Which ROM are you using? Certain ROMs like Redux and CM7 have a special script called "06mountdl" that compensates the small cache by downloading data to another location.
I have 5MB cache only, but thanks to this script I can download anything I like from Market to my phone with CM7 ROM.

 

Maybe its using an expandable RAM disk. Download a big app or game.like cordy to test downloads.

Won't help with radio though. But if you have fastboot flash available it doesn't matter anyway.

I tested need for speed with 3MB cache and noticed no difference what so ever

 

You can or you can use the fastboot command line from windows command prompt. Have a look at the adb and fastboot faq in my signature.

I'm confident that you can download as whatever QSI shows as cache should be what android sees as cache and thats what matters.

If you have a 25MB /cache and want to download 27MB app, it doesnt get to 25MB downloaded then stop. It stops immediately so its not that it gets full and cannot download anymore, rather it assesses the amount of registered cache and doesnt download if its not enough.

I linked cache to my ext partition once and could download apps bigger than my cache partition so it should all be good.

 

also it means you cannot flash radio from recovery, you have to use fastboot or you can brick