data/privacy/security leaks by using external software.
2. Google is trying to save 20 bucks
There is nothing wrong with Google docs or sheets and I have used them both. But sooner or later you make enough documents or work with enough spreadsheets you're going to want or need some feature that office has.
Google may be a rich company but it's also a very frugal company in many ways, particularly wrt technology (they pioneered the "huge amounts of redundant cheap hardware" approach to DC construction, for example). When Googlers were being coaxed into switching to Docs from MS Office, the financial benefits were front and centre to that pitch.
1. Yes, Google probably prefers for people to use its own products both for usability and security reasons.
2. Google also wants to save money. However, if someone wants a license for a Microsoft product, they can get one.