All your app.toml files should be in your project root directory, no need to duplicate any source code.
And yes, use shopify app config use to switch back to production .toml!
Also. I need to correct something I said earlier - the tunnel url issue I mentioned no longer applies once you are migrated to the Next-Gen dev platform. Once you are on the Next-Gen dev platform, running shopify app dev creates an app preview locally in your connected dev store, but will not update the deployed urls. There’s some more information about the changes to the dev platform here