Why does the story of Pinnochio change the third person to 1st person? How does the story change with this shift? 2. When Pinocchio is lost in the...

First of all, this is not much of a story to begin with.  It's a summary of a story.  It's telling, not showing.  There are huge jumps in the narration, no dialogue, no dramatic arc. 

If you change the POV to 1st person Pinnochio, then the story will be told by a naive narrator.  He obviously doesn't know the motivations of the fox and cat--that deduction is left up to the reader.  So, the story takes on situational irony--the audience knows more than the protagonist. 

The function, then, of Pinnochio in first-person is to make it a coming-of-age story--he must learn to be gererous after being swindled.  Pinnochio must learn to be human-like before becoming a human.

In my opinion, the story (if told as one completely, not used as an exercise) is better in third person.  Since Pinnochio is a fable it should be styled for a young audience.  Third person allows for more maneuvering with character and plot.  It makes the unbelievable (wooden boy talking to animals) more believable.  First person narration delves into introspection and does not advance plot well, so a young audience might be confused.  Also, naive narrators do not match up well with naive audiences.  Such narrators work better with adults (think Huck Finn here).