Dear Rabbi Kornfeld:
a) Daf 85a: How could Rabbi Zeira be called that name based upon a contraction of "ze'ira" (short)? Isn't that a kinui shem, as in "Rabbi Shorty"?
b) Daf 86b: Also, why were the mal'achim "insulted" to have been accused of worshiping their dust-why would Avraham Avinu know NOT to suspect them?
Finally, why did they "rub it in" when saying that Yishmael, who would be suspect of such a thing, came from Avraham?
a) Being short or tall is not insulting; it is the way one was created. Although little children sometimes taunt people for such traits, they sometimes taunt a person's name or clothes (or glasses), none of which can be considered "insulting" identifying marks for adults (as long as they are not used in a taunting manner, see Nedarim 50b regarding the woman who tauntingly referred to Shmuel as short).
In Chulin 137b, Rav is called "Aba Aricha" because of his height. Rashi Menachos 37a explains that one Tana was called "Rebbi Yosi with the sunken nose." Although Tosfos there protests that this is a degrading nickname, even he would agree that there is a difference between "tall" or "short" and "sunken nose" (since the latter is considered a Mum, Bechoros, 43b).
Besides, Rav Zeira's shortness may have been emphasized to represent his extraordinary modesty (which is evident from our Sugya), see Megilah 11a (David Hu ha'Katan), and Chulin 60b ("Let the Tzadikim be referred to by your title name, moon -- 'Yakov the Katan, Shmuel the Katan'").
b) From Yoma 19b ("they left him and cried...") it appears that there is nothing wrong with being Choshed when necessary, as long as one feels remorse for having to have been Choshed the person who was innocent. The censure seems to have been for not showing remorse upon discovering that his guests were "upright."
There is no source at all in the verse to say that the Malachim actually responded in such a manner, as the MAHARSHA points out. Rather, the Gemara means to state the fact; Avraham's son turned out as he did partially because of "ha'Choshed b'Kesherim Lokeh b'Gufo" (Yoma ibid.). This means that Hash-m sometimes provides a person with divine assistance to help him avoid a potential pitfall that awaits him. If he is Choshed b'Kesherim he does not merit such assistance with regard to avoiding that particular sin that he was Choshed others with wrongly (if he did not feel bad about it).
As a possible added proof to your answer letter (a) I think I saw that Reb Yehoshua ben Korcha was the son of Reb Akiva who was bald, hence the name Korcha! Also Ben Zoma said all the chachomim are in front of me like a garlic peel, except for this bald person, again refering to Reb Akiva.
Hence we see that people were refered to by physical attributes.
Yes, Tosfos in Pesachim 112a DH Tzivah, and numerous other places, cites the opinion that Rebbi Akiva was called Korchah because he was bald. Tosfos rejects this interpretation on the very grounds that you mention; they would not call him a degrading nickname.
However, Tosfos finds it necessary to "prove" from the Pesukim and Gemaras that it is degrading to point out a person's baldness, and it is possible that those who argue do not consider "baldy" to be degrading unless it is said in a degrading manner. (Tosfos is l'Shitaso, as we cited from Menachos 37a, since he considers a physical trait to be derogatory even if it is not said in a degrading manner.)