Legal Question in Real Estate Law in California

Yes. The listing was not an offer, but rather an invitation for offers. You made an offer and it has been rejected by a counter offer. The ball is in your court now.

Yes. Listing real estate at a particular price is, legally, not an offer to sell but only an invitation to make an offer. You made the offer here. The seller then has full liberty to accept or reject it, to make a counter-offer, or whatever. What happened to you used to be quite common, when real estate was "hot" and prices were skyrocketing. Haven't heard of buyer offers being countered recently, especially not 20% over the asking price.

Either seller has another full price offer, or not. If not, and you withdraw your offer, seller owes the listing broker a full commission. If this is the case, seller might well reconsider.