Sorry, I'll have to butt in on this one.
"So as the number of users increase, does the RAM increase quite a bit?
With 768mb of RAM, approximately how many blogs will that support?"
This is were a lot of confusion happens, and a lot of guesses get returned as an answer.
In all honesty, there is no magic relation between specs and number of blogs.
What it comes down to is the number of requests, and the amount of resources it takes to serve those requests.
You could have 1000 blogs, or 10 blogs. If the number of requests are the same, the resource usage will be quite similar. Even with caching, a request is a request to MU.
That's without getting into how many plugins the blog has turned on, etc., but overall any request goes through index.php (or blogs.php, etc. but I'm keeping it simple). It doesn't matter if they're requesting a permalink from blog 1, or blog 100, it all goes through the same files.
Without getting into the db side of things, again it all comes down to the number of requests, and by that (to clarify) I mean traffic.
Again, 10 high traffic blogs may be similar to 1000 barely active blogs.
You'll have to watch your server load and responsiveness, and when it gets close to struggling, diagnose it. It may be from bad requests, tons of errors, or just plain needs more power.
Even a general guideline, other than MU not being suitable for shared hosting, is tricky. Nobody knows how much traffic you have or will have. Most of the time, when setting up a new site, you won't even know.
A VPS like that is a decent start. Watch your resources, make sure you have some form of caching (xcache and super cache is a good start), then keep an eye on it.
If it starts to become slow, take a look. It may be a plugin, it may need to be scaled up. Only you will be able to know for sure.
"Also, do most of you use 10mb for the storage allotted to bloggers? To me that seems like nothing...but with only 20GB of space it will have to do for now :)"
You'll run out of resources before you hit space concerns more than likely, even giving up 100M or so. YMMV, but that's a good estimate. Traffic depending, file type depending, etc.